May 2 (Bloomberg) -- Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender, fueling speculation that Countrywide's bondholders face renewed risk of default.
``There is no assurance that any such debt would be redeemed, assumed or guaranteed,'' the Charlotte, North Carolina-based bank said in an April 30 regulatory filing, adding that no decision has been reached. Investors have grown more optimistic the bank would back Countrywide debt, and Standard & Poor's said this week it may raise Countrywide's rating to match Bank of America's.
Bank of America agreed to buy Countrywide, the largest U.S. mortgage lender, for about $4 billion amid speculation that the worst housing market since the Great Depression would bankrupt Countrywide. Bondholders have been counting on the merger to put Bank of America's AA credit rating behind Calabasas, California- based Countrywide's $97.2 billion of debt.
Countrywide's $1 billion of 6.25 percent notes maturing in 2016 traded at 90.25 cents on the dollar yesterday with a yield of about 7.9 percent, according to data compiled by Bloomberg. The debt traded as low as 46 cents in January, with a yield of 20 percent, just before Bank of America announced the purchase.
``I'd be quite concerned if I was a bondholder if the intent of Bank of America is as it reads in the filing,'' said Gary Austin, founder of PDR Advisors LLC in Charlotte. PDR manages about $600 million, doesn't hold Countrywide debt.
Questions About Debt
Investors have been asking Bank of America about plans to back Countrywide's debt since January, when the issue was raised in a conference call to discuss the merger. The bank has demurred ever since. Bank of America spokesman Scott Silvestri declined to comment further beyond the filing.
The purchase of Countrywide is scheduled to close in the third quarter. Investors have speculated Bank of America may seek a lower price or cancel the deal because U.S. home prices and sales have deteriorated.
``This confirms how tenuous this transaction is,'' said Christopher Whalen, managing director at Institutional Risk Analytics, a banking research firm in Torrance, California.
Whalen expects Bank of America to absorb the best assets, including Countrywide Bank, while the debt remains with a new company created by the merger, Red Oak Merger Corp. Red Oak may then file for bankruptcy, shielding Bank of America from liability, Whalen said.
Protecting Shareholders
Bank of America Chief Executive Officer Kenneth Lewis is a ``tough guy and he's got to protect his shareholders,'' Whalen said.
The wording in the bank's filing is new, Victoria Wagner, a credit analyst at Standard & Poor's Corp., said in an interview yesterday.
``If they let the debt fail, it would have implications for their other obligations,'' she said. ``They are still going to wholly own Countrywide.''
Standard & Poor's expects to boost Countrywide credit ratings to match Bank of America's when the merger closes, Wagner wrote in an April 30 report. Standard & Poor's rates Countrywide at BBB+, an investment-grade rating five notches below Bank of America's.
``If we sense the status of this merger changing, we will review all ratings on Countrywide and the likely outcome would be a several-notch downgrade,'' she wrote.
Bank of America rose 44 cent to $39.83 in German trading after gaining 4.9 percent yesterday in New York Stock Exchange composite trading. Countrywide added 4.7 percent yesterday to $6.05.
No Details
Bank of America has stopped short of explicitly guaranteeing Countrywide's debt since announcing the acquisition. Executives don't want to get into details on how the legal entities will be structured, according to credit analysts Kathleen Shanley of Gimme Credit LLC and David Hendler of CreditSights Inc.
Countrywide's finances have worsened since the merger announcement because of falling house prices in California, which accounts for about 40 percent of its lending. The company reported a first-quarter loss of $893 million as late payments and foreclosures soared. Lewis has reiterated Bank of America's commitment to the deal, citing long-term benefits of becoming the largest U.S. mortgage lender.
``If bondholders get stiffed by Bank of America, it will scare the hell out of everyone,'' Whalen said. ``This is called thinking the unthinkable.''
Debt Holders
Countrywide debt included $11.5 billion in credit lines at the end of 2007 and $47.7 billion in advances from the Federal Home Loan Bank Board. Bank of America said the credit lines will be paid when the merger is completed, while the advances will remain outstanding.
The remaining debt, about $38.1 billion, would equal about 2.4 percent of the bank's total liabilities at the end of last year, according to the filing.
Among the biggest debt holders is Los Angeles-based Capital Research & Management Co., with $630 million, Bloomberg. Capital Research doesn't discuss its holdings, spokeswoman Maura Griffin said.
