Investors in Countrywide’s debt got an unhappy reminder on Monday that the mortgage lender’s acquisition by Bank of America did not necessarily mean that their money was safe.

Bank of America Chief Financial Officer Joe Price said on a conference call that the bank does not intend to guarantee Countrywide’s public debt, spooking investors and sending the cost of insuring the debt of Countrywide’s home loan unit higher.

“We have received a lot of questions about Countrywide’s public debt,” Price said after the company announced the company’s results. “All I can say at this point is, we don’t intend to guarantee the public debt but we understand the ramification of not paying.”

The cost to insure the debt of Countrywide Home Loans rose to 235 basis points, or $235,000 per year for five years to insure $10 million in debt, from 220 basis points, according Phoenix Partners Group.

Bank of America first suggested in May that it may not stand behind Countrywide’s debt. Then, the deal had not closed, and the reluctance was seen as a possible sign that BofA may want to revise the terms of the deal or walk away from it completely.

Bank of America closed its purchase of Countrywide on July 1.

One analyst said the bank’s latest statement was aimed at limiting any damage to its own investors, as otherwise they might have believed Bank of America would take on Countrywide’s liabilities under any terms.

(Photo credit: Reuters)

Most reporters covering the M&A space are all too familiar with the Sunday night dealwatch. Many big takeovers are traditionally announced on Sunday night so they can be splashed all over the front page of Monday papers  that are otherwise devoid of major news.

Now, meet the Friday afternoon death watch, which is threatening to ruin the weekends for many U.S. banking executives, their customers, regulators and some reporters.

Banking regulators typically swoop down and take over troubled banks on Fridays, and with the U.S. economy slowing, executives at many more banks may have to make changes to their weekend plans.

Although it is not a policy, the Federal Deposit Insurance Corp prefers to take over institutions on a Friday as it gives regulators the time to do the transition before reopening branches the following Monday.

“It gives you the weekend to put new people in place,” says John Douglas, a former FDIC general counsel who is now a partner at the law firm Paul Hastings.

“In an emergency situation they would do it earlier,” Douglas says. “But typically it is a Friday.”

It is a strong preference. Five banks have failed this year, and all of them have been taken out on Fridays.

It might just be a coincidence, but Friday evenings are also typically the time that both companies and politicians typically announce bad news — as it is the day that many newspapers tend to have earlier deadlines and as fewer people tend to read them on a Saturday. 

The latest bank failure — and one of the largest of them all – was just last Friday. Regulators swooped in to seize mortgage lender IndyMac Bancorp after a bank run in which panicked customers withdrew more than $1.3 billion of deposits in 11 business days. By Monday, regulators had reopened the bank’s doors and will run the bank while they look for a buyer.

Analysts decline to speculate about which banks might fail, but several smaller lenders and even larger ones appear to have elevated levels of troubled loans relative to their sizes.

Earlier this month, RBC Capital Markets analyst Gerard Cassidy estimated that more than 300 banks could fail in the next three years, up from his February estimate of no more than 150.

For at least a year or two, TGIF may not be the refrain at many banks.

(Photo credit: Reuters)

Banks battered by the credit crisis may look cheap, but so far neighbors have mostly resisted the temptation to gobble up neighbors, thanks in no small part to an accounting peculiarity that threatens to turn a target’s balance sheet into a ticking time bomb set to explode on purchase.

Under U.S. accounting rules, if a company acquires another, it must record the value of the target’s assets and liabilities at their market value at the time of purchase. For banks acquiring banks now, that is a problem. The purchase could end up cutting into the acquirer’s capital.

But Jamie Dimon is not going to let one thorny accounting issue hold him back.

The JPMorgan chief, fresh from digesting Bear Stearns, said at a conference call after announcing higher-than-expected quarterly profits that he expects the current crisis to lead to more mergers in the banking sector over time.

And although purchase accounting makes doing a deal difficult, he seems poised to do one when he sees one.

“I think the mark-to-market accounting makes it harder for a bank to buy a bank because you have to basically write the loans to a market value,” Dimon said. “But it does not make it impossible. Certainly not for us.”

His finance chief, Mike Cavanagh, echoed the sentiment.

“We wouldn’t do a deal or not do a deal based on pure accounting…we would do or not do a deal based on how much value we thought it adds to shareholders,” Cavanagh said. “Just makes it harder, that’s all.”

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Grey Wolf is licking its wounds after shareholders of the U.S. oil driller rejected the company’s proposed buyout of oil services firm Basic Energy Services on Tuesday. 

Grey Wolf’s shareholders were likely banking on a takeover offer from Canada’s Precision Drilling Trust, which had previously bid $10-a-share for the company and said that the offer would be back on the table if Grey Wolf broke off its deal for Basic. 

