Bank of America, said on Wednesday it would invest $2 billion in Countrywide Financial, helping shore up the finances at the largest U.S. mortgage lender, which has struggled with a liquidity crunch this month.
The second-largest U.S. bank said it would buy non-voting preferred stock that yields 7.25% and can be converted into Countrywide common stock at $18 per share, 17.5% below the shares' Wednesday closing price.
Bank of America announced its investment six days after Countrywide stunned investors by tapping an entire $11.5 billion credit line because it was having difficulty selling short-term debt.
This raised concerns about whether the Calabasas, California-based company might survive the mortgage and credit crisis afflicting a wide range of U.S. lenders.
"In the current turmoil, the stock market has been underestimating the value in Countrywide's operations and assets," Bank of America Chief Executive Kenneth Lewis said in a statement. "We hope this investment will be a step toward a return to more normal liquidity in the mortgage markets."
Countrywide's market value was about $12.6 billion as of Wednesday's close. Countrywide's shares rose 19.5% to $26.07 in after-hours electronic trading. Bank of America shares 95 cents to $52.60 after-hours.
"It's a $2 billion vote of confidence from a major financial institution," said Steve Persky, a portfolio manager at Dalton Investments in Los Angeles, which invests $1.2 billion. "Are we out of the woods yet in the mortgage market? No."
In January, before the mortgage crisis surfaced, Charlotte, North Carolina-based Bank of America was the subject of speculation it might buy or enter a joint venture with Countrywide. Lewis at the time said "we're not particularly interested in the wholesale and correspondent business."
The impetus behind the $2 billion investment and the bank's longer-term goals were not immediately clear.
"Eventually I think they'd be looking to acquire the whole firm," said Ganesh Rathnam, a Morningstar Inc analyst who covers Bank of America. "I don't see why they would otherwise buy $2 billion into it."
Bank of America probably could not acquire Countrywide outright for a while. The bank's pending acquisition of LaSalle Bank from ABN AMRO would push it up against a 10% federal cap on deposits. Buying the operator of Countrywide Bank would probably push it over.
Goldman Sachs and law firm Wachtell, Lipton, Rosen & Katz advised Countrywide on the transaction. Bank of America was advised by its own investment bankers and law firm Cleary Gottlieb Steen & Hamilton LLP.