Countrywide Plummets on Deal, Debt Fears

Countrywide Financial(CFC Quote) shares plunged as much as 17% Monday after an analyst suggested that Bank of America(BAC Quote) should "walk away" from the deal.

Friedman, Billings, Ramsey analyst Paul Miller said troubled Calabasas, Calif.-based lender Countrywide faced $20 billion to $30 billion of loan writedowns in a note Monday morning. Similar concerns led rating agency Standard & Poor's on Friday to cut Countrywide's debt to junk status and Fitch Ratings on Monday put the lender's debt on its "Rating Watch Evolving" list.

BofA will "likely renegotiate the transaction down to the $0 to $2 level and force [Countrywide] bondholders to absorb the remainder of the potential writedowns," he wrote. "[BofA] should completely walk away from the [Countrywide] deal, as [Countrywide's] loan portfolio will prove a drag on earnings and could force [BofA] to raise additional capital."

Charlotte-based banking giant BofA agreed to pay $4.1 billion in stock, or approximately $7 a share, for Countrywide in January. The deal is expected to close in the third quarter.

Calls to representatives for both companies were not returned.

Countrywide shares fell 62 cents, or 10.4%, to $5.36. BofA's stock slid 82 cents, or 2.1%, to close at $38.97.

Miller, who cut Countrywide's equity rating to underperform, the equivalent of a sell, from market perform, said BofA may choose not to walk away from the deal or lower its offer, as doing so might result in "negative publicity" the firm does not want. With a market capitalization of $172 billion, BofA can absorb the deal, Miller said.