By Jason Simpkins
Merrill Lynch & Co. Inc. (MER), the third-largest U.S. securities firm, has announced a plan to shore up its credit ratings and raise capital by offloading $31 billion in collateralized debt obligations (CDOs), issuing an $8.5 billion stock offering, and courting yet another cash infusion from Temasek Holdings Pte., Singapore's sovereign wealth fund.
Temasek Holdings, which became Merrill's largest shareholder in December, will purchase $3.4 billion of the new stock. However, Merrill Lynch will pay Temasek the sum of $2.5 billion to offset losses on the fund's earlier investment.
Temasek plunked down $6.2 billion for an initial 9.4% stake in Merrill in December and then followed up with another $6.6 billion investment in January. Of course, Merrill Lynch stock has dropped by about 30% this year-to-date, and 60% since early December 2007.
"Temasek confirms its commitment of $3.4 billion in the public offering by Merrill Lynch, a portion of which is subject to regulatory approval," spokeswoman Myrna Thomas said in a statement. "The commitment includes a sum of $2.5 billion arising from a re-set payment."
The purchase is subject to approval by U.S. regulators because Temasek now owns more than 10% of the New York broker.
Merrill Lynch has also sold off $30.6 billion of collateralized debt obligations to Lonestar Funds for $6.7 billion dollars, roughly 22 cents on the dollar. CDOs are essentially the bundles of mortgages (many of them subprime) that were securitized by investment banks, and then sold to other investors. The CDOs collapsed with the bursting of the housing bubble. CDOs have accounted for about $27 billion of the total $41 billion, or 65%, of the writedowns Merrill has taken in the past year.
Merrill will provide financing for about 75% of the purchase price, the company said in a statement. The sale will result in a pretax write-down of $4.4 billion.
"The sale of the substantial majority of our CDO positions represents a significant milestone in our risk-reduction effort," said Chief Executive Officer John Thain.
However, Merrill Lynch shareholders are dismayed by Thain's actions and more to the point, his words. Thain, who took over for former CEO Stan O'Neil late last year, has for eight months insisted that Merrill Lynch was well capitalized.
"We're very confident that we have the capital base now that we need to go forward in 2008," Thain said in January.
"We have more capital than we need, so we can say to the market that we don't need more injections. We can confirm that we have tackled the problem," Thain told Spain's El Pais newspaper in March.
Thain was even positive on the company's July 17 conference call, saying: "Right now we believe that we are in a very comfortable spot in terms of our capital."
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