BofA seen likely to honor Countrywide's debt

NEW YORK (Reuters) - While Bank of America (BAC.N) still has not explicitly said it would guarantee Countrywide's debt after it completed the acquisition of the largest U.S. mortgage lender, bondholders are seen likely to be made whole.

The second largest U.S. bank last week completed its purchase of Countrywide debt for about $2.5 billion, but bondholders are still waiting for the Charlotte, North-Carolina based bank to say how it would treat the mortgage lender's debt, estimated at $40 billion.

Bank of America provided no guarantees in its latest regulatory filing on Tuesday but the new organizational structure detailed there indicates bondholders will be repaid, CreditSights analyst David Hendler said in a report.

"Countrywide's bank credit facilities have been repaid and its outstanding debt has been assumed by an indirect subsidiary, created and wholly owned by BofA," Hendler wrote.

"Our view continues to be that BofA will ultimately honor the outstanding indebtedness from (old) Countrywide, based on our discussion with the company following this filing, as well as our prior analysis."

Countrywide's bonds have rallied and its credit default swaps have tightened as investors felt more secure. Spreads on Countrywide's 4 percent notes due in 2011 narrowed to 2.96 percentage points over Treasuries on Wednesday, from as wide as 7.49 percentage points in May.

Both bond and credit default spreads gapped out when Bank of America in April said it was examining options for Countrywide debt and that there was "no assurance" it would redeem, assume or guarantee the debt.

But according to the latest filing, a fully-owned Bank of America subsidiary assumed Countrywide's indebtedness, including subordinated notes, junior subordinated notes, euro medium term notes, preferred stocks and convertible securities.

Recent rating actions by Standard & Poor's and Moody's Investors Service also indicate reduced risk that Countrywide's debt will not be guaranteed.

Both rating firms last week aligned the mortgage lender's ratings with those of Bank of America, lifting them from junk level into investment grade.

Moody's upgraded Countrywide even though it noted that a substantial amount of the lender's debt that is not guaranteed by the bank will remain outstanding.

The third rating firm, Fitch Ratings, kept its "BBB-minus" Countrywide rating on review because it still saw the possibility that Countrywide's debt could remain the obligation of the mortgage lender, not Bank of America.

Fitch Ratings analyst Vincent Arscott said the latest filing on Tuesday does not clear the bondholder status yet.

"Any company that has a subsidiary with its own debt, that debt is not necessarily guaranteed. My guess this is not going to give us an answer to a $100 million question," he said.

But Countrywide bondholders will benefit from at least implied support because the bank has reputational issues to consider as it integrates its new acquisition, Gimme Credit analyst Kathleen Shanley said in a recent report.

(Reporting by Anastasija Johnson; editing by Gary Crosse)