Calculated Risk: Just What Kind of Deal Did Countrywide Get?
A whole lot of Countrywide discussion today. There is some very interesting commentary from the folks over at Calculated Risk tonight, who speculate that the $2 billion invested in Countrywide by Bank of America might potentially be in the form of a so-called floorless convertible bond, also known as a death spiral bond. (For a quick primer, click here). At question here is a vague disclosure in Countrywide's recent 8-K that says the conversion price for the securities issued to BofA "may be adjusted upon the occurence of certain events." Those events were not enumerated. Fueling the speculation is the the OCC's recent approval of the investment, which apparently notes that BofA can't convert its investment into common stock, because the investment has been classifed as a debt obligation and not as equity. (Whether the OCC is arbiter of such classification or not is something I'll admit I don't know, since all the press releases I've seen refer to the investment as one involving convertible equity rights.) While it would be surprising if BofA actually invested in such an instrument, and it's much more likely the "certain events" clause refers to something much less ominous, the post notes that a floorless convertible bond isn't at least entirely out of the question, with CR noting that Countrywide should probably further disclose what "certain events" are part of the deal. I'd add that there is plenty of leeway regarding what "other events" might comprise -- say, a sale of Countrywide for an amount below the original convertible strike price. Others I've seen comment on this suggest it probably has something to do with the bank holding company act. But the confusion suggests that there is some important information we're missing. We just don't know what it is. Note: CR edited his post, ostensibly because he wasn't happy with the original characterization, so I've done the same and edited this post's title and some of the content to cover some of the commentary I've seen around this topic.