S&P Cuts Countrywide Debt to Junk

Standard & Poor's cut Countrywide Financial's(CFC Quote) credit rating to junk Friday, after a regulatory filing called into question whether Bank of America(BAC Quote) would repay the lender's outstanding debt after their planned merger.

S&P lowered its ratings on Countrywide Financial Corp. and Countrywide Home Loans Inc. to BB+/B from BBB+/A-2 and Countrywide Bank to BBB/A-3 from A-/A-2. The rating agency cited BofA's May 1 filing with the Securities and Exchange Commission, which said it was "evaluating alternatives for the disposition of the remaining Countrywide indebtedness," including "allowing it to remain outstanding as obligations of Countrywide (and not Bank of America)."

S&P said the filing suggests BofA might not support approximately $17 billion of medium-term notes, $4 billion of convertible debt, $2.2 billion in junior subordinated debt and $1 billion of subordinated debt outstanding.

The rating agency also said there is language in the filing suggesting Countrywide will wrapped into a separate facility, wholly owned by BofA, and assurances that Countrywide's common shareholders will receive common dividends.

"Until this filing it was our understanding that [BofA] would acquire all of Countrywide as stated in the January 2008 merger agreement," S&P said. "This new filing raises the possibility that this assumption is no longer true."

S&P put all of Countrywide's ratings on CreditWatch Developing, but said it could change that pending clarification of BofA's intentions.

"If selective debt of Countrywide is not fully supported under the merger terms or its legal status as a wholly owned subsidiary post acquisition is not considered to be core under our criteria, then ratings could either be affirmed or lowered," Standard & Poor's credit analyst Victoria Wagner said in the rating agency's press release.