Moody’s Investors Won’t Change Countrywide Rating

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Countrywide Financial Corp. avoided heading into speculative-grade territory as Moody’s Investors Service yesterday affirmed its Baa3 rating, the lowest rung on the investment-grade ladder. On August 16, Moody’s placed the home-mortgage lender under review for possible downgrade, and Countrywide in October reported a $1.2 billion third-quarter loss from rising mortgage delinquencies and credit-related costs.

A cut to junk status, Countrywide warned in a recent securities filing, would limit its ability to raise money in public debt markets and cause it to lose bank deposits.

On Friday, Moody’s said it expects Countrywide to report additional write-downs in its loan inventories and possibly more losses, “but not to the extent of significantly impairing capital.” The outlook on the rating is negative, as Countrywide faces a challenging environment to achieve profitability, Moody’s said.

Standard & Poor’s Ratings Services rates Countrywide as an investment-grade triple-B-plus, on a watch for a downgrade. Fitch Ratings also gives the company a high-grade triple-B-plus rating, under a watch that could result in a cut, upgrade, or no change to the rating.

Countrywide shares, which lost another 12% yesterday, are down 75% on the year.

In its November 9 quarterly filing with the Securities and Exchange Commission, Countrywide said it believes it has “adequate funding liquidity,” but that “the effect of future developments on the company may require us to … procure additional sources of financing.”

In August, Countrywide raised $2 billion by selling preferred stock to Bank of America Corp. That preferred stock is convertible into a stake of about 16% in Countrywide. The bank also sold $4 billion in convertible debt in May in a private placement largely with hedge funds and banks. Buyers can force Countrywide to repurchase $2 billion of the debt in October 2008 and another $2 billion in May 2009.

Countrywide is struggling to cope with a credit crunch brought on by a surge in delinquencies and defaults on mortgage loans made to borrowers with poor credit. The market for bonds built out of such loans has dried up, forcing lenders like Countrywide to find other sources of funds.

Countrywide has responded by shifting its mortgage business into its bank, which can fund loans with deposits and advances from the Federal Home Loan Bank system. The company also has begun concentrating on loans it can hold as long-term investments or sell to government-sponsored investors Fannie Mae and Freddie Mac. Such loans typically have smaller profit margins and there is greater competition for that business.

Countrywide posted its first quarterly loss in 25 years in the third quarter on $2.27 billion in mortgage losses and write-downs and soaring credit reserves, though it expects to return to a profit this quarter. The company said last week that its October mortgage-loan funding fell 48% from a year earlier.


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