Countrywide's credit spreads tighten: traders

NEW YORK (Reuters) - Countrywide Financial Corp's CFC.N credit spreads tightened on Monday, despite a slump in the mortgage lender's shares, amid a view by credit investors that a sell-off late last week was overdone, traders said.

Countrywide's shares fell 12 percent to $5.26 on the New York stock exchange after a Friedman, Billings, Ramsey analyst said Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) is likely to renegotiate its deal to buy Countrywide or completely walk away from it.

But the cost of protecting Countrywide's debt fell, indicating credit investors see less risk. Spreads were helped by a Moody's Investors Service report late on Friday saying it expects Bank of America to complete the acquisition and support Countrywide's debt.

Five-year credit default swaps for Countrywide Home Loans narrowed to 245 basis points on Monday, or $245,000 a year to protect $10 million of debt, down from 290 basis points on Friday, according to data from Phoenix Partners Group.

Spreads on Countrywide Financial Corp's 5.8 percent notes due in 2012 narrowed by 15 basis points to 497 basis points over Treasuries, according to MarketAxess.

Spreads had widened after Bank of America said in a filing last Wednesday it was providing no assurance it would guarantee or assume Countrywide's debt after it completes its proposed $4 billion acquisition of the largest U.S. mortgage lender. The filing prompted Standard & Poor's to cut Countrywide's rating to junk status on Friday.

The filing also raised concerns that Bank of America might put Countrywide's debt in a separate entity after the acquisition, raising default risks.

Following S&P's downgrade, however, Moody's said in a statement on Friday that although Bank of America may not legally guarantee or assume Countrywide's debt, "it is likely to support it" after the acquisition.

"We believe that Bank of America would have much to lose and little to gain by not supporting the Countrywide debt," Moody's senior credit officer Craig Emrick said in a statement.