A Merrill Lynch & Co. analyst raised the possibility Wednesday of bankruptcy for Countrywide Financial Corp., the biggest U.S. mortgage lender.
“Effective insolvency” would result if creditors force Countrywide to sell assets at depressed prices or investors lose confidence in its ability to raise cash, Kenneth Bruce, a Merrill analyst in San Francisco, said in a research note Wednesday.
Shareholders shouldn’t “understate the importance of liquidity,” Bruce wrote.
“If liquidations occur in a weak market, then it is possible for CFC to go bankrupt,” said Bruce, who downgraded Countrywide to “sell” from “buy.”
Countrywide’s shares have lost almost half their value this year on concern that a credit crunch in the mortgage industry will erode profit. Shares of KKR Financial Holdings LLC, Scottish Re Group Ltd. and other companies tied to the mortgage industry dropped Wednesday on speculation earnings will be hurt by the crisis.
Bankers have curtailed lending to mortgage providers and are demanding more collateral, forcing more than 70 companies to seek buyers or shut since the start of last year.
Countrywide stock dropped $3.17 to $21.29.
KKR Financial, which said it lost $40 million on the sale of $5.1 billion of mortgage loans, dropped 31 percent, or $4.75, to $10.52.
Scottish Re said it was evaluating risks in its $3.1 billion of bond holdings backed by subprime and so-called Alt-A mortgages, or those made to borrowers who don’t qualify for prime loans. Shares of the company declined 90 cents, 24 percent, to $2.79.
Last week, Countrywide said it had access to about $187 billion in credit. Chief executive officer Angelo Mozilo assured investors that the company has enough cash to cope with the market turmoil, and said it may even benefit as competitors are forced out of business.
“We continue to think the company can survive a period of secondary market instability,” Bruce said in his note. “However, the steps that it would take to preserve shareholder value would be expensive, likely leading to further share price declines from here.”
Amber Cousins, a spokeswoman for Countrywide, didn’t return calls seeking comment. Carrie Gray, a spokeswoman for Merrill Lynch, declined to make Bruce available for comment.
“Any talk of bankruptcy is grossly exaggerated,” said Edwin Walczak, who manages $600 million at Vontobel Asset Management in New York and owns 182 million Countrywide shares.
Walczak said he’s been buying Countrywide shares amid the turmoil in part because most of Countrywide’s new mortgages qualify to be bought by Fannie Mae and Freddie Mac, so they are “easily securitized.”
Countrywide is based in Calabasas, Calif., the nation’s largest home lender, is struggling to raise the money it needs to keep lending. Shares fell 13 percent Wednesday following a Merrill Lynch report suggesting that the lender may be forced to cease operations.
On the outside chance that Countrywide closes its doors, borrowers with loans serviced by the company would likely have their accounts transferred to another company, a common practice in the mortgage business.
Borrowers refinancing or obtaining a new mortgage, however, could find themselves without their loans. When other lenders have closed, borrowers have been left without the money they need to complete a sale, leaving some stranded at the closing table.
