Merrill raises yet more capital after Q2 losses
Merrill Lynch is selling $6.7 billion of collateralised debt obligations (CDOs), terminating hedges on CDOs and undertaking a $8.5 billion public stock offering to raise capital.
These actions come several weeks after the bank revealed second-quarter losses of $4.7 billion and $9.1 billion in writedowns on its structured product, monoline and mortgage exposures.
Merrill is selling a notional $30.6 billion in US super senior CDOs of asset-backed securities to an affiliate of Texas-based private equity firm Lone Star Funds for $6.7 billion – representing a 78.1% fall in value of the portfolio.
“The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts,” said John Thain, chairman and chief executive of Merrill Lynch.
The bank will terminate its CDO-related hedges with XL Capital Assurance, the financial guarantee subsidiary of Security Capital Assurance, for a payment of $500 million. These hedges had a carrying value of $1 billion at June 27, 2008.
The bank is also negotiating settlements on CDO hedges with monoline insurers, including MBIA. These hedges have a current carrying value of $800 million.
Merrill also plans to raise $8.5 billion through a public stock offering. Singapore’s sovereign wealth fund Temasek has committed to buy $3.4 billion of this.
As a result of these transactions, Merrill Lynch expects to record a pre-tax writedown of $5.7 billion for the third quarter.
Meanwhile, ratings agency Moody’s has placed XL Capital Assurance’s Baa1 senior debt rating and A1 insurance financial strength ratings on review for possible downgrade, reflecting concerns that it may not succeed in its plan to raise $2.5 billion of capital in the form of common stock and hybrid securities. The If the capital raising is not successful, Moody’s said XL'sratings are likely to be downgraded, possibly more than one notch.
See also: Merrill Lynch startles market with end-of-day news on losses
Merrill Lynch names new CFO
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