Bank of America invests $2 billion in Countrywide
Countrywide Fin -ancial Corp on Wednesday received a $2 billion
injection from Bank of America Corp, helping the largest U.S. mortgage
lender shore up its finances as it struggles with a liquidity crunch.
Bank of America, the second-largest U.S. bank, said it bought
non-voting preferred stock that yields 7.25 percent and can be converted
into Countrywide common stock at $18 per share, 17.5 percent below the
shares' Wednesday closing price. Countrywide shares soared 20 percent in
after-hours trading.
"It's a $2 billion vote of confidence from a major financial
institution," said Steve Persky, a portfolio manager at Dalton
Investments in Los Angeles. "Are we out of the woods yet in the mortgage
market? No."
Sean Egan, managing director of independent credit rating firm
Egan-Jones Ratings Co, said the investment "is a large positive in the
sense that it bolsters confidence and enhances liquidity."
"However, based on recent results at other mortgage firms,
Countrywide will probably need some additional capital to plug the
hole," he added. "Countrywide is going to have to shrink its business.
Its wings have been clipped."
The investment came six days after Countrywide stunned investors by
tapping an entire $11.5 billion credit line because it was having
difficulty selling short-term debt.
This raised concerns about how well the Calabasas, California-based
company could navigate the credit crisis afflicting a wide range of U.S.
lenders. At least two analysts said bankruptcy was possible if market
conditions worsened.
Countrywide made 17.4 percent of U.S. mortgage loans from January to
June, according to newsletter Inside Mortgage Finance. Charlotte, North
Carolina-based Bank of America ranked fifth, with a 6.7 percent share.
"In the current turmoil, the stock market has been underestimating
the value in Countrywide's operations and assets," Bank of America Chief
Executive Kenneth Lewis said in a statement. "We hope this investment
will be a step toward a return to more normal liquidity in the mortgage
markets."
Countrywide's market value was about $12.6 billion as of Wednesday's
close. Its shares closed up 3 cents at $21.82 in regular trading, and
soared to $26.19 after hours. Bank of America shares closed up 35 cents
to $51.65 in regular trading, and rose to $52.50 after hours.
Prior to the investment, Countrywide shares had fallen 49 percent
this year as delinquencies and foreclosures increased, leading to a
shortage of credit needed to make new home loans.
Worries about Countrywide's health led many customers at its bank
unit to withdraw money, including deposits that were federally insured.
On Monday, Countrywide placed advertising in several newspapers to
assure depositors their money was safe.
Angelo Mozilo, Countrywide's chief executive, said the Bank of
America investment helps position the company he helped found for future
growth.
Analysts said Countrywide still faces a struggle, now that credit
worries over riskier "subprime" borrowers have spread into other
markets.
The impetus behind Bank of America's investment, and the bank's
longer-term goals, were not immediately clear. The investment follows
the U.S. Federal Reserve's surprise decision on Friday to cut what it
charges banks to borrow, and perhaps help boost liquidity in the
financial system.
Reuters |