The risk of Bank of America Corp. defaulting rose to the highest since at least November 2001 after the biggest U.S. bank by market value said it will rescue Countrywide Financial Corp.Credit-default swaps tied to the bonds of Charlotte, North Carolina-based Bank of America increased 12 basis points to 92 basis points, according to broker Phoenix Partners Group in New York, suggesting deteriorating perceptions of credit quality.

Bank of America may take on too many liabilities in its $4 billion acquisition of Countrywide, the money-losing mortgage lender besieged by bankruptcy speculation, the contracts show. Bank of America would inherit the “heightened” credit risk of Countrywide’s home equity loans and option adjustable-rate mortgages, analysts led by David Hendler at bond research firm CreditSights Inc. said in a report today.

“There’s probably a little doubt here,” Brian Yelvington, a strategist at CreditSights in New York, said in an interview. “They say the due diligence is done, but is it?”

Moody’s Investors Service today said it may cut Bank of America’s A financial strength rating. The ratings company said it may raise Countrywide Home Loans’ Baa3 ranking.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality.

Countrywide Contracts

Bank of America will buy Countrywide for about $7.16 a share in stock, the company said in a statement today. The offer is 7.6 percent below yesterday’s closing price on the New York Stock Exchange. Countrywide gives Bank of America about 9 million borrowers and fees from servicing $1.5 trillion of mortgages.

The purchase would put Bank of America in an “all-out capital replenishment phase” to ensure it meets regulatory guidelines, Hendler said in today’s report.

Contracts on Calabasas, California-based Countrywide plunged to 325 basis points, Phoenix prices show. Investors yesterday sought 7.25 percentage points, or $750,000, upfront and 500 basis points a year for five years to protect Countrywide bonds.

Sellers of default protection on Countrywide demanded an upfront fee of as much as 31 percent, or $3.1 million, earlier this week on concern the company was headed for bankruptcy. Soaring defaults on mortgages as the U.S. housing market endures its worst slump in 27 years prompted Countrywide’s market value to drop 82 percent in the past 12 months.

Narrowing Gap

Credit-default swap prices suggest that investors for the first time in about three months see Bank of America as risky as Citigroup Inc., the U.S. bank that replaced its chief executive officer after writedowns on subprime mortgage securities. JPMorgan Chase & Co. and Bear Stearns Cos. analysts today said the New York-based bank may write down as much as $16 billion when it reports fourth-quarter earnings.

Bank of America contracts have traded an average 17 basis points below Citigroup in the past three months. The gap has narrowed to 1 basis point, according to CMA Datavision and Bloomberg data.

The Markit CDX North America Investment Grade Index, a benchmark gauge of default risk tied to the bonds of 125 companies including Countrywide, rose 3.25 basis point to 96.25 at 10:23 a.m. in New York, according to Deutsche Bank AG. The index rises as investor sentiment worsens.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

In Europe, credit-default swaps on the Markit iTraxx Europe benchmark index of 125 companies with investment-grade ratings fell 0.25 basis points to 66.25, according to JPMorgan. The index rose to 67.5 basis points this week, the highest since the start of the credit slump in July.

Source : Bloomberg

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