As Countrywide Financial looks to stave off what could be a crippling downgrade to its credit rating, analysts say the mortgage giant will need to remain transparent in its disclosures over the next several months to quell concerns about its stability.
Jittery investors sent shares of Countrywide down Monday as the lender looks to address concerns raised by ratings agencies.
"It's one of our key concerns on the company, and I think that's one of the reasons why they raised money from Bank of America," said Robert Napoli, an analyst at Piper Jaffray. "Countrywide tried to do their best to position themselves to be profitable going forward. That's not going to be easy to do in this market."
The company said that if its credit rating falls any further it will "severely" limit its access to the public corporate debt market, and that could have repercussions on its business.
In a filing with the Securities and Exchange Commission, the company warned that a lower rating also will raise the interest rate at which it can borrow to refinance or renegotiate its current borrowings.
Napoli said that because Countrywide deals only in mortgages, its subprime exposure has taken a higher profile than that of institutions like Merrill Lynch and Citigroup , which have experienced billions in writedowns themselves but have other businesses that can compensate for the mortgage losses.
As such, Napoli said, it will be critical for the company to be as forthcoming as possible about its subprime exposure. Countrywide also will have to show that it's taking the proper measures to correct the problems.
"They need to prove to the ratings agencies that what they're doing today isn't adding to the problems, but adding to their future profitability," Napoli said.
For Countrywide, a below investment-grade rating could affect its bank subsidiary's ability to capture custodial deposit accounts.
"As of Sept. 30, 2007, up to $5.5 billion of our custodial deposits may be subject to placement with another bank if our credit ratings were reduced below investment grade," Countrywide said in the filing.
A ratings downgrade also would harm its ability to retain commercial deposits.
Turnaround Not Far Away
Napoli believes that as long as Countrywide fully discloses its financial condition and takes proactive measures to make sure the practices that predated the subprime fallout are addressed, the company can stabilize over the next three quarters.
"By no later than the second quarter of 2008 and maybe by the first quarter of 2008 we will all know how deep the problems are, and where they are," he said. "Once all that is known, the headlines for the new surprises that you get every day will diminish, and that's what it will take to stabilize the credit markets."
Countrywide's subprime problems peaked in August, and in the third quarter the company posted a $1.2 billion loss.
To mitigate the risk, Countrywide procured other sources of liquidity, including $9.2 billion of cash and cash equivalents, $2 billion of which came from Bank of America.
Countrywide also said it has focused more on loans that it can be directly sold or securitized into programs by government-sponsored agencies, such as Fannie Mae, Freddie Mac and Ginnie Mae.
-- Reuters contributed to this report.