NEW YORK — The cost of insuring against a default in the debt of Countrywide Financial Corp. came under pressure Friday after Standard & Poor's cut the company to junk.
S&P is the first of the three major ratings agencies to push the company into junk territory. The agency cited planned acquirer Bank of America Corp.'s May 1 Securities and Exchange Commission filing which indicated that it is possible that the bank wouldn't support some of Countrywide's debt, including the approximately $17 billion of medium-term notes, $4 billion of convertible debt, $2.2 billion of junior subordinated debt and $1 billion of subordinated debt currently outstanding.
Countrywide's five-year credit default swap, or CDS, contract swooped to a spread of 240 basis points shortly after the news before quickly widening to 250 basis points, according to levels from broker Phoenix Partners Group. The CDS closed Thursday's session at 165 basis points, but has been moving wider throughout Friday's session, Phoenix Partners indicated.
This means the annual cost of protecting a notional $10 million of Countrywide bonds against default for five years is now $250,000 versus $165,000 late Thursday.
Credit default swaps widen when cautious investors buy credit protection against the possibility of default.
"If selective debt of Countrywide is not fully supported under the merger terms or its legal status as a wholly owned subsidiary post acquisition is not considered to be core under our criteria, then ratings could either be affirmed or lowered," said Standard & Poor's credit analyst Victoria Wagner in a statement.
Countrywide officials weren't immediately available for comment.
