Countrywide Deal at Risk

Four months after Bank of America agreed to buy Countrywide for $4 billion, Wall Street is buzzing that it may reduce the offer or perhaps even walk away from the deal. Countrywide’s share price sank 10.4%. The rout was touched off by an analyst report urging BoA to abandon the acquisition because of growing problems at Countrywide. Robert Stickler, a BoA spokesman, said the deal was on track. But stock market investors have their doubts. Countrywide’s shares closed at $5.36, almost 24% below the $7 offer price.

Many still hope the BoA deal will save Countrywide from an uncertain future. But the problems at Countrywide have intensified. Losses on mortgages and home equity loans have ballooned, federal and state agencies have investigated its business practices, and the company is bracing for a wave of lawsuits from angry customers and investors. The Senate Judiciary Committee is scheduled to hold hearings to examine the way Countrywide’s loan servicing unit has treated troubled borrowers who try to hang on to their homes by seeking Chapter 13 bankruptcy.

The troubles have grown so acute that two longtime analysts denounced the deal. “BoA should completely walk away from the Countrywide deal, as Countrywide’s loan portfolio will prove to be a drag on earnings and force BoA to raise additional capital,” Paul Miller, a mortgage industry analyst at Friedman, Billings, Ramsey & Company, wrote in a report. He downgraded Countrywide’s rating to underperform. Charles Peabody, a financial services analyst at Portales Partners, said the deal put BoA “between a rock and a hard place” and put a sell rating on its stock. “Either the deal goes through and BoA faces significant charges, or the deal fails and BoA faces a significant write-down on its $2 billion preferred investment in Countrywide,” he wrote.

Even before those warnings, BoA itself had prompted speculation it might pull back from the deal. BoA added a new paragraph to merger documents suggesting that it might not guarantee some or all of Countrywide’s publicly traded bonds. BoA previously created a bankruptcy-remote vehicle that could house Countrywide’s debt. S&P and Fitch responded by cutting Countrywide’s credit rating to junk-bond levels. Many analysts said BoA’s statement about Countrywide’s debt could be a hardball tactic to cut a new deal at a lower price. “They should walk away, but they will not,” Mr. Miller said. Instead, he thinks that BoA will try to renegotiate the deal for as little as $2 a share.

Countrywide’s losses have risen sharply since BoA made its initial $2 billion investment last summer. Losses may reach $16 billion. BoA, in the meantime, is under pressure to raise billions of dollars in fresh capital. On top of its recent $4 billion preferred stock offering, BoA may have to slash its dividend and raise up to $8 billion of common stock. Mr. Stickler said that the company felt “pretty comfortable at the moment” with its capital position and said the Countrywide transaction was “on track to close, as agreed to, early in third quarter.”

Countrywide has other pressing matters on its hands. Sen. Charles Schumer (D-NY), chairman of the Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts, is set to hold a hearing examining the lender’s practices. Steve Bailey, Countrywide’s chief executive for loan administration, is among those scheduled to testify. In prepared remarks, Mr. Bailey denies that Countrywide’s servicing unit is abusing the bankruptcy system and says that an internal review of loans in bankruptcy shows that mistakes are few. Nevertheless, the company is instituting new procedures to safeguard its customers. “Now that Congress is taking a close look at what Countrywide has been up to, the company finally seems to recognize the need to change its behavior,” Senator Schumer said in a statement. “But a pattern this unsettling will demand more than cosmetic fixes.”

[Source: NYT]