Countrywide Cut by Merrill; Bankruptcy Seen Possible (Update1)
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 Countrywide's creditors force it 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 dropped 42 percent 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.
The stock dropped to $22.86 at 8:30 a.m. in early trading before U.S. stock exchanges opened. It closed at $24.46 on the New York Stock Exchange yesterday.
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 immediately return a call for comment.