Corporate Bond Risk Rises as Bankruptcy, Default Fears Spread 
By Shannon D. Harrington and Hamish Risk
Aug. 15 (Bloomberg) -- The risk of owning corporate bonds rose after a Merrill Lynch & Co. analyst said Countrywide Financial Corp., the biggest U.S. mortgage lender, may have to file for bankruptcy.
Credit-default swaps on Countrywide widened after Merrill Lynch analyst Kenneth Bruce raised the possibility that a loss of access to short-term loan markets could force Countrywide into bankruptcy. Contract prices for mortgage lender Residential Capital LLC and for home-loan insurer Radian Group Inc. are also trading as if investors see a high probability of default.
``This market is feeling awfully similar to the fall of 1998'' when Russia defaulted on its debt and banks had to bail out hedge fund Long Term Capital Management, said Bruce, who is based in San Francisco. Bruce downgraded Countrywide's stock to ``sell'' from ``buy'' in a research note today.
Deutsche Bank AG and Barclays Plc and other banks refused to provide emergency loans for 17 Canadian finance companies managing funds of C$27 billion ($25.3 billion) after the firms failed to sell asset-backed commercial paper to repay maturing debt. The Canadian issuers may default if they can't raise the money elsewhere, ratings company DBRS in Toronto said yesterday.
``Funding problems for asset-backed paper issuers are causing credit spreads to widen,'' said Willem Sels, head of credit strategy at Dresdner Kleinwort in London. ``Liquidity for borrowers beyond one week remains very low.''
Sydney-based hedge fund Basis Capital Management Ltd. said today that losses at one of its funds may exceed 80 percent as delinquencies on subprime mortgages prompted creditors to force a sale of assets. Sentinel Management Group Inc., a Northbrook, Illinois-based money manager that oversees $1.6 billion of assets, yesterday said it froze client withdrawals because of the credit-market turmoil.
ResCap, Radian
Sellers of credit swaps to protect against a default by Minneapolis-based Residential Capital, the mortgage-lending unit of GMAC LLC, started demanding upfront payments today in a signal that investors see a high chance of a debt default.
The one-year contracts were quoted at 4.75 percent upfront and 500 basis points a year, prices from CMA Datavision in London show. That compares with 880 basis points yesterday.
Credit-default swaps on Philadelphia-based Radian rose 62 basis points to 925 basis points, according to CMA. Radian bonds are rated A2, the sixth-highest investment-grade by Moody's Investors Service. The credit-default swap contracts are trading as if the bonds were rated Ca, the second-lowest junk rating, according to data from Moody's credit strategy group.
Countrywide climbed as much as 65 basis points to 440 basis points, Phoenix prices show, while HSBC Bank Plc, the U.K.'s biggest mortgage lender, rose 12 basis points to 43.5 basis points, according to CMA.
A basis point on a credit-default swap contract protecting $10 million of debt is equivalent to $1,000.
CDX Indexes
Contracts on the CDX North America Investment-Grade Index, a benchmark for the cost of protecting investment-grade bonds, rose as much as 2.5 basis points to 80 basis points, according to broker Phoenix Partners Group in New York.
The iTraxx Crossover Series 7 Index of 50 European companies, a benchmark for the cost of protecting mainly high- risk, high-yield debt, increased 22 basis points to 366 basis points, according to JPMorgan Chase & Co.
The iTraxx Japan Series 7 Index of 50 investment-grade Japanese companies rose 3.5 basis points to 36.5 basis points.
Bear Stearns, Lehman
Contracts on Bear Stearns Cos., the securities firm managing two hedge funds that collapsed because of bad subprime bets, widened 20 basis points to 175 basis points. Lehman Brothers Holdings Inc., the biggest U.S. underwriter of mortgage bonds, rose 15 basis points to 160, according to Phoenix.
The cost of contracts on Kaupthing Bank hf, Iceland's biggest lender, rose to a record after it agreed to buy NIBC Holding NV less than a week after the Dutch investment bank reported losses stemming from the subprime mortgage slump.
Credit-default swaps tied to Reykjavik-based Kaupthing's debt climbed as much as 40 basis points to 122 basis points, according to Deutsche Bank AG.
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