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THE RATINGS GAME:
Countrywide Upgraded
As Analysts Say Lender Can Weather The Storm
Dow Jones & Company, Inc.
BOSTON (Dow Jones) -- An analyst at Banc of America
Securities upgraded shares of troubled mortgage lender
Countrywide Financial Corp. to neutral from sell Friday,
saying that tapping its $11.5 billion credit facility
should provide Countrywide the time needed to address
liquidity and capital concerns.
In a research note, however, analyst Robert Lacoursiere
cut his price target on the stock to $21 from $31. Shares
of Countrywide (CFC) , the largest U.S. mortgage lender,
closed Thursday off 11% at $18.95 after it said it borrowed
$ 11.5 billion from a group of 40 banks due to problems
finding money in credit markets. To reduce its reliance
on credit markets further, the company said that it would
try to originate nearly all mortgages through its banking
operation.
Lacoursiere said the upgrade doesn't reflect any shift
in his bearish stance on the residential mortgage market.
Instead, the stock price "fairly balances the probability
of a conservative worst-case outcome of a liquidity induced
distressed asset/breakup sale valued $7.25 against the
prospect of a smaller and much less profitable company
that we would value at $23.50 today."
Although Lacoursiere warned that "sizable risks
remain," he said Countrywide's use of its credit
line gives the company breathing room. "As a result
we think the possibility of a liquidity induced distressed
sale [is] unlikely," the analyst wrote.
Still, the company faces headwinds such as higher financing
costs, slipping fundamentals and credit pressures, and
Lacoursiere slashed his per-share profit estimates for
this year and 2008. "Seeing the potential for a
volatile saw- toothed performance as the market reassesses
risk and confronts multiple quarters of poor results
against deteriorating fundamentals, we do not see this
as an opportunity to build a position," he said.
Credit agencies have already lowered their ratings on
Countrywide's debt. The uncertainty surrounding the company's
future highlights how far the pain that started in subprime
mortgages has spread into other home loans that were
seen as more secure.
Housing prices are down in many areas of the country,
and more borrowers are defaulting as their mortgage rates
rise. Several mortgage lenders have gone out of business
or stopped originating new loans as sources of short-term
financing have dried up. In response to the trouble in
credit markets, the Federal Reserve on Friday said it
has cut the discount rate to 5.75% from 6.25%.
The stock market rallied in response to the Fed's rare
move as Countrywide's share gained more than 18% at $22.50
Friday morning.
Earlier this week, the stock plunged after Merrill Lynch
analyst Kenneth Bruce downgraded the shares to sell from
buy.
"We fear that the acceleration of margin calls
and forced asset sales in the capital markets could lead
to more problems for Countrywide to finance its mortgage
operations," Bruce wrote in a note to clients Wednesday.
"Should a liquidity event occur, for which the
likelihood is increasing, Countrywide shares would probably
witness further selling pressure," he said.
Morningstar analyst Erin Swanson in a Thursday note
took a more cautiously optimistic tone. After reviewing
Countrywide's financial position, "we believe the
chances of bankruptcy are remote and the firm will be
able to operate through the current liquidity squeeze," the
analyst said.
Although the company is facing "unprecedented disruptions" in
the mortgage market and won't be able to completely sidestep
the near-term pressure, "any earnings hit will not
destroy significant value," Swanson said.
"The waters ahead are choppy, and market fear is
not subsiding," the analyst said. "However,
we contend that as the best-positioned mortgage originator,
Countrywide is highly undervalued right now."
"Although the situation is currently dire, we think
Countrywide's strategy leaves the company viable over
the long term," added analysts at Fix-Pitt Kelton
in a report Friday. "Essentially Countrywide is
walking away from market-based financing and moving to
a more stable source of financing at the bank."
Meanwhile, some are backing the "too big to fail" argument.
"In our view, the odds favor having the government
save Countrywide rather than letting it fail," said
Stanford Group in a note Friday. "The disruption
to the economy would simply be too great."
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