Bank of America May Not Guarantee Countrywide's Debt (Update1)
May 2 (Bloomberg) -- Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender, fueling speculation that Countrywide's bondholders face renewed risk of default.
``There is no assurance that any such debt would be redeemed, assumed or guaranteed,'' the Charlotte, North Carolina-based bank said in an April 30 regulatory filing, adding that no decision has been reached. Investors have grown more optimistic the bank would back Countrywide debt, and Standard & Poor's said this week it may raise Countrywide's rating to match Bank of America's.
Bank of America agreed to buy Countrywide, the largest U.S. mortgage lender, for about $4 billion amid speculation that the worst housing market since the Great Depression would bankrupt Countrywide. Bondholders have been counting on the merger to put Bank of America's AA credit rating behind Calabasas, California- based Countrywide's $97.2 billion of debt.
Countrywide's $1 billion of 6.25 percent notes maturing in 2016 traded at 90.25 cents on the dollar yesterday with a yield of about 7.9 percent, according to data compiled by Bloomberg. The debt traded as low as 46 cents in January, with a yield of 20 percent, just before Bank of America announced the purchase.
``I'd be quite concerned if I was a bondholder if the intent of Bank of America is as it reads in the filing,'' said Gary Austin, founder of PDR Advisors LLC in Charlotte. PDR manages about $600 million, doesn't hold Countrywide debt.
Questions About Debt
Investors have been asking Bank of America about plans to back Countrywide's debt since January, when the issue was raised in a conference call to discuss the merger. The bank has demurred ever since. Bank of America spokesman Scott Silvestri declined to comment further beyond the filing.
The purchase of Countrywide is scheduled to close in the third quarter. Investors have speculated Bank of America may seek a lower price or cancel the deal because U.S. home prices and sales have deteriorated.
``This confirms how tenuous this transaction is,'' said Christopher Whalen, managing director at Institutional Risk Analytics, a banking research firm in Torrance, California.
Whalen expects Bank of America to absorb the best assets, including Countrywide Bank, while the debt remains with a new company created by the merger, Red Oak Merger Corp. Red Oak may then file for bankruptcy, shielding Bank of America from liability, Whalen said.
Protecting Shareholders
Bank of America Chief Executive Officer Kenneth Lewis is a ``tough guy and he's got to protect his shareholders,'' Whalen said.
The wording in the bank's filing is new, Victoria Wagner, a credit analyst at Standard & Poor's Corp., said in an interview yesterday.
``If they let the debt fail, it would have implications for their other obligations,'' she said. ``They are still going to wholly own Countrywide.''
Standard & Poor's expects to boost Countrywide credit ratings to match Bank of America's when the merger closes, Wagner wrote in an April 30 report. Standard & Poor's rates Countrywide at BBB+, an investment-grade rating five notches below Bank of America's.
``If we sense the status of this merger changing, we will review all ratings on Countrywide and the likely outcome would be a several-notch downgrade,'' she wrote.
Bank of America rose 44 cent to $39.83 in German trading after gaining 4.9 percent yesterday in New York Stock Exchange composite trading. Countrywide added 4.7 percent yesterday to $6.05.
No Details
Bank of America has stopped short of explicitly guaranteeing Countrywide's debt since announcing the acquisition. Executives don't want to get into details on how the legal entities will be structured, according to credit analysts Kathleen Shanley of Gimme Credit LLC and David Hendler of CreditSights Inc.
Countrywide's finances have worsened since the merger announcement because of falling house prices in California, which accounts for about 40 percent of its lending. The company reported a first-quarter loss of $893 million as late payments and foreclosures soared. Lewis has reiterated Bank of America's commitment to the deal, citing long-term benefits of becoming the largest U.S. mortgage lender.
``If bondholders get stiffed by Bank of America, it will scare the hell out of everyone,'' Whalen said. ``This is called thinking the unthinkable.''
Debt Holders
Countrywide debt included $11.5 billion in credit lines at the end of 2007 and $47.7 billion in advances from the Federal Home Loan Bank Board. Bank of America said the credit lines will be paid when the merger is completed, while the advances will remain outstanding.
The remaining debt, about $38.1 billion, would equal about 2.4 percent of the bank's total liabilities at the end of last year, according to the filing.
Among the biggest debt holders is Los Angeles-based Capital Research & Management Co., with $630 million, Bloomberg. Capital Research doesn't discuss its holdings, spokeswoman Maura Griffin said.
