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what took them so long

Countrywide Rating Cut to `Junk' By Standard & Poor's (Update2)

By David Mildenberg

May 2 (Bloomberg) -- Countrywide Financial Corp.'s credit rating was unexpectedly cut below investment grade by Standard & Poor's Corp., which cited doubt about whether Bank of America Corp. will back the home lender's debt after they merge.

The revision reflects ``the new level of uncertainty as to the ultimate legal status of Countrywide's creditors'' after the lender's sale to Bank of America, Standard & Poor's said in a statement today. Prices on instruments that protect investors from a Countrywide default made their biggest jump in almost four months.

Bank of America, the second-largest U.S. bank by assets, agreed in January to buy Countrywide, the largest U.S. mortgage lender, for about $4 billion after speculation that Countrywide couldn't pay its debts and might go bankrupt. Bondholders have been counting on the merger to put Bank of America's AA credit rating behind Countrywide's $97.2 billion in debt.

``There is no assurance that any such debt would be redeemed, assumed or guaranteed,'' the Charlotte, North Carolina-based bank said in an April 30 regulatory filing, adding that no decision has been reached. Countrywide is based in Calabasas, California.

Bank of America rose 0.6 percent to $39.63 at 2:51 p.m. in New York Stock Exchange composite trading. Countrywide dropped 3 percent to $5.87. Credit-default swaps tied to Countrywide's home-lending unit climbed 95 basis points to 250, according to London-based CMA Datavision. The instruments pay buyers if a company breaks its debt agreements, and a rising price shows investors are more concerned about default.

Merger Doubts

``Until this filing, it was our understanding that Bank of America would acquire all of Countrywide,'' Standard & Poor's analyst Victoria Wagner wrote today. ``This new filing raises the possibility that this assumption is no longer true.''

Countrywide Financial and its home lending unit had their ratings cut to BB+/B from BBB+/A-2. Standard & Poor's also cut the rating on Countrywide Bank FSB to BBB/A-3 from A-/A2.

Investors have been asking Bank of America about plans to back Countrywide's debt since January, when the issue was raised in a conference call to discuss the merger. The bank has demurred ever since.

Bank of America spokesman Scott Silvestri said earlier today, before the S&P downgrade, that the filing ``just means we haven't made a decision.'' He referred questions about S&P's action to Countrywide, where officials couldn't be reached immediately for comment.

Completion Date

The purchase of Countrywide is scheduled to close in the third quarter. Investors have speculated Bank of America may seek a lower price or cancel the deal because U.S. home prices and sales have deteriorated.

``This confirms how tenuous this transaction is,'' said Christopher Whalen, managing director at Institutional Risk Analytics, a banking research firm in Torrance, California, referring to Bank of America's filing.

Whalen expects Bank of America to absorb the best assets, including Countrywide Bank, while the debt remains with a new company created by the merger, Red Oak Merger Corp. Red Oak may then file for bankruptcy, shielding Bank of America from liability, Whalen said.

Bank of America Chief Executive Officer Kenneth Lewis is a ``tough guy and he's got to protect his shareholders,'' Whalen said.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: May 2, 2008 15:05 EDT

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