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Buyers Wary of Lender's Bonds

Investors want an extra yield as mortgage giant Countrywide sells debt amid housing slump.

October 17, 2006|From Bloomberg News

Countrywide Financial Corp. is getting buffeted by bondholders as it prepares to sell as much as $4.5 billion of new debt in a slumping housing market.

Investors are demanding an extra yield to own the company's $1 billion of 6.25% notes due in 2016, data show. This extra yield, or "spread," compared with similar-maturity U.S. Treasury notes has widened by 24 basis points to 136 basis points since they were sold in May.

Spreads on bonds of rivals with comparable credit ratings have risen by less than 2 basis points, Merrill Lynch & Co. index data show. One basis point is 0.01%.

Investors are concerned that Calabasas-based Countrywide is expanding into the riskiest parts of the mortgage business just as the housing market slows. As much as $20 billion of the $118 billion in mortgages Countrywide made in the second quarter gave borrowers the option to defer full payments in the first few years, increasing the amount of debt owed.

"Bondholders have to ask themselves if it's worth taking the risk" of more bad news about the housing market, said Scott MacDonald, director of research at hedge fund Aladdin Capital Management in Stamford, Conn. Aladdin manages $11.5 billion in assets, including bonds of Countrywide.

Investors who bought Countrywide's 10-year subordinated notes in May have earned 3.52%, including reinvested interest, according to Trace, the bond-price reporting system of NASD (formerly the National Assn. of Securities Dealers). A Merrill Lynch index that contains the bonds and those of Countrywide's peers has returned 4.94%.

New-home prices in the U.S. will fall this year for the first time since 1991, and existing houses will have the smallest gain ever as a glut of properties forces sellers to accept lower offers, the National Assn. of Realtors said recently.

Last month, 4.5% of all Countrywide loans had delinquent payments, up from 4.15% in August. The increase was caused in part by loans to people with bad credit, and missed payments will probably continue to rise, JPMorgan Securities Inc. analysts said.

"There's been some broader concern about the mortgage market, and when people think about the mortgage industry, they think about Countrywide," said Banc of America Securities analyst John Guarnera.

Countrywide said Sept. 8 that it planned to raise $3.5 billion to $4.5 billion in debt this year. Chairman and Chief Executive Angelo Mozilo has warned investors the mortgage business will slow.

"It's no secret that the housing market is cooling rapidly," Mozilo said at the company's investor forum Sept. 12.

On Monday, Countrywide shares slipped 24 cents to $36.12.

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