Countrywide debt cut to junk

There haven't been a lot of significant credit market tremors in recent days. The market has taken each and every capital raising, credit downgrade announcement, and so on in stride. But S&P just announced that it was cutting its rating on Countrywide Financial debt to "junk" status. The news follows an earlier story from Bloomberg that focuses on concerns Bank of America wouldn't back all of Countrywide's debt in its proposed takeover deal.

Here's an excerpt from that Bloomberg piece:

"Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender, increasing the likelihood of a default.

"There is no assurance that any such debt would be redeemed, assumed or guaranteed,'' the bank said in an April 30 regulatory filing, adding that no decision has been reached. Investors had grown more optimistic the bank would back Countrywide debt, and Standard & Poor's said this week it may raise Countrywide's rating to match Bank of America's.

"Prices on instruments that protect investors from a Countrywide default made their biggest jump since March 10. Bank of America agreed in January to buy the largest U.S. mortgage lender for $4 billion amid speculation that the worst housing market since the Great Depression would bankrupt Countrywide. Bondholders are counting on the merger to put Bank of America's AA credit rating behind Countrywide's $97.2 billion of debt.

"Countrywide's $1 billion of 6.25 percent notes due in 2016 fell 2.5 cents to 89.5 cents on the dollar at 12:24 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 8 percent, or 4.2 percentage points more than similar-maturity Treasuries, Trace data show. The debt fell to about half that price in January before Bank of America announced the purchase of Calabasas, California-based Countrywide.

"I'd be quite concerned if I was a bondholder if the intent of Bank of America is as it reads in the filing,'' said Gary Austin, founder of PDR Advisors LLC in Charlotte, North Carolina, where Bank of America is based. PDR manages about $600 million and doesn't hold Countrywide debt.

"Credit-default swaps tied to Countrywide's home-lending unit climbed 35 basis points earlier today to 190 basis points, 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."

And here's a quick update on the S&P news:

"Standard & Poor's Ratings Services said Friday it lowered ratings on Countrywide Financial Corp. and Countrywide Home Loans Inc. to BB+/B from BBB+/A-2. The move was due to the disclosure from Bank of America Thursday that there is no assurance that any of Countrywide's debt will be "redeemed, assumed, or guaranteed" after their pending merger, according to the ratings agency. All of Countrywide's ratings are on CreditWatch Developing due to the uncertainty over the legal status of Countrywide's creditors after the union. Any rating below 'BBB' is deemed "not investment grade" by S&P."