NEW YORK -- Standard & Poor's cut the credit rating of Countrywide Financial Corp to junk status on Friday on concerns that Bank of America may not support some of the mortgage lender's debt once it completes its proposed takeover.
The downgrade was the result of a regulatory filing by Bank of America earlier this week, which provided no assurance it would guarantee Countrywide's debt after it completes its proposed $4 billion acquisition, the rating agency said.
Shares of Countrywide, the largest U.S. mortgage lender, fell 3 percent on Friday and bonds extended their losses after the downgrade. Countrywide's 6.25 percent notes due in 2016 fell to 86.5 cents on the dollar from 92 cents on Thursday, according to MarketAxess.
Countrywide had previously warned that a downgrade would bring "a substantial adverse impact on our operations."
The company, in a February regulatory filing, said a loss of its investment grade rating would result in the acceleration of some secured debt obligations and hurt its ability to manage and hedge its inventory of loans.
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It would also increase Countrywide's financing costs and potentially hurt its ability to attract and retain bank deposits. In addition, up to $4.2 billion of its custodial deposits could be transferred to another bank if it is cut below investment grade, the company said.
S&P cut Countrywide's rating to "BB-plus," the highest junk level, from "BBB-plus," the third lowest investment grade.
It said ratings are on "creditwatch developing," meaning S&P may raise, affirm or cut again depending on the legal status of Countrywide's debt.
Bank of America said in a filing earlier this week that Countrywide had outstanding debt of about $97.23 billion as of Dec. 31, including Federal Home Loan Bank advances to Countrywide Bank of about $47.68 billion, which it expects will remain outstanding until repaid by Countrywide Bank.
Bank of America said it was examining options to dispose of remaining Countrywide indebtedness, including redeeming, assuming or guaranteeing some or all of this debt or allowing it to remain outstanding as obligations of Countrywide.
But the bank has made "no determination in this regard, and there is no assurance that any of such debt would be redeemed, assumed or guarantee," it said in a Securities and Exchange Commission filing this week.
"All that clause means is that we've not made a decision," said Bank of America spokesman Scott Silvestri.
Investors have been concerned about Bank of America's treatment of the debt for months as the bank provided no details about its treatment of Countrywide's obligations.
"The clear implication of Bank of America's refusal to take responsibility for the $40 billion or so in parent company debt is that Bank of America CEO Ken Lewis is considering a bankruptcy filing for Countrywide as one possible strategy after the transaction closes," Christopher Whalen, managing director at Institutional Risk Analytics, wrote in a research report.
Under one possible scenario, Bank of America could buy Countrywide and place all its assets in a new company called Red Oak, Whalen said. Bank of America could then move Countrywide's bank out of Red Oak and into another part of Bank of America, and in exchange give cash to Red Oak.
Red Oak could be placed in Chapter 11 bankruptcy protection if the U.S. economy, housing market and mortgage industry continue to weaken, he said.
Kathleen Shanley, analyst for independent research firm Gimme Credit, said there are other cases where companies did not guarantee debt of finance businesses they acquired.
HSBC did not guarantee the debt of Household International (now HSBC Finance) and American International Group does not guarantee the debt of International Lease Finance Corp or American General Finance, she said.
"In both cases, however, the finance companies have received credit from the rating agencies for implied support, and the parent companies have from time to time contributed capital or taken other steps to support their subsidiaries," she said.
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