NEW YORK (Reuters) - Countrywide Financial Corp CFC.N on Tuesday denied market speculation that it might seek bankruptcy protection, but its shares sank 27.4 percent in their biggest drop since the 1987 stock market crash on concern the largest U.S. mortgage lender's problems would worsen.
The lender said there was "no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the company," but its shares closed down $2.09 at $5.55, their lowest close since 1996.
Countrywide has said it has sufficient liquidity to operate, but credit rating agency Egan-Jones Ratings Co said on Tuesday the company "is severely challenged and might falter if it does not receive an infusion of at least $4 billion within the next couple of weeks."
Shares of Countrywide have fallen 86.9 percent in the last year. Tuesday's decline pulled the KBW Mortgage Finance Index .MFX down 7.1 percent and the Standard & Poor's Financials Index .GSPF down 3.6 percent. Other decliners included mortgage lender IndyMac Bancorp Inc IMB.N, down 10.9 percent, and bond insurer MBIA Inc (MBI.N), down 20.8 percent.
Tuesday's decline also followed a New York Times article citing court records that it said showed Countrywide, based in Calabasas, California, fabricated documents related to the bankruptcy of a Pennsylvania borrower.
"There is renewed speculation that Countrywide will declare bankruptcy or have some default action," said Al Greenberg, head options floor trader at broker-dealer BNY ConvergEx Group in Chicago.
Credit default swaps on debt of Countrywide's home loans unit soared. Investors demanded 29 percent upfront and 5 percentage points a year to protect against default for five years, up from 21.5 percent upfront plus annual premiums on Monday, CMA DataVision said. Swaps trade on an upfront basis when the market considers a company "distressed."
Like many U.S. mortgage lenders, Countrywide has struggled with the nation's housing slump. Falling home prices and tight credit markets have led to soaring defaults and write-downs of home loans stuck on lenders' books industrywide.
Chief Executive Angelo Mozilo on Oct. 26 said Countrywide would earn 25 cents to 75 cents per share in the fourth quarter, after losing $1.2 billion in the third quarter, and survive the credit crunch. The company also set plans to lay off up to 12,000 employees, or one-fifth of its workforce.
Yet some analysts are not convinced Countrywide is out of the woods, though the lender now specializes in smaller home loans that mortgage financiers Fannie Mae FNM.N and Freddie Mac FRE.N will buy that may be less susceptible to default.
"With forecasts for home price declines, home sales and recession continuing to worsen on a daily basis, the outlook for Countrywide worsens relative to management's recent guidance," Lehman Brothers Inc analyst Bruce Harting wrote on Tuesday. He said Countrywide's loan credit quality may not stabilize and profitability may not recover until 2009 at the earliest.
Harting rates Countrywide "underweight," and cut his forecast for fourth-quarter profit to 20 cents per share from 26 cents. Analysts, on average, expect a quarterly profit of 12 cents per share, according to Reuters Estimates.
Countrywide is expected to disclose December mortgage lending activity as soon as Friday, and to report fourth-quarter results on Jan. 29.
Tuesday's share price decline also puts Bank of America Corp's (BAC.N) $2 billion investment in the company in August further under water. The second-largest U.S. bank bought preferred stock convertible at $18 per share into what could become a one-sixth stake in Countrywide.
Bank of America spokesman Scott Silvestri declined to comment. The bank's shares closed down $1.49, or 3.7 percent, at $38.41, and earlier touched a four-year low.
Additional reporting by Dena Aubin and Kristina Cooke in New York, Doris Frankel in Chicago; Editing by Brian Moss, Toni Reinhold