Countrywide, ResCap debt protection costs surge
NEW YORK (Reuters) - The cost of insuring the debt of Countrywide Financial Corp. CFC.N and Residential Capital LLC leaped on Thursday on new concerns about Countrywide's liquidity and the state of the mortgage market.
By 9:50 a.m. EDT, Countrywide's credit default swap spreads were at 750 basis points. They had been quoted at 1,050 basis points earlier in the session, more than double the 500 basis points late on Wednesday.
Countrywide's credit default swaps swung wildly on Thursday as fears grew about the company's liquidity and the possibility it may be pushed into a bankruptcy filing.
Some analysts, however, said they view concerns of a near-term bankruptcy as overblown.
"There are a lot of measures that they can take before filing -- selling mortgage holdings in the pipeline, slowing originations, and most importantly, talking to third parties about an equity investment," said Ricardo Kleinbaum, analyst at BNP Paribas in New York.
However, "it's not that they are too big too fail," he said.
New concerns about Countrywide's liquidity were raised on Thursday after the company said it is drawing down an entire $11.5 billion credit facility to bolster liquidity as a shortage of credit devastates much of the mortgage industry.
Countrywide's one-year default swap costs surged as high as 1,800 basis points in an illiquid market, more than double the cost of five-year protection, indicating that investors see the risk of bankruptcy as near term.
"This is the low-cost option for Countrywide and they will no longer need to tap the commercial paper markets to fund mortgage originations," said Kleinbaum.
"It buys Countrywide time," he said. "There should be no problem making margin calls on repos due to the high quality assets on a good part of the portfolio."
RESCAP
Credit default swaps of Residential Capital LLC also moved wildly, with the cost to insure the debt for five years surging to 22 percent of the debt. It cost $2.2 million upfront to insure $10 million in debt for five years, in addition to annual payments of 500 basis points, according to data by CMA DataVision.
Credit default swaps are typically quoted upfront when the company's credit spreads rise above 1,000 basis points, a level that indicates distress. ResCap started trading upfront for the first time on Wednesday, at 11.5 percent upfront plus annual 500-basis-point premiums, according to CMA.
