United Kingdom-based Countrywide, a residential real estate service provider not affiliated with the Countrywide Financial acquired by Bank of America (BAC), may be on its way to default, based on a recent Standard & Poor's study of two "unusual and negative" aspects of the company's debt structure. Countrywide acts as sort of an intermediary party in the UK housing market, and provides independent estate agents the opportunity to take a local franchise under the Bairstow Eves name and offer retail financial products. The franchises are highly pedestrianized in urban areas like London, where the brand is a household name. Countrywide carries a strong market position, a widely known brand and an established branch network across the UK, which together made the company appear more likely to default due to high leverage rather than fundamental business problems, S&P said. But a recent review of the company led to an S&P report of several likely factors that may lead to default and a significantly low recovery rate. The rating agency noted the likeliness of Countrywide continuing as a going concern despite any default that may occur. "This report charts the evolution of our default scenarios for Countrywide, the movement of issuer credit ratings as the company's financial profile deteriorated, and actual versus expected recoveries," said S&P research analyst Taron Wade. "Moreover, it shows that measures to protect credit quality are not necessarily positive for recovery prospects in the event of default." S&P identified two aspects of the company's debt structure that may represent a risk of default: a payment-in-kind (PIK) 'toggle' option granted to lenders on a £100 million tranche of the senior secured notes, as well as the provision of a sizable revolving credit facility relative to the working capital needs of the company. The 'toggle' option allowed the issuer to pay interest in cash or PIK form at its discretion until 2011. Countrywide opted to pay the full amount of the coupon on its toggle notes in kind for the interest period commencing May 15, 2008, Wade told HousingWire. This feature, along with the sizable credit facility, supported credit quality by providing additional flexibility, but also enabled Countrywide's financial performance to deteriorate more severely than if the company had a higher interest burden or more constrained liquidity. S&P therefore assessed a 37% recovery rate for senior secured lenders -- "significantly lower" than recovery prospects on other senior secured debt. Write to Diana Golobay.