Oct. 14 (Bloomberg) -- Bondholders are penalizing Bank of America Corp. the most of any of the largest U.S. financial firms as the investigation into the foreclosure crisis expands.
Credit-default swaps on the country’s largest bank by assets are above those of its peers by a record margin, according to data provider CMA. The contracts, which imply Bank of America has lost its investment-grade rating, exceed Citigroup Inc.’s by the most ever and surpassed Morgan Stanley’s this week for the first time in a year.
Attorneys general from all 50 states joined to open an investigation into whether lenders and mortgage companies falsified documents as they sought to repossess homes. Charlotte, North Carolina-based Bank of America said Oct. 8 it would curtail foreclosure sales nationwide, as speculation rose the lender would have to buy back home mortgages with faulty documentation.
“As we look at the financial landscape and try to put pen to paper and figure out who might be most exposed to problems associated with foreclosure moratoria, with robo-signers, with mortgage put-backs, Bank of America’s at the top of the list,” said David Havens, a financial institution debt analyst at Nomura Holdings Inc. in New York.
Bank of America is being singled out for expanding its real-estate operations and acquiring Countrywide Financial Corp., then the biggest U.S. mortgage lender, in 2008 during the worst housing slump since the Great Depression, Havens said. The bank also increased its mortgage assets through the $29 billion purchase of Merrill Lynch & Co. in January 2009 under pressure from the Federal Reserve as it tried to prevent failure of the U.S. banking system.
“There’s nothing different about our company today than yesterday,” Chief Executive Officer Brian T. Moynihan said today after a speech in Boston. The bank’s review of foreclosures will take “a few weeks to get through,” he said.
Jerry Dubrowski, a spokesman for Bank of America, declined to comment further.
Elsewhere in credit markets, JPMorgan Chase & Co. sold $4 billion of bonds. Univision Communications Inc. revised terms asking lenders to delay maturities on $2.5 billion of its debt, as leveraged loan prices rose to the highest since May. In emerging markets, relative yields fell for a sixth straight day, the longest streak since July.
JPMorgan’s offering came a day after the second-biggest U.S. bank by assets said it was adding $1 billion to reserves set aside for repurchasing mortgages and also expanded a review of foreclosures to about 115,000 files in 41 states from at least 56,000 loans in 23 states on Sept. 23.
Citigroup Most Active
“There was at least an estimate for the liability that people could chew on and deal with when they announced the reserves they took for the problem,” said Lon Erickson, a money manager who helps oversee $9 billion of fixed-income assets, including JPMorgan bonds, for Thornburg Investment Management Inc. in Santa Fe, New Mexico. “It makes the market feel better when there’s a black-and-white number to start with as a base and they can adjust up or down from there.”
Bonds from New York-based Citigroup were the most actively traded U.S. corporate securities by dealers today with 121 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. New York-based JPMorgan was second-most active with 118 trades.
Commercial paper outstanding increased for a fourth straight week. The seasonally adjusted market for the short-term IOUs, which typically mature in 270 days or less and are used to finance everyday business activities such as payroll and rent, rose $5.1 billion in the week ended Oct. 13 to $1.1275 trillion, the Federal Reserve said today on its website.
Univision boosted the interest rate on the extended portion of loans by 0.25 percentage point to 4.25 percentage points over the London interbank offered rate, according to people familiar with the negotiations who declined to be identified because terms are private. The amendment would extend the due date by 2.5 years to March 2017. The debt was used to take the Spanish- language media company private in 2007 through a leveraged buyout.
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index climbed 0.08 cent to 91.14 cents on the dollar, the highest since May 13 and its seventh consecutive daily gain. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has climbed from 89.34 cents at the end of August.
High-yield, high-risk debt, such as leveraged loans, are ranked below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
In emerging markets, the extra yield investors demand to own corporate bonds rather than government debentures fell 6 basis points to 245 basis points, or 2.45 percentage points, the lowest since April 26, according to JPMorgan Chase & Co. index data.
Reliance Industries Ltd., India’s largest company by market value, sold $1.5 billion of U.S. dollar-denominated notes in its first benchmark bond offering in the currency, Bloomberg data show.
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose for the third day this month, climbing 1.75 basis points to a mid-price of 97.25 as of 6:37 p.m. in New York, according to index administrator Markit Group Ltd.
The index typically rises as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The cost to protect Bank of America’s debt for five years rose 12.9 basis points today to 193.4, according to CMA. The difference between the swap price and the average of the five largest banks has grown to 41.1 basis points, the most on record.
Citigroup’s swaps rose 8.4 basis points to 173.8 and contracts on New York-based Morgan Stanley climbed 1.9 to 175.2, CMA data show. In February, Citigroup’s contracts were 94.4 basis points higher than those of Bank of America’s.
“For all of these residential real estate issues that are dominating the headlines today and have significant political implications in the 19 days going into the election, Bank of America sits there more exposed than Citigroup right now,” Nomura’s Havens said.
Prices on Bank of America’s credit-default swaps imply the debt is ranked Ba1 as of yesterday, five levels below its actual A2 grade, according to Moody’s Corp.’s capital markets research group. That’s the first time the firm’s swaps have signaled a junk ranking since May 6, the data show.
Bank of America’s $2.5 billion of 4.5 percent notes due in April 2015 fell 1.7 cents to 104.28 cents on the dollar, Trace data show. The bonds were issued at 99.9 cents in March to yield 215 basis points more than Treasuries of similar maturity. The bank has $360 billion of bonds outstanding, Bloomberg data show.
The climb in the swaps prices reflects potential costs that banks may face on so-called mortgage put-backs from investors. Put-backs occur when a mortgage lender is forced to repurchase a loan that’s been sold for securitization. Banks may also have to pay for legal challenges.
The Association of Financial Guaranty Insurers, a trade group for bond insurers, said in a letter last month to Moynihan that his bank should repurchase as much as $20 billion in home loans that were based on wrong or missing information.
Moody’s put Bank of America’s loan-servicing grade on review for a possible downgrade on Oct. 4, citing irregularities in the foreclosure process and deterioration of loss mitigation and collections.
The bank’s swaps have nearly doubled this year, adding 94.8 basis points. That’s still down from 400.7 basis points in March 2009, CMA data show.
“You’ve had balance sheet repair but the work isn’t done,” said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York. “People need to get their hard hats back on.”
--With assistance from Shannon D. Harrington, Tim Catts, Nishad Majmudar, Sapna Maheshwari and Krista Giovacco in New York. Editors: Pierre Paulden, Alan Goldstein
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