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Bank of America Gets Sweet Deal for Ailing Mortgage Lender

Bank of America'sdecision to throw a $2 billion lifeline to Countrywide Financial is far more than BofA telling Countrywide "here's some money, pay us back when you can." Countrywide is paying dearly for the injection.

There are big strings attached to the deal which only serve to highlight the desperate position that Countrywide faces, while putting BofA into the catbird's seat.

In exchange for the $2 billion, Bank of America is receiving non-voting preferred stock that yields a whopping 7.25% and can be converted into Countrywide common stock at $18 per share.

Should BofA covert the preferred shares, it will own about 16% of Countrywide.

In an interview with CNBC's Maria Bartiromo, Angelo Mozilo, chief executive and co-founder of Countrywide, called the deal a "win win" for both companies and a "priceless endorsement" of Countrywide.

He even went so far to say that the deal "premium" with its 7.25% coupon on the convertible preferred shares "is not a high premium. We've got a reasonableness statement from Goldman Sachs looking at the entire transaction."

But analysts at Goldman Sachs said in a research note Thursday that "given a 7.25% yield (which seems high relative to similar historical transactions) and an $18 strike price (which falls below our $20 12-month price target), we believe that Bank of America may share our concerns regarding earnings progression; we forecast falling production margins, increasing credit costs, and further residual writedowns."

"Indeed," continued the report, "this transaction should prove EPS dilutive (albeit marginally) from higher funding costs as well as a potentially higher share count."

For as long as Bank of America holds on to its preferred stake it's sitting on a $2 billion 7.25%-coupon money machine that nets a dividend payment of $145 mln a year.

Bank of America could also choose to hedge its position in the open market which could raise hundreds of millions of dollars more, though it has not disclosed any plans to do so.

Goldman concluded its report on a down note: "$2 bn does little to change Countrywide's liquidity predicament. Additionally, we believe that today's announcement should dampen seemingly interminable acquisition speculation; if Bank of America wanted to buy Countrywide, one would think that they would have offered more
than $2 bn in convertible funding."

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