Minutes for Diamond Lake Investment Club January 10, 2008 plus the aftermath on Friday
Bank America Might Walk Away From CountryWide Deal ...
http://online.wsj.com/article/SB120070492065001981.html?mod=hps_us_whats_news
==============
Countrywide Financial Corp. shares dropped nearly 10% Friday amid growing investor fears that Bank of
America Corp. could walk away from its agreement to acquire the struggling home-mortgage lender.
Countrywide shares were at $4.96 in 4 p.m. composite trading on the New York Stock Exchange Friday, a 12-
year low, down from $5.48 Thursday and $6.33 on Jan. 11, the day plans were announced for a merger in
which shareholders would get 0.1822 Bank of America share for each share in the mortgage company.
Based on Bank of America's closing of $35.97, the offer values Countrywide at about $3.8 billion, or $6.55 a
share.
Countrywide's closing price was about 24% below the offer price. On the day the deal was announced, the
gap was about 10%.
Bank of America declined to comment. Countrywide representatives didn't respond to requests for comment.
Stocks in takeover deals regularly trade below the offer price because of the risks that plans could fall
through. The gap, known as the arbitrage spread, is wider than usual in this case, though.
"The Street thinks the deal will have to be re-priced" lower, said Paul J. Miller Jr., an analyst at Friedman,
Billings, Ramsey & Co. He has argued since the deal was announced that there is a high risk the price will
be renegotiated if the mortgage market continues to worsen and Countrywide losses exceed Bank of
America's expectations. The purchase is due to be completed in the third quarter.
Some Wall Street analysts attributed the wide gap to details of the merger agreement that Countrywide filed
with the Securities and Exchange Commission late Thursday. The agreement gives Bank of America wide
leeway to walk away. One condition is that Countrywide must get an unqualified opinion on its 2007
annual report from an outside auditor. Bank of America wouldn't be held to a "specific performance" clause,
which generally refers to the ability of the seller to force the buyer to complete a buyout. Countrywide also
agreed to a broadly worded clause on "material adverse changes" that could torpedo the deal.
Frederick Cannon, an analyst at Keefe, Bruyette & Woods in San Francisco, said arbitrage traders "had a
tough year in 2007 and are reluctant to put on the trade where there is perceived risk."
Despite those risks, he said, he expects the transaction to be completed on the current terms.
Some planned buyouts of mortgage lenders fell apart last year. H&R Block Inc. last April announced plans
to sell its Option One Mortgage unit to Cerberus Capital Management LP, but the business continued to
deteriorate, and the two companies called off the deal in December.
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
Are Countrywide Financial Bonds Bankruptcy Remote?
January 22, 2008 [sic]
... we wonder how many of the CFC bond holders understand that they may face an equal or greater haircut
[than common stock holders].
The CFC 6.25%s of 2016 closed at 79.125 on Friday or over a 10% YTM. The pricing reflects the expectation
that BAC will assume responsibility for the CFC debt at par. But after hearing from some bankers in the
know and reading the "Agreement and Plan of Merger" filed with the SEC by BAC last week, we think that
CFC bond holders will soon get the joke.
Usually, when a company acquires another, the former assumes the debt of the latter and agrees to make
timely payments of interest and principal as previously contracted. In the case of BAC's purchase of CFC,
however, BAC seems to view the transaction as an option.
Bankers who've been briefed by BAC officials tell The IRA that CEO Ken Lewis intends to keep the crippled
thrift holding company "bankruptcy remote" by merging CFC with a new vehicle, called Red Oak Merger
Corp in the merger plan, and that BAC does not intend to consolidate the entity or take full responsibility
for the CFC debt.
According to the plan: "…at the Effective Time, [CFC] shall merge with and into Merger Sub. Merger Sub
shall be the Surviving Company in the Merger and shall continue its existence as a limited liability
company under the laws of the State of Delaware." (BAC public affairs officials Kevin Stitt and Pamela Black
did not respond to written questions sent by The IRA via email on Thursday.)
The implication is that BAC eventually will take direct ownership of the FDIC insured Countrywide Bank
FSB, which now has assets of some $130 billion, leaving the remaining assets of the formerly public CFC
and a good chunk of its $105 billion in parent level debt at risk of an eventual default. BAC officials are
reported to have said that BAC's deposit base and debt issuing power offer significant funding advantages to
CFC, but also said that BAC will keep the target separate for an "interim period" of indeterminate duration.
FDIC insured banks, you see, cannot file bankruptcy. Were BAC to even contemplate putting the company
formerly known as CFC into Chapter 11, it would first need to move Countrywide Bank FSB to a different
part of the BAC group. Otherwise, when BAC was about to file the Chapter 11 petition, the Office of Thrift
Supervision would intervene and invoke its statutory authority as the bank's primary regulator to appoint
the FDIC as receiver of the bank, potentially stripping BAC of its entire equity investment.
