Bank of America knows when it’s time to buy.
The Charlotte, N.C.-based bank is making a $2 billion equity investment in the beleaguered Countrywide Financial (nyse: CFC – news - people ), the companies said Wednesday evening.
Bank of America (nyse: BAC – news - people ) will purchase $2 billion worth of preferred Countrywide stock yielding 7.3%, and that can be converted into common stock at $18 per share, giving the mortgage lender a much-needed cash infusion amid a crippling credit crunch.
Countrywide shares soared 20.01%, or $4.37, to $26.19 after hours Wednesday on the news. Bank of America shares rose 1.9%, or 98 cents, to $52.63.
Bank of America is buying low, and Peter Slatin, founder of the Slatin Real Estate Report, believes it’s a good bet on Countrywide, which he said has been an aggressive lender, not a stupid one.
“It’s not just propping up a bad company, but showing faith in a reasonable company,” Slatin said, “and I think the future of the American housing market, if not the immediate future.”
Slatin added that the key is what kind of management influence Bank of America will want to assert on Countrywide.
Goldman Sachs (nyse: GS – news - people ) analyst Lori Appelbaum believes it’s clearly a good investment from Bank of America’s standpoint, and gives Countrywide the strong backing in the marketplace it needed after the market’s loss of confidence in the mortgage sector.
She noted that Bank of America has invested in financial institutions before, such as the Chinese bank ICBC before its IPO, as well as Sallie Mae (nyse: SLM – news - people ) (See: “Sallie Surges On Bank Takeover”).
A number of investors are believed to be stepping up to take advantage of struggling companies that are rushing to shed distressed mortgages like KKR Holdings. KKR Holdings announced last week that it had sold $5.1 billion in residential mortgage loans from its portfolio and Thornburg Mortgage (nyse: TMA – news - people ) followed suit on Monday with billions of dollars in sales (See: “Who’s Buying Mortgages?”).
Jason Arnold, an analyst at RBC Capital Markets, said that there are opportunistic investors out there who have been anticipating a blowup in the credit markets and are sitting on the sidelines with capital. “I’m sure this is their wildest dream,” he said.
Large, long-term holders, who aren’t funding themselves in the capital markets, such as insurance companies and mutual funds, are good bets for buying up quality mortgages, such as those sold recently by Thornburg and KKR.
As the mortgage lending mess has evolved, Countrywide has found itself making headlines, most recently from having to lay off employees in its loan origination unit, Full Spectrum (See: “Cuts Claimed At Countrywide”)
The ongoing credit crisis has hit America’s largest mortgage lender hard in recent weeks. (See: “Countrywide On Its Side”)
Last Thursday, Countrywide said it will have to draw on an $11.5 billion credit line to ease its liquidity jam. The sudden announcement, and particularly Countrywide’s decision to draw on its entire credit line, was considered a desperate move by the lender and fanned speculation that the company was edging toward Chapter 11. On that day, all three ratings agencies also cut their ratings on the company’s senior debt.
Courtesy of Forbes.com
