(US) Countrywide Cut by Merrill; Bankruptcy Seen Possible

Countrywide Cut by Merrill; Bankruptcy Seen Possible

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.z7iz3TxD4M&refer=home

By Steve Dickson


A Countrywide branch office Aug. 15 (Bloomberg) -- Countrywide Financial Corp., the biggest U.S. mortgage lender, was downgraded to ``sell'' by Merrill Lynch & Co., which raised the possibility of bankruptcy if the company loses access to short-term financing.

``We cannot understate the importance of liquidity,'' Kenneth Bruce, a Merrill analyst in San Francisco, said in a research note today. ``Effective insolvency'' would result should creditors force Countrywide to sell assets at depressed prices or investors lose confidence in its ability to raise cash, he wrote.

``If liquidations occur in a weak market, then it is possible for CFC to go bankrupt,'' said Bruce, who had rated Countrywide a ``buy'' since April 2005, according to data compiled by Bloomberg. Countrywide 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. 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 5.6 percent to $23.09, the lowest in almost four years, at 10:15 a.m. in New York Stock Exchange composite trading.

Credit Risk

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.

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.

Bruce said 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.