Countrywide May Lose Access to Corporate Debt Markets

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Countrywide Financial reported today that its access to capital necessary to fund loans and ongoing operations may become incapacitated if its current debt obligations are cut to junk status. According to Market Watch:

“Our ability to place custodial deposit accounts on deposit with our bank subsidiary could be affected if our credit ratings were reduced below investment grade,” Countrywide said in a Form 10-Q filed Friday.

Not being able to place custodial deposits at the banking unit would disrupt Countrywide’s ability to originate and service home loans because lenders must establish these accounts to hold the borrower’s mortgage payments.

As of Sept. 30, up to $5.5 billion of Countrywide’s custodial deposit accounts on deposit with the bank could be affected if the credit rating fell into junk status, according to the filing.

Countrywide already dodged a bullet during the height of the current round of the credit crunch by tapping credit lines and negotiating a deal with B of A to inject $2 billion in to the company. Part of the strategy to get around the credit crunch for Countrywide relies on switching its originating activity over to their banking arm which improves their access to liquidity including capital from the Federal Reserve in exchange for appropriate collateral as needed.

Obviously when Countrywide dodged the first bullet no one was naive enough to suggest that they made it through the wilderness; but ratings agencies (who are already held in shaky regard due to their misrating of mortgage issuances) need to do their job of properly rating debt to protect investors and other parties. If they cede their ratings due diligence to Countrywide’s capital needs it will be another large black mark on an already tarnished reputation for the likes of S&P, Moody’s and Fitch.

What do you think?