Countrywide Drops 21% On Merrill Lynch Bankruptcy Talk
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Countrywide Corp., the biggest American mortgage lender, fell by as much as 21%, the most since the 1987 stock-market crash, after Merrill Lynch & Co. raised the possibility of bankruptcy.
“Effective insolvency” would result if creditors force Countrywide to sell assets at depressed prices or investors lose confidence in its ability to raise cash, a Merrill analyst in San Francisco, Kenneth Bruce, said in a research note yesterday.
Shareholders shouldn’t “understate the importance of liquidity,” Mr. Bruce wrote. “If liquidations occur in a weak market, then it is possible for CFC to go bankrupt,” said Mr. Bruce, who downgraded Countrywide to “sell” from “buy.” The company trades under the ticker CFC.
Countrywide’s shares have lost more than half their value this year on concern a credit crunch in the mortgage industry will erode profit at the Calabasas, Calif.-based company. KKR Financial Holdings LLC, Scottish Re Group Ltd., and other companies tied to the mortgage industry dropped yesterday on speculation 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 $4.49, or 18%, to $19.97, in New York Stock Exchange composite trading at 1:33 p.m. It reached $19.25 earlier today, a 21% decline.
The stock extended its decline after CNBC reported that Countrywide’s 30-day asset-backed commercial paper is being quoted by securities dealers at a 12.54% yield. The company previously borrowed at 15 basis points, or 0.15 percentage point, over the London interbank offered rate, the cable-television network reported. Libor, as the rate is known, currently is about 5.57% for 30-day borrowings.
Countrywide’s overnight corporate commercial paper was quoted yesterday at 6% and 6.5% for 30 days, according to the director of money funds for American Century Investments, Denise Latchford.
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 90 cents, or 24%, to $2.79.