Another deal in the U.S. energy services sector could also be in peril, said Raymond James analyst Marshall Adkins, and this one doesn’t even have a competing bid to shake up shareholders.

“It wouldn’t be entirely surprising to see a similar result in the upcoming Allis-Chalmers/Bronco Drilling vote,” Adkins said in a research note on Wednesday. 

Oilfield service company Allis-Chalmers Energy is trying to buy Bronco Drilling in a stock and cash deal currently valued at about $450 million.

Adkins said that, given a recent pullback in Allis-Chalmers shares, the current offer represents a roughly 16 percent discount to its peer group’s price-to-earnings and enterprise value-to-EBITDA multiples.

“As a result, shareholders could reject Allis-Chalmers’ second offer for Bronco,” Adkins said. “Stay tuned for next month’s shareholder vote!”

Bronco shareholders vote on the offer on August 14.

(Reporting by Michael Erman)

How do you save an investment bank from rumor mongers? Take it private, one analyst suggests.

Lehman Brothers, the investment bank whose stock has fallen more than 30 percent this month, has been targeted by the fear-trade just as Bear Stearns was earlier this year, Fox-Pitt Kelton analyst David Trone wrote in a research note.

“We continue to believe that the decline in Lehman’s stock has little to do with the company’s liquidity and balance sheet, but is more based on investors’ pricing in the probability of a Bear Stearns-like run-on-the-bank,” Trone wrote.

Bear Stearns, once the fifth-largest U.S. investment bank, faced a run on the bank in March, and was forced to sell itself.

Trone said “an emergency prohibition of short-selling in brokerage shares is imperative,” but in the absence of such a measure going private was the best bet.

“Without a public stock, there would be no shorting, thus no motivation for rumor-mongering, thus no source to spook their counterparties and creditors,” Trone wrote.

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Lehman Brothers CEO Dick Fuld is not giving up on the independent investment bank model despite predictions by pundits that brokerages will have to look for commercial bank partners to tide over future crises and sustain growth.

“I believe in the model. I believe the value of what we have created in the past for shareholders can be created again,” Fuld said on a conference call after Lehman’s quarterly results.

Lehman posted a quarterly loss of $2.8 billion, matching its forecast, after recording massive trading and hedging losses.

Experts say stand-alone U.S. investment banks such as Lehman are likely going to have to find commercial bank partners to get access to a stable source of funds. That will help them deal with future shocks and to sustain growth even if regulators restrict leverage.

Fuld did keep the door open to potential suitors, saying if someone came up with an offer that made sense, “I clearly have the obligation to take that to the board.”

“If the model changes, so that … banks are the only way to go, then that is a model that has to be considered,” Fuld said. “But today, the power of this franchise, we can very much go it alone and be very strong.”

(Photo credit: Reuters)

Buyers brave enough to go after the big deals amid the onslaught of the credit crisis this year have had to deal with an extra headache - a hit to their stock price after the announcement, a new study shows.The shares of acquirers in the top 20 U.S. deals have seen an average decline of 5.5 percent since the announcement of the transactions, according to a Lab Thomson report this week.  

The Lab Thomson study, which was conducted by Michael Thompson and Richard Peterson of Thomson Reuters, looked at deals including such takeover announcements as NRG’s bid for Calpine, Hewlett-Packard eyeing Electronic Data Systems and CME’s planned buy of NYMEX Holdings.

The study shows bidders in seven of the top 10 deals have seen their share price fall after the announcement. Five, including Delta, CME and Bank of America, have seen double-digit percentage declines.

Deals in real estate and financials sector have generally resulted in lower share prices, the study shows.

But buyers in some sectors have done better than the others.

Bidders in the energy sector, such as NRG Energy, Smith International and Grey Wolf, have seen share prices move higher, the study shows. They also account for the bulk of the nine bidders whose shares have actually outperformed the S&P 500 index since the date of the announcement.

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Bank of America can keep saying yes to Countrywide, but the skeptics just won’t go away.

Last night over dinner with Oppenheimer & Co analyst Meredith Whitney, BofA chief Kenneth Lewis said the bank will go ahead with the roughly $3.1 billion purchase of the giant money-losing mortgage lender and that it still makes sense for it to do so.

Lewis said the bank’s planned acquisition remains attractively priced, even if write-downs at Countrywide exceed expectations, Whitney wrote in a research note.

On Wednesday, Lewis reaffirmed his commitment to the acquisition at a Wall Street Journal conference, saying it was an important strategic move.

Lewis said he remains undeterred even as many consumer advocates, lawyers and politicians have criticized the merger and Countrywide’s lending practices. 

