Countrywide Falls, Merrill Cites Bankruptcy Prospect (WOW!)

Countrywide Falls; Merrill Cites Bankruptcy Prospect (Update1)

By Elizabeth Hester
A Countrywide branch office Aug. 15 (Bloomberg) — Countrywide Financial Corp., the biggest U.S. mortgage lender, fell for the fifth consecutive day on the New York Stock Exchange after Merrill Lynch & Co. raised the possibility of bankruptcy.

“Effective insolvency'’ would result should creditors force Countrywide to sell assets at depressed prices or investors lose confidence in its ability to raise cash, Kenneth Bruce, a Merrill analyst in San Francisco, said in a research note today.

Shareholders shouldn’t “understate the importance of liquidity,'’ Bruce wrote. “If liquidations occur in a weak market, then it is possible for CFC to go bankrupt,'’ said Bruce, who downgraded Countrywide to “sell'’ from “buy.'’ The company trades under the ticker CFC.

Countrywide’s shares have lost almost half their value this year on concern a credit crunch in the mortgage industry will erode profit at the Calabasas, California-based company. KKR Financial Holdings LLC, Scottish Re Group Ltd., and other companies tied to the mortgage industry dropped today on concern earnings will be hurt by the crisis.

Bankers have curtailed lending to mortgage providers and demanded more collateral, forcing more than 70 companies to seek buyers or shut since the start of last year.

Countrywide dropped 8.1 percent to $22.47, and reached the lowest level in almost four years, in New York Stock Exchange composite trading at 1:33 p.m.

KKR Financial, which said it lost $40 million on the sale of $5.1 billion of mortgage loans, dropped 24 percent, or $3.67, to $11.60.

Scottish Re

Scottish Re said it was evaluating risks in its $3.1 billion of bond holdings backed by subprime and so-called Alt-A mortgages, or those made to borrowers who don’t qualify for prime loans. Shares of the company declined 87 cents, or 24 percent, to $2.82.

Newcastle Investment Corp. fell as much as 18 percent after Lehman Brothers Holdings Inc. cut its ratings on shares of the real estate investment trust. The stock rebounded, trading up 11 cents at $15.48.

Thornburg Mortgage Inc. rose 55 percent to $11.79, after the company said it’s moving closer to getting funding and has no plans to file for bankruptcy.

The perceived risk of owning Countrywide’s bonds increased, according to credit-default swap prices that reflect bets on the company’s credit quality. Countrywide five-year credit swaps climbed as much as 65 basis points to 440 basis points, according to broker Phoenix Partners Group in New York.

Countrywide Assurances

Last week, Countrywide said it had access to about $187 billion in credit. Chief Executive Officer Angelo Mozilo assured investors that the company has enough cash to cope with the market turmoil, and said it may even benefit as competitors are forced out of business.

“We continue to think the company can survive a period of secondary market instability,'’ Bruce said in his note. “However, the steps that it would take to preserve shareholder value would be expensive, likely leading to further share price declines from here.'’

Amber Cousins, a spokeswoman for Countrywide, didn’t return calls seeking comment. Carrie Gray, a spokeswoman for Merrill Lynch, declined to make Bruce available for comment.

“They do have a number of sources of liquidity,'’ said Frederick Cannon, an analyst at KBW Inc. in San Francisco. “They’re not just dependent on Wall Street, they do have a large bank,'’ which can access other forms of financing, he said. Cannon rates the stock “market perform.'’

`Severe Contraction’

Bruce said in his report that the “severe contraction'’ in liquidity is surfacing in almost every type of asset. He cited Coventree Inc., the Canadian investment bank that yesterday sought emergency funding after investors declined to buy its debt. The company later said it found buyers for C$600 million ($557 million) of the securities.

Coventree’s problem may spread to the U.S., Bruce said.

“We hesitate to use the word contagion, but this market is feeling awfully similar to the fall of 1998,'’ he said, referring to the market crisis that resulted from Russia’s debt default and the collapse of hedge fund Long-Term Capital Management LP.

To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net .