By Jeff Kearns and Lynn Thomasson
Jan. 8 (Bloomberg) -- Countrywide Financial Corp. dropped the most since Black Monday in October 1987 in New York trading on speculation that it needs cash to continue operating its mortgage business.
``There's some sort of rumor that they would go under, but it's purely a rumor,'' said Thomas Garcia, head of trading at Thornburg Investment Management, which oversees about $50 billion in Santa Fe, New Mexico.
Investors drove Countrywide shares down 79 percent last year on concern the company was suffering from a cash shortage. The company tapped emergency credit lines and got a bailout from Bank of America Corp. as the worst housing slump in 16 years fueled bets that Countrywide might seek bankruptcy court protection.
``There is no substance to the rumor that Countrywide is planning to file for bankruptcy,'' spokesman Rick Simon said in a statement. Calabasas, California-based Countrywide has said it has adequate liquidity to run its business and predicted in October that it will be profitable this year. The company posted its first loss in 25 years during the third quarter.
Countrywide shares lost $2.17, or 28 percent, to $5.47. They sank to the lowest price since July 1996. On so-called Black Monday on Oct. 19, 1987, the Dow Jones Industrial Average tumbled 23 percent.
At least 20 mortgage lenders have declared bankruptcy since December 2006, according to Bloomberg data. U.S. foreclosures set a third-quarter record as overdue payments on subprime mortgages rose. That's made investors who buy mortgages reluctant to bid, and bankers have cut off credit lines to home lenders.
Bank of America, the nation's second largest bank, invested $2 billion in Countrywide in August. The preferred shares it acquired can be converted into common stock at $18 each and pay a 7.25 percent dividend, according to a regulatory filing at the time. Based on Countrywide's share price today, Bank of America's investment has lost 70 percent of its value. That excludes a $36.25 million quarterly dividend the lender was obligated to pay Bank of America, regulatory filings show.
``They are current on all their payments,'' said Vicky Wagner, an analyst at Standard & Poor's Corp.
Bank of America spokesman Scott Silvestri declined comment on the Countrywide investment. Bank of America, based in Charlotte, North Carolina, slumped 3.7 percent to $38.41, the lowest since December 2003.
Credit-default swaps tied to Countrywide's debt soared to a record as investors demanded as much as 30 percent upfront and 5 percent a year to protect from a Countrywide default for five years, according to broker Phoenix Partners Group in New York.
Yesterday, investors were demanding 20 percent upfront and 5 percent a year. Contracts trade on upfront payments when the market sees a high risk of default.
Options traders increased bets the stock will slide as much as 67 percent from yesterday's close before this month's contracts expire on Jan. 18. The number of puts traded rose to 379,431, almost 10 times the 20-day average, and bearish bets outnumbered bullish ones, or calls, by 2.77-to-1. The most- active contracts, January $5 puts, surged ninefold to 90 cents.
``That's panic buying in options,'' said Peter Dunay, who oversees $160 million including options as chief investment strategist at Leeb Capital Management in New York. ``People are definitely speculating that Countrywide could be going much lower.''
Countrywide's $1 billion of 3.25 percent debt due in May tumbled 6.5 cents to 83 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields about 60 percent, or 5,759 basis points more than similar-maturity Treasuries, Trace data show. Bonds that trade at a yield spread of 1,000 basis points are considered ``distressed,'' indicating investor concern about a default. A basis point is 0.01 percentage point.
Countrywide has enough money to pay its loans, said Fitch Ratings credit analyst Vincent Arscott in an interview. The company has $14.9 billion in bonds and bank loans maturing in 2008, according to data compiled by Bloomberg.