Bank of America Corp. may be in the driver's seat when it comes to buying or walking away from Countrywide Financial Corp., but observers warn that B of A's reluctance to provide guarantees to the mortgage lender's bondholders could lead to a date in bankruptcy court.
The $1.76 trillion-asset Charlotte company said in a regulatory filing last week that it could give "no assurance" of an outright guarantee for about $38 billion of Countrywide's outstanding debt. That announcement led some observers to believe B of A may try to buy certain Countrywide assets while isolating some of the Calabasas, Calif., mortgage lender's debt. Others say B of A may be laying the groundwork for a price reduction.
Analysts and legal observers said that such moves could backfire if bondholders, fearful of the prospects of being left exposed before B of A closes the $4.1 billion deal, force Countrywide into involuntary bankruptcy. Then B of A would have to cede control over Countrywide's fate to a bankruptcy judge.
Legal observers agreed that a bankruptcy filing might prevent the January deal from closing. No one reached for this story indicated that B of A would purposefully goad bondholders into taking such action. They said bankruptcy could jeopardize B of A's initial $2 billion investment in Countrywide in August, along with any loan exposure to the mortgage lender. However, some analysts say that if B of A closes the deal it could face up to $30 billion of losses from Countrywide's loan portfolio.
Thomas Chen, a managing director and head of financial institutions at Piper Jaffray & Co., said that even though it might want a lower price for Countrywide's equity by "refusing to assume responsibility" for its bonds, B of A also would want to avoid "overplaying its hand," since "a panicked situation would collapse the value of the entire enterprise."
Sen. Charles Schumer, D-N.Y., weighed in on the issue of price Tuesday. Dow Jones quoted him as saying B of A should demand a lower price if it turns out the original one was based on Countrywide's profits from alleged abuse of homeowners seeking bankruptcy protection. He made his comments during a Senate Judiciary subcommittee hearing on how companies have dealt with bankrupt homeowners.
Kenneth D. Lewis, B of A's chairman, president, and chief executive, said in an interview last month that he reserves the right to evaluate the terms of the deal until its closing, which is expected in July. "We know nothing now that would be outside of the parameters we set up when we made our assessment of the company." B of A said Tuesday that the deal remains on track.
Margaret Howard, a professor at Washington & Lee University School of Law in Lexington, Va., said in an interview Tuesday that a decision on involuntary bankruptcy would be outside B of A's control and would be more palatable for bondholders than a situation where it isolates certain Countrywide assets and debts. "Bankruptcy operates on the equity principle, where you share equally with every other unsecured creditor" and gain a priority over shareholders, Prof. Howard said.
Christine Myatt, a bankruptcy lawyer in the Greensboro, N.C., office of Nexsen Pruet Adams Kleemeier LLC, said bankruptcy proceedings would create considerable uncertainty for B of A, forcing a significant writedown on the initial Countrywide investment and making it difficult to recoup any unsecured loans to the mortgage lender.
B of A would not detail its loan exposure Tuesday. It said in last week's regulatory filing that it has had "a number of significant commercial relationships" with Countrywide.
Legal observers said there could be perceived benefits for B of A in bankruptcy process. Prof. Howard said it could emerge as a lender to Countrywide if the lender goes into bankruptcy. Ms. Myatt said B of A could have an opportunity to buy certain assets at depressed prices, though it would have to bid against others.
Betsy Graseck, an analyst at Morgan Stanley, questioned whether the bondholders would have "sufficient cohesion" to force Countrywide into bankruptcy. She said she believes B of A would carry most of Countrywide debt's over and use proceeds from continued operations to pay off the bonds over time. Calls to Countrywide were not returned for comment.
