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NEW YORK - Countrywide Financial yesterday denied market speculation that it might seek bankruptcy protection, but its shares sank 27.4 per cent in their biggest drop since the 1987 stock market crash on concern the largest US mortgage lender's problems would worsen.
The lender said there was "no
substance to the rumour that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumour that any of the major rating agencies are contemplating negative action relative to the company", but its shares closed down US$2.09 at US$5.55, their lowest close since 1996.
Countrywide has said it has sufficient liquidity to operate, but credit rating agency Egan-Jones Ratings said yesterday the company "is severely challenged and might falter if it does not receive an infusion of at least US$4 billion ($5.2 billion) within the next couple of weeks."
Shares of Countrywide have fallen 86.9 per cent in the past year. Yesterday's decline pulled the KBW Mortgage Finance Index down 7.1 per cent and the Standard & Poor's Financials Index down 3.6 per cent. Other decliners included mortgage lender IndyMac Bancorp, down 10.9 per cent, and bond insurer MBIA, down 20.8 per cent.
Yesterday's decline also followed a New York Times article citing court records that it said showed Countrywide, based in Calabasas, California, fabricated documents related to the bankruptcy of a Pennsylvania borrower.
"There is renewed speculation that Countrywide will declare bankruptcy or have some default action," said Al Greenberg, head options floor trader at BNY ConvergEx Group in Chicago.
Credit default swaps on debt of Countrywide's home loans unit soared. Investors demanded 29 per cent upfront and 5 percentage points a year to protect against default for five years, up from 21.5 per cent upfront plus annual premiums on Monday, CMA DataVision said.
Swaps trade on an upfront basis when the market considers a company "distressed".
Like many US mortgage lenders, Countrywide has struggled with the nation's housing slump. Falling home prices and tight credit markets have led to soaring defaults and write-downs of home loans stuck on lenders' books industrywide.
Chief executive Angelo Mozilo on October 26 said Countrywide would earn US25c to US75c per share in the fourth quarter, after losing US$1.2 billion in the third quarter, and survive the credit crunch. The company also set plans to lay off up to 12,000 employees, or one-fifth of its workforce.
Yet some analysts are not convinced Countrywide is out of the woods, though the lender now specialises in smaller home loans that mortgage financiers Fannie Mae and Freddie Mac will buy that may be less susceptible to default.
"With forecasts for home price declines, home sales and recession continuing to worsen on a daily basis, the outlook for Countrywide worsens relative to management's recent guidance," Lehman Brothers analyst Bruce Harting wrote.
He said Countrywide's loan credit quality might not stabilise and profitability might not recover until 2009 at the earliest.
Countrywide is expected to report fourth-quarter results on January 29.
- REUTERS