Below is a good summary of the problems financial institutions encounter when their business has deteriorated to the extent where they could slip below investment grade. The increase in the cost of funds, inability to obtain or hold deposits, etc. will have a debilitating effect of their business. With all that said the risk of the firm must also be understood. Text in bold is my emphasis. From Yahoo.
Countrywide, the largest U.S. mortgage lender, said in a U.S. regulatory filing on Friday, that if its credit rating dropped below its current lowest rating, this would "severely," limit its access to the public corporate debt market and that could have repercussions on its business.
A below investment-grade rating also would mean Countrywide would face more restrictive terms and higher rates when it renegotiated or refinanced its existing borrowings, the company said in a U.S. Securities and Exchange Commission filing.
"While we retain our investment grade ratings, all three rating agencies have placed our ratings on some form of negative outlook," the company said in the filling.
Additionally, a below investment-grade rating also could affect the company's bank subsidiary's ability to capture custodial deposit accounts on deposit.
"As of September 30, 2007, up to $5.5 billion of our custodial deposits may be subject to placement with another bank if our credit ratings were reduced below investment grade," Countrywide said in the filing.
A ratings downgrade also would harm its ability to retain commercial deposits.
Countrywide suffered a mortgage and capital markets crisis that peaked in August and which some critics say it helped create. In the third quarter, the company posted a $1.2 billion loss.
To mitigate the risk, Countrywide said it has procured other sources of liquidity, including $9.2 billion of cash and cash equivalents in the bank at the end of the quarter.
Countrywide also said it has focused more on loans that it can be directly sold or securitized into programs by government-sponsored agencies, such as Fannie Mae, Freddie Mac and Ginnie Mae.
By the end of the third quarter of 2007, 4.9 percent of subprime loans it serviced were pending foreclosure, up from 2.9 in the year-earlier quarter. Delinquent subprime loans rose to 29.9 percent from 16.9 percent.
The foreclosure rate for all its loans in its servicing portfolio rose to 0.9 percent from 0.5 percent.