July 1, 2008 / 7:47 PM / 10 years ago

UPDATE 1-S&P, Moody's raise Countrywide after BofA takover

(Recasts, adds Moody’s action)

NEW YORK, July 1 (Reuters) - Two rating agencies on Tuesday raised their debt ratings on Countrywide Financial Corp. after the largest U.S. mortgage lender was acquired by Bank of America (BAC.N).

S&P raised Countrywide’s counterparty rating to “AA,” the third-highest investment-grade level, from the highest junk level of “BB-plus” to align it with ratings of Bank of America. The upgrade reflects expectations that Bank of America will honor Countrywide’s debt, S&P said in a statement.

And Moody’s Investors Service upgraded Countrywide’s senior debt rating to “Aa2,” in line with Bank of America’s ratings. The ratings of Charlotte, North Carolina-based Bank of America were affirmed.

Moody’s said Bank of America will repay certain Countrywide debts after the close of the transaction, but a substantial amount of Countrywide debt that is not guaranteed by the bank will remain outstanding.

Countrywide had $97.23 billion of outstanding debt as of Dec. 31, including Federal Home Loan Bank advances to Countrywide Bank of about $47.68 billion.

Moody’s said Countrywide’s creditors will benefit from Bank of America’s banking franchise, better risk management and implicit support from the bank.

The rating agency cautioned, however, that if a future organizational structure results in uncertainty about support for Countrywide’s non-bank credits, a negative rating action could follow.

The third rating firm, Fitch Ratings, kept its “BBB-minus” Countrywide rating on review until details of the new corporate structure are announced.

Fitch said the latest regulatory filing by Bank of America left open the possibility that Countrywide’s debt could remain the obligation of the mortgage lender, not Bank of America.

In that case, Countrywide’s debt rating could be downgraded from its current level and would remain below Bank of America’s rating. But if Bank of America guarantees Countywide’s debt, ratings could be equalized, Fitch said.

Bank of America completed its acquisition of Countrywide on Tuesday. For details click on [ID:nN01486703].

The deal makes Bank of America the No. 1 mortgage originator and mortgage servicer in the United States, according to S&P.

S&P said the outlook, which indicates the likely direction of the rating over the next two years, is negative because of continued weakness in Bank of America’s now expanded mortgage portfolio and credit card book.

“Although we acknowledge the long-term advantages associated with the Countrywide acquisition, we anticipate that the transaction will incrementally add to credit losses,” S&P said in a statement.

S&P said it could cut the rating if the magnitude and duration of weakness in Bank of America’s consumer business exceeds expectations.

The rating agency said it will also monitor Bank of America’s capital to ensure it remains within the range expected for the rating, calling the bank’s capital management “aggressive.”

The cost to insure Countrywide’s debt against default dropped on Tuesday after the acquisition. Countrywide’s credit default swaps fell to 185 basis points, or $185,000 to insure $10 million of debt per year for five years, from 217 basis points on Monday, according to Phoenix Partners Group.

Bank of America’s credit default swaps widened to 125 basis points from 110 basis points on Monday. (Reporting by Anastasija Johnson; Editing by Leslie Adler)

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