Wow, Merrill is raising cash like there is no tomorrow. Which of course makes one wonder what they know that the rest of us don’t yet know.
From Bloomberg:
Merrill Lynch & Co. said it will record $5.7 billion of pretax writedowns in the third quarter because of additional losses on the sale of collateralized debt obligations and hedging contracts with bond-insurers including XL Capital Assurance.The New York-based firm said today in a statement that it plans to raise $8.5 billion by selling shares in a public offering. Temasek Holdings, the Singaporean government investment fund that already is one of Merrill’s biggest investors, will buy $3.4 billion of stock in the offering, Merrill said.
Merrill Chief Executive Officer John Thain is pushing to rid the firm of its CDOs, which have contributed the majority of $18.7 billion of net losses reported over the past four quarters. Thain has had to raise capital to stave off credit- ratings downgrades and satisfy regulators that the firm can withstand losses.
“It does mark an attempt at curing the problem but at a tremendous cost to existing shareholders,” said Charles Peabody, an analyst at Portales Partners LLC in New York who recommends selling the shares. “You’re going to raise $8.5 billion in capital. How can you be pleased by that? It’s a necessity.”
Merrill said it sold $30.6 billion of CDOs to an affiliate of the Dallas-based investment firm Lone Star Funds, resulting in a pretax writedown of $4.4 billion. Merrill will provide financing for about 75 percent of the purchase price, according to the statement.
Ahem, note in our wonderful world of smoke and mirrors, a heavily-seller-financed sale is still a sale.
Reader S had these comments:
MER back to the well…that makes it $15B or so in the last few weeksBloomberg $4B
FDS $3.5B
New Offering $8.5BM. Whitney [of Oppenheimer, the analyst who has been the most accurate so far on the credit crunch] on the Q2 call
“Okay. Thanks. My second question is a broader question, and I appreciate it’s sort of easier asked than done, but given the fact that this is sort of the fourth quarter of material writedown for the company, and just knowing what your reputation is, I can imagine you are incredibly frustrated. And why not at this point be the first to purge assets and just get it over with? And if that means raising capital, that means raising capital. But you bring people to want to be long-term shareholders. Stock go down, just start fresh. What is the pushback on that? It seems like the most basic question out there. If you could just elaborate on that? Thanks.”
Looks like they listened….or have they? Time will tell.
Update: I had to run to replace a dead keyboard, and readers per comments did the heavy lifting on what this deal portends. Not pretty at all.
First, per the Wall Street Journal:
The biggest single action Merrill took Monday was the sale of mortgage assets to an affiliate of Lone Star Funds. Those assets had a face value of $30.6 billion, and Merrill was carrying them on its books at $11.1 billion as of the end of June. Lone Star paid just $6.7 billion for the assets, or 22 cents for every dollar of face value. The sale reduced Merrill’s holding of such assets by more than half, to $8.8 billion from $19.9 billion.
Read that twice. 22 cents on the dollar, and that with 75% financing. So the real price is lower or zero. Take your pick. And the urban legend in finance land (and I was a believer till just now) was that subprime paper had been marked down pretty well, but Alt-A and Option ARM still has a way to go.
Amazingly, the Journal says
Despite the steep discount, Merrill’s sale may bode well for other firms on Wall Street such as Lehman Brothers Holdings Inc. that are also sitting on hard-to-sell assets.
And how was the play, Mrs. Lincoln? And get a load of this:
Merrill’s decision to sell the mortgage assets was described by one person close to the company as an attempt to “lance the boil” and put the mortgage debacle behind it once and for all.
This looks more like an amputation of a gangrenous limb without anesthetic.
As for the fundraising, Merrill provided price protection to Temasek and other recent investors. As reader Burrite noted:
When Temasek invested $4.4 billion in December, the terms of the deal were that if MER raised any common equity at a price of less than $48, it would reimburse Temasek for the difference between the new offering price and $48. Assuming this deal occurs at $23, that means MER will pay $2.5 billion (of the $8.5 bn it is raising) to Temasek. Stated differently, it also implies that Temasek is buying 150 million new shares of MER ($3.4 bn/$23), and will be paying about $6-$7 for those shares, if you net out MER’s payment to Temasek.
And what does this portend for other holders of dubious paper? Merrill’s moves are decidedly bad news for other big credit market players, particularly Citi and Lehman.
Other good comments below.
JP 
Posts
When Temasek invested $4.4 billion in December, the terms of the deal were that if MER raised any common equity at a price of less than $48, it would reimburse Temasek for the difference between the new offering price and $48. Assuming this deal occurs at $23, that means MER will pay $2.5 billion (of the $8.5 bn it is raising) to Temasek. Stated differently, it also implies that Temasek is buying 150 million new shares of MER ($3.4 bn/$23), and will be paying about $6-$7 for those shares, if you net out MER’s payment to Temasek.
Nice.