NEW YORK -- The cost of insuring the debt of Countrywide Financial Corp. <CFC.N> dropped Thursday afternoon after a wild day of trading that saw its credit spreads double, before ending the day lower.
Countrywide's credit default swap spreads tightened to around 470 basis points, or $470,000 per year for five years to insure $10 million in debt. The swaps had earlier gapped out to more than 1000 basis points, compared to 620 basis points on Wednesday, said an analyst.
Concerns that Countrywide may be forced into bankruptcy were sparked on Thursday morning when the largest U.S. mortgage lender said it drew down an entire $11.5 billion bank credit line as a global credit crisis limits its access to short-term cash. For details, see [ID:nN16321010]
The news fanned concerns from Wednesday when a Merrill Lynch analyst said the company could be forced into bankruptcy if market liquidity worsens. [ID:nN15253338]
Some analysts, however, said they view concerns of a near-term bankruptcy as overblown.
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"There are a lot of measures that they can take before filing — selling mortgage holdings in the pipeline, slowing originations, and most importantly, talking to third parties about an equity investment," said Ricardo Kleinbaum, analyst at BNP Paribas in New York.
However, "it's not that they are too big too fail," he said.
"This is the low-cost option for Countrywide and they will no longer need to tap the commercial paper markets to fund mortgage originations," said Kleinbaum.
"It buys Countrywide time," he said. "There should be no problem making margin calls on repos due to the high quality assets on a good part of the portfolio."
Countrywide's one-year default swap costs also surged as high as 1,800 basis points during the day in an illiquid market, more than double the cost of five-year protection, indicating that investors see the risk of bankruptcy as near term.
RESCAP
Credit default swaps of Residential Capital LLC also suffered on Thursday, with the cost to insure the debt for five years earlier surging to 22 percent of the debt. It cost $2.2 million upfront to insure $10 million in debt for five years, in addition to annual payments of 500 basis points, according to data by CMA DataVision.
Credit default swaps are typically quoted upfront when the company's credit spreads rise above 1,000 basis points, a level that indicates distress. ResCap started trading upfront for the first time on Wednesday, at 11.5 percent upfront plus annual 500-basis-point premiums, according to CMA.
Moody's Investors Service and Fitch Ratings cut ratings on ResCap and Countrywide on Thursday, lowering GMAC's home lending unit ResCap to junk status. [ID:nN16331783]
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