...
Original minutes
Bank America Might Walk Away From CountryWide Deal ...
http://online.wsj.com/article/SB120070492065001981.html?mod=hps_us_whats_news
==============
Countrywide Financial Corp. shares dropped nearly 10% Friday amid growing investor fears that Bank of
America Corp. could walk away from its agreement to acquire the struggling home-mortgage lender.
Countrywide shares were at $4.96 in 4 p.m. composite trading on the New York Stock Exchange Friday, a 12-
year low, down from $5.48 Thursday and $6.33 on Jan. 11, the day plans were announced for a merger in
which shareholders would get 0.1822 Bank of America share for each share in the mortgage company.
Based on Bank of America's closing of $35.97, the offer values Countrywide at about $3.8 billion, or $6.55 a
share.
Countrywide's closing price was about 24% below the offer price. On the day the deal was announced, the
gap was about 10%.
Bank of America declined to comment. Countrywide representatives didn't respond to requests for comment.
Stocks in takeover deals regularly trade below the offer price because of the risks that plans could fall
through. The gap, known as the arbitrage spread, is wider than usual in this case, though.
"The Street thinks the deal will have to be re-priced" lower, said Paul J. Miller Jr., an analyst at Friedman,
Billings, Ramsey & Co. He has argued since the deal was announced that there is a high risk the price will
be renegotiated if the mortgage market continues to worsen and Countrywide losses exceed Bank of
America's expectations. The purchase is due to be completed in the third quarter.
Some Wall Street analysts attributed the wide gap to details of the merger agreement that Countrywide filed
with the Securities and Exchange Commission late Thursday. The agreement gives Bank of America wide
leeway to walk away. One condition is that Countrywide must get an unqualified opinion on its 2007
annual report from an outside auditor. Bank of America wouldn't be held to a "specific performance" clause,
which generally refers to the ability of the seller to force the buyer to complete a buyout. Countrywide also
agreed to a broadly worded clause on "material adverse changes" that could torpedo the deal.
Frederick Cannon, an analyst at Keefe, Bruyette & Woods in San Francisco, said arbitrage traders "had a
tough year in 2007 and are reluctant to put on the trade where there is perceived risk."
Despite those risks, he said, he expects the transaction to be completed on the current terms.
Some planned buyouts of mortgage lenders fell apart last year. H&R Block Inc. last April announced plans
to sell its Option One Mortgage unit to Cerberus Capital Management LP, but the business continued to
deteriorate, and the two companies called off the deal in December.
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
Are Countrywide Financial Bonds Bankruptcy Remote?
January 22, 2008 [sic]
... we wonder how many of the CFC bond holders understand that they may face an equal or greater haircut
[than common stock holders].
The CFC 6.25%s of 2016 closed at 79.125 on Friday or over a 10% YTM. The pricing reflects the expectation
that BAC will assume responsibility for the CFC debt at par. But after hearing from some bankers in the
know and reading the "Agreement and Plan of Merger" filed with the SEC by BAC last week, we think that
CFC bond holders will soon get the joke.
Usually, when a company acquires another, the former assumes the debt of the latter and agrees to make
timely payments of interest and principal as previously contracted. In the case of BAC's purchase of CFC,
however, BAC seems to view the transaction as an option.
Bankers who've been briefed by BAC officials tell The IRA that CEO Ken Lewis intends to keep the crippled
thrift holding company "bankruptcy remote" by merging CFC with a new vehicle, called Red Oak Merger
Corp in the merger plan, and that BAC does not intend to consolidate the entity or take full responsibility
for the CFC debt.
According to the plan: "…at the Effective Time, [CFC] shall merge with and into Merger Sub. Merger Sub
shall be the Surviving Company in the Merger and shall continue its existence as a limited liability
company under the laws of the State of Delaware." (BAC public affairs officials Kevin Stitt and Pamela Black
did not respond to written questions sent by The IRA via email on Thursday.)
The implication is that BAC eventually will take direct ownership of the FDIC insured Countrywide Bank
FSB, which now has assets of some $130 billion, leaving the remaining assets of the formerly public CFC
and a good chunk of its $105 billion in parent level debt at risk of an eventual default. BAC officials are
reported to have said that BAC's deposit base and debt issuing power offer significant funding advantages to
CFC, but also said that BAC will keep the target separate for an "interim period" of indeterminate duration.
FDIC insured banks, you see, cannot file bankruptcy. Were BAC to even contemplate putting the company
formerly known as CFC into Chapter 11, it would first need to move Countrywide Bank FSB to a different
part of the BAC group. Otherwise, when BAC was about to file the Chapter 11 petition, the Office of Thrift
Supervision would intervene and invoke its statutory authority as the bank's primary regulator to appoint
the FDIC as receiver of the bank, potentially stripping BAC of its entire equity investment.
...
Original minutes
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