Countrywide shareholders are scheduled to vote on the merger on June 25, and Bank of America, which agreed to buy Countrywide in January, has said it expects a third-quarter closing. 

As the closing date nears and Bank of America repeatedly re-assures investors, the arbitrage spread on the deal has significantly tightened. The spread, the difference between the offered takeover price and the target company’s current trading price, was more than 40 percent on May 8.  

But Countrywide shares were trading at $4.72 on Wednesday afternoon, which is still more than 10 percent below the all-stock transaction price of about $5.30 per share.

Some analysts have estimated that the bank could face more than $10 billion of losses tied to Countrywide’s portfolio. And last month Bank of America said in a regulatory filing that it might not assume all Countrywide debt.

The skeptics here could be worried about the huge downside to the bet that a deal will indeed go through. If BofA walked away, Countrywide’s shares would plummet, meaning the potential risk of betting the merger will go through is high even if the chance of its falling apart now is low.

(Reporting by Paritosh Bansal and Dan Wilchins)

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The days of the eye-popping LBO may be over, but buyout shops are still raising eye-popping amounts of cash.

So far in 2008, private equity firms have raised nearly $100 billion, according to Thomson Reuters data. Buyout-focused funds have raised $65.1 billion, while others that are not focused on buyouts, such as real estate and energy funds, have raised $34 billion. In all $99.2 billion has been raised from 134 funds, Thomson Reuters data shows.

But overall acquisitions by financial sponsors are down 78 percent and global issuance of leveraged syndicated loans is down 68 percent, compared with the same period last year.

So where is the money going?

Minority stakes for one. Financial sponsors have spent $12 billion  so far this year on building up minority stakes in listed companies, up 86 percent from the same period in 2007, according to the data.

Financial services companies, which have been hit hard by the credit crunch and looking to raise funds, have attracted a lot of that cash. The volume of convertible offerings by financial issuers hit an all-time high in May with nearly $20 billion in new issues, according to the data.

The top 10 minority stake acquisitions so far this year include TPG’s $2 billion investment in Washington Mutual, KKR’s $1.25 billion in Legg Mason and WL Ross’ $750 million in Assured Guaranty.

But that still leaves a lot of unused funds with private equity firms, and they are hunting for places to deploy that money. 

“There is so much in the pipeline right now that we expect the back half of 2008 to be more active than the first half of last year,” according to Robert Profusek, chair of Jones Day’s M&A practice.

Profusek expects the activity to be higher in terms of the number of transactions, though, and not necessarily in the dollar amount, as Clear Channel-like mega buyouts may not happen.

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When dealmakers putting together the terms of Bear Stearns’ fire sale to rival JPMorgan Chase reworked the merger agreement, they not only increased the offer price but also made changes to make sure the transaction would survive scrutiny in Delaware courts, according to a Paul Hastings analysis.

JPMorgan initially agreed to buy Bear Stearns for $2 a share as the investment bank verged on collapse amid concern that the company did not have enough capital to keep going. The offer was later raised to $10 a share.

Predictably, the fire sale has led to unhappy investors who have filed lawsuits in New York and Delaware courts. The Delaware court has put the case before it on hold because of the New York action.

In a client note, “Revisiting the Bear Stearns/JP Morgan Transaction: An Analysis of Deal Protections and Fiduciary Duties” released Wednesday, the Paul Hastings lawyers wrote they expect the New York court to apply Delaware legal principles.

The plaintiffs in the New York case accuse Bear’s board of directors of violating its fiduciary duties to shareholders in agreeing to the JPMorgan deal, saying the terms are unfair and precluded any other bidders from emerging.

But thanks to the changes, the deal is likely to survive the challenges, according to the Paul Hastings note.

“It appears that the parties revised or deleted the deal protection measures in the March 24th amendment to give them a better chance of surviving scrutiny by the Delaware courts,” the Paul Hastings lawyers wrote.

For instance, the parties removed the so-called Renegotiation Covenant, which had the effect of precluding any topping bid, according to the note.

“The Delaware courts would likely take a hard stance against such a provision since it effectively precludes superior proposals,” the lawyers said.

Another example. They removed the ambiguity related to the so-called “Force the Vote Provision,” requiring Bear’s board to submit the deal to stockholders for approval even if it changed its recommendation on the deal.

The provision is now explicitly subject to the “fiduciary out,” which allows the board to change its recommendation in light of a superior proposal. But the amended agreement also weakened the “fiduciary out” by restricting when it can be used, according to the note.

It seems, then, the dealmakers had one eye on the clock, one on the prize – and one on Delaware courts.

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