Liquidity Concerns Plague Countrywide

The mortgage lender's shares were approaching single-digits Monday.
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Updated from 3:03 EST

Shares of

Countrywide Financial

(CFC)

are approaching the single-digits, as bond market pressure seeps into stock traders' mindsets.

As investors worry that the troubled California lenders' liquidity may not be ample enough, its shares were plunging another 12.4% Monday. The price is hovering over the $10-per-share line at $10.57.

"It's the same old worries," says Joe Capone, managing member and founder of SMaRT Financial Partners, a fund specializing in financial services equities, referring to concerns that the housing market recession has a long way to fall before recovering and that companies will face more writedowns and losses. Capone is also a contributor to

TheStreet.com

's investment ideas Web site

RealMoney.com

.

Just last week, the chorus of executives heralding worse days ahead for the housing market grew larger and more alarmist.

Wells Fargo

(WFC) - Get Report

CEO John Stumpf said the sector's recession is the worst since the Great Depression, adding that it is far from over.

Capone adds that

Goldman Sachs'

(GS) - Get Report

ratings

downgrade of

Citigroup

(C) - Get Report

to a sell Monday is also pressuring the entire financial sector.

Breaking Down Countrywide's Big Stumble

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But, some traders say renewed attention to pressure on bond prices of GMAC's mortgage unit ResCap and Countrywide is also worrisome to Countrywide's stock investors. The debt of both companies is trading at distressed levels.

"Either the bond market is overdoing it, or the stocks are still overvalued," says Capone, who owns Countrywide puts. Typically, companies whose bonds are trading at extremely low levels are near bankruptcy, revealing investors' concerns that their investment may not be paid back, and the accompanying stocks often trade in the single-digits.

A

Wall Street Journal

report last week alleged that Countrywide competitor ResCap is $800 million away from tripping a loan covenant, meaning investors could potentially declare a default and argue for accelerated payment of its bonds. And a company filing late Friday -- which included updates on loans on watch and details on its exposure to struggling homebuilders -- suggests "another round of losses may be waiting on deck," writes Kathleen Shanley, analyst at GimmeCredit, an independent credit research firm.

ResCap and GMAC are 51% owned by private-equity firm Cerberus Capital, so they do not have publicly traded stock, though bonds and shares of minority stakeholder

General Motors

(GM) - Get Report

are also under pressure Monday. GM stock is down over 6%, while its most liquidly traded 30-year bond due 2033 is down a point, or 1 cent on the dollar.

Some Countrywide bonds are trading at distressed levels, or about 63 cents on the dollar, even though they still have an investment grade credit rating. Some of ResCap's bonds are trading even lower, at about 55 cents on the dollar.

"

ResCap bonds trade as though they're single-C, or just one notch above default," says Brian Hessel, managing partner at Stonegate Capital, adding that any bonds touching the mortgage industry or the financial sector are being unabashedly sold.

Some analysts wonder if the pessimism is overdone.

Hessel points out that ResCap's $1.25 billion of bonds due in June 2008 are trading at about 70 cents on the dollar, meaning the market is fairly convinced the company won't be able to pay out that maturity in the next seven months. If one were to buy those bonds at this level, they'd yield about 80% to maturity, he says.

Countrywide Financial's nearest maturing bond, a $750 million offering due in one month, on Dec. 19, 2007, is trading at 98 cents on the dollar, which could yield a buyer about 32% if you believe the lender can afford to pay it back in one month.

Investors are getting mixed messages from Countrywide itself. The firm reported a greater-than-expected $1.2 billion loss in the third quarter, but management said it would return to profitability in the fourth quarter. It has a relationship with

Bank of America

(BAC) - Get Report

, which injected $2 billion into Countrywide earlier this year via a convertible bond deal. Bank of America also has the right of first refusal, meaning it may purchase the company if someone else were to express interest.

CreditSights, another independent research firm, notes that while Countrywide still faces "ongoing severe headwinds" and may need higher provisions, or cash set aside for loan losses, and asset markdowns. But they argue that Countrywide's methodologies for such cushioning measures are "conservative" and could "mitigate further pain in future quarters."

From the company itself, chief executive Angelo Mozilo flip-flopped in his assessment of the housing market of late. To investors, he says the company will return to profitability. To Washington lawmakers, Mozilo says the worst is not over as he argues that the government has not done enough to stem the tide of defaults and home price depreciation that's led his mortgage lending business to face its current funding problems.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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