Analysts say BofA may lower Countrywide deal price

By Tenzin Pema

BANGALORE (Reuters) - At least two analysts said Bank of America Corp <BAC.N> will likely lower its purchase price for Countrywide Financial Corp <CFC.N>, with Friedman, Billings Ramsey analyst saying the bank may bring down its deal price to the $0 to $2 level or completely walk away from the deal.

Shares of Countrywide, the largest U.S. mortgage lender, fell nearly 12 percent to $5.29 in morning trade on the New York Stock Exchange, after Friedman downgraded Countrywide to "underperform" from "market perform."

Analysts at S&P Equity Research expect Bank of America to complete the buyout of Countrywide, but at a lower price due to the rapid deterioration of Countrywide's credit portfolio.

Friedman analyst Paul Miller, in a note to clients, said Countrywide's loan portfolio has deteriorated so rapidly that it currently has negative equity and the proposed takeover of the company will be a drag on Bank of America's earnings due to the elevated credit expenses at Countrywide,

Miller cut his target on Countrywide's stock to $2 from $7.

Bank of America, which in January agreed to buy Countrywide for $4 billion, said in a filing last week there was no assurance that any of the mortgage lender's outstanding debt would be redeemed, assumed or guaranteed.

"Bank of America announced that it might not guarantee Countrywide's debt, which is most likely the first step in renegotiating the entire deal," Miller said. "We estimate that if fair-value adjustments to the loan portfolio could exceed approximately $22 billion, this would increase the odds of Bank of America renegotiating the transaction or walking away."

He said Bank of America's current purchase price allows for some adjustments to loan values as it is below Countrywide's first-quarter net tangible equity of $11 billion.

Miller, however, added that given the rapid credit deterioration and weak secondary market demand, markdowns on Countrywide's loans could easily exceed Bank of America's estimates when the company performed due diligence and the cushion was built into the deal.

He expects markdowns on Countrywide's $95 billion loan portfolio -- which includes $28 billion of option adjustable rate mortgages (ARMs), $14 billion of home equity line of credits (HELOCs), $20 billion of fixed rate second lien mortgages, and $19 billion of Hybrid ARMs -- to be material.

"We believe Countrywide has significant credit risk on its balance sheet, not only in its loan portfolio, but in its subprime and HELOC securities and residuals, its representations and warranties on loans sold, and in loans held outside of banking operations," Miller said.

S&P Equity Research analysts also said they were "particularly wary of Countrywide's option ARM portfolio because we do not believe that it has yet been stress-tested."

"Indeed, one of our major concerns about Bank of America is the potential inheritance of Countrywide's option ARM portfolio," they added.

S&P Equity Research analysts maintained their "hold" rating on both Countrywide and Bank of America.

On Friday, Standard & Poor's cut the credit rating of Countrywide to junk status on concerns that Bank of America may not support as much as $24 billion of the mortgage lender's debt once it completes its proposed takeover.

Countrywide, in a February regulatory filing, had 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.

In addition to increasing Countrywide's financing costs and potentially hurting its ability to attract and retain bank deposits, up to $4.2 billion of its custodial deposits could be transferred to another bank if it were cut below investment grade, the company had said.

Bank of America shares were trading down more than 1 percent to $39.35 in morning trade on the New York Stock Exchange.

(Editing by Bernard Orr, Anil D'Silva)