Credit analyst suggest buying Countrywide on weakness

By Ronda Fears

Nashville, Tenn., April 4 - Regardless of interest rates going forward or whether the refinancing boom of the past year has run its course, Countrywide Credit Industries (subsidiary rating A3/A) is positioned to weather a variety of interest rate environments, said Kathy Shanley, senior bond analyst with Gimme Credit. She recommends adding the credit on recent weakness.

"Recent merger speculation may come to naught, but Countrywide's 10-K suggests the mortgage banking specialist is well-positioned to maintain its existing credit quality as a stand-alone company," Shanley said in a report Thursday.

Countrywide remains mostly a prime mortgage lender, with a 6.6% share of the mortgage market, ranking behind Wells Fargo, Chase and Washington Mutual. For the 10 months ended Dec. 31, about 80% of the company's total loan volume consisted of conventional loans, typically conforming loans meeting Fannie Mae/Freddie Mac guidelines.

Countrywide is dabbling in the sub-prime sector, the analyst noted, but those loans accounted for only 4.5% of last year's dollar volume.

Delinquency rates are up sharply on the sub-prime segment of the servicing portfolio, to 14.4% at Dec. 31 versus 11.8% at Feb. 28, 2001, but the total delinquency rate increased less dramatically over the same period to 5.4% from 4.9%, with less than 1% of the loans in the portfolio facing the prospect of foreclosure.

"Although Countrywide has expanded in recent years by adding ancillary products such as insurance, it remains primarily a mortgage banking monoline," Shanley said in the report.

"As such, despite its solid track record of managing its interest rate exposure, we view it as inherently more risky than diversified credits within the financial services sector. Mitigating this risk is a well-managed funding program."

Short-term debt, including $1.4 billion of commercial paper outstanding at Dec. 31, is part of the funding mix. But Countrywide has $10.9 billion in committed bank credit lines and reusable mortgage purchase commitments.

In its 10-K filing, the company says it doesn't let commercial paper exceed the unused portion of its facilities, the analyst pointed out, adding that Countrywide stated it aims to keep a six-month funding cushion available on its existing lines.

In addition, while some assets, including mortgage servicing rights and retained interests, may not be readily marketable, she said other assets like mortgage loans and mortgage-backed securities could be more readily liquidated in the event of a funding disruption.

"A recent story in Barron's revived the perennial merger talk about Countrywide, citing Citigroup, Wells Fargo, U.S. Bancorp and the U.K.'s Lloyds Group as possible buyers," Shanley said in the report.

"We agree Countrywide, which ranked fourth last year on the lists of both mortgage originators and mortgage servicers, is a desirable target, since it is the only independent player with any meaningful scale, but such takeover talk is old news. In 2000, the company's longtime chairman, Angelo Mozilo, suggested he might consider a sale."

Press reports at the time suggested several major competitors actually put in bids, though no agreement was ever reached. Since then several domestic competitors like Washington Mutual have completed other mortgage-related acquisitions. At the same time, the analyst said potential offshore acquirers such as ABN AMRO may be chastened by the disastrous experience the National Australia Bank had last year with losses on its HomeSide Lending purchase.

Thus, Shanley said buyers should not let that angle impact their decision.

"Although we wouldn't rule out the possibility of an eventual sale, we wouldn't buy this credit as a takeover play," the analyst said.

"On its own merits, however, we view Countrywide as weak single-A and would consider adding this name on weakness."

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