NEW YORK — Shares of Countrywide Financial Corp., the largest U.S. home lender, plunged 16% Wednesday amid escalating concerns over its ability to raise cash in the commercial paper market where companies secure short-term funding.
The stock, which has dropped 42% this year, recently had tumbled more than 20% at one point during afternoon trade. Meanwhile, the perceived risk of owning Countrywide bonds also rose Wednesday.
Spokespeople at the Cacabasas, Calif., lender didn't return requests seeking comment.
"I don't think Countrywide can access the unsecured commercial paper market," said David Sylvester, an executive vice president in San Francisco-based Wells Capital Management, which manages $90 billion in money market assets.
Commercial paper is short-term debt, with maturities, on average, of about 30 days. Usually a cheaper alternative to bank loans, commercial paper is the domain of companies with stellar credit ratings and is cushioned by their bank credit lines.
A drying up of an important source of financing would complicate Countrywide's lending operations, although as an investment-grade-rated company it still has access to other funding sources. It also erodes investor confidence in the lender's creditworthiness, which was reflected Wednesday not only in the stock price, but also in the derivatives market.
The annual cost of protecting a notional amount of $10 million of Countrywide bonds against a possible default for five years hit $450,000 up from $368,500 a day earlier, according to Phoenix Partners, a New York-based inter-dealer broker, and, CMA DataVision, a London-based credit information specialist. Earlier this month, the same credit protection cost about $172,000, according to credit default swaps levels.
One banker on Wall Street took a dim view of Countrywide's prospects. "Any company in their situation can't access the commercial paper market at any level," he said. That includes the asset-backed commercial paper market.
Asset-backed commercial paper, which accounts for more than half the $2.2 trillion of commercial paper outstanding at the end of July, is used by companies such as mortgage lenders and automakers. A mortgage lender typically secures an asset-backed commercial paper line with a pool of home loans that it holds.
In a sign that investors are nervous about existing Countrywide commercial paper, the banker said that some of the lender's commercial paper was on offer in the secondary market for 800 basis points over a popular short-term interest rate benchmark. This roughly translates to about a 13% yield - and a loss of about $500,000 on $25 million of Countrywide commercial paper - underscoring the urgency on the part of the seller.
Merrill Lynch Uses The "B" Word
Earlier in the day, Merrill Lynch & Co. (MER) slashed its rating on Countrywide stock to sell, citing "accelerating" liquidity challenges. The firm has had a "buy" on Countrywide since April 2005, according to Thomson Financial, and as of Wednesday, there are five sell ratings on the stock, six buy ratings and five hold ratings.
"We fear that the acceleration of margin calls and forced asset sales in the capital markets could lead to more problems for (Countrywide) to finance its mortgage operations," Merrill analyst Kenneth Bruce wrote in a research report. He furthered, "if liquidations (of assets) occur in a weak market, then it is possible for (Countrywide) to go bankrupt."
Countrywide officials have said it has enough cash to survive the credit-market turmoil. During a recent conference call with analysts and investors, Countrywide Chief Executive Angelo Mozilo said, "We are certainly not going to have any issues funding the company," pointing to its "very conservative liquidity management philosophy" and "adequate, diversified, reliable sources of liquidity available." But he also said, "The pressure point would be short-term funding."
Countrywide said it had access to $190.3 billion in short-term liquidity at the end of June. What it called "highly reliable" short-term financing, including its commercial-paper holdings, came in at $46.2 billion. And the lender listed $3.8 billion in long-term debt that matures within six months.
In its second-quarter report filed with the Securities and Exchange Commission, Countrywide also warned that "disruptions in the debt markets or a reduction in our credit ratings, could have an adverse impact on our earnings and financial condition, particularly in the short term."
As some investors and analysts increasingly question if Countrywide is too big to fail, others believe it remains well-capitalized to weather the storm. Analysts at independent research firm CreditSights said in an Aug. 12 report that the company's liquidity position "remains healthy."
Bruce, the Merrill analyst, noted that the "severe contraction" in liquidity is touching almost every type of asset. He pointed to Coventree Inc., a Toronto-based financial company that sought emergency funding after it couldn't sell $950 million in new debt to investors.
Other Funding Sources
"Still, Countrywide does have access to alternative sources of funding," said Sylvester of Wells Capital.
These include the various repurchase or repo markets where financial institutions can secure short-term loans in return for collateral. It also includes collateralized loans, said Sylvester, which involves putting up collateral.
