In a surprise announcement today, Countrywide Financial Corp. said Bank of America made a $2 billion investment in the nation's biggest mortgage lender.
The deal gives Charlotte, N.C.-based BoA 7.25 percent non-voting convertible preferred shares that can be converted into common stock at $18 per share, the statement indicated. Shares of Calabasas, Calif.-based Countrywide, traded under the symbol CFC, closed before today's announcement at $21.82.
A Merrill Lynch analyst sent shockwaves across the globe when he suggested that Countrywide, which reported $130.2 billion in second quarter originations -- more than any other U.S. lender -- could face bankruptcy.
The lender, which saw its ability to obtain capital through commercial paper curtailed, responded by drawing down entirely an $11.5 billion unsecured credit line provided through a syndicate of 40 of the world's biggest banks. Investors responded by sending shares of the company lower.
"We believe that in the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets," BoA Chairman and CEO Kenneth D. Lewis was quoted as saying in today's announcement. "This investment reflects our confidence in their business and recognizes the importance of the company in providing home financing across the country."
In January, the Financial Times reported the two financial giants held discussions about an alliance. Citing people close to the matter, the Times said the talks could lead to an acquisition of Countrywide by BoA -- though that never materialized.
If BoA, which agreed not to purchase additional voting shares, exercises the conversion, it will be subject to trading restrictions for 18 months.
"This transaction benefits all of Countrywide's constituents, including investors, shareholders, mortgage customers, deposit holders, business partners and employees," Countrywide Chairman and Chief Executive Officer Angelo R. Mozilo said in the statement.
But Moody's Investors Service has taken a more cautious view of the move.
"Countrywide's overall liquidity and access to funding remain strained due to continued dislocations in the mortgage markets, and these matters, among others, need to be addressed before Moody's would resolve its the ratings review," an analyst for the ratings agency said in a statement issued after Countrywide's announcement.
Moody's noted Countrywide still needs to improve its borrowing facilities, still faces mortgage market that is unstable and faces the potential to lose its leadership role in the business. The agency warned about possible downgrades to Countrywide's debt ratings.