Merrill Lynch (MER) announced yesterday evening, that it will be selling off some of its CDO (collaterized Debt Obligations) asset-backed securities, that have basically become the bane to the company’s existence, in an attempt to clean up its books.
According to the firm, this is a “substantial sale of U.S. super senior ABS CDO securities, resulting in an exposure reduction of $11.1 billion from June 27, 2008.”
This will reduce the company’s CDO exposures to $8.8 billion, from $19.9 billion. As a result of the transaction, the company will take a pretax write-down in Q3 of ‘08 of approximately $5.7 billion. The write-down will be comprised of a $4.4 billion loss associated with the sale of the CDOs, and $1.3 billion related to other prior CD) transactions as well as a termination of hedges with XL Capital Assurance.
Merrill Lynch’s stock is called a few cents higher in pre-market trading, showing that Wall Street views this transaction as a positive. Now while getting these CDO’s of the books is a very good thing, there are quite a few negatives associated with the deal.
The original value of the CDOs was $30.6 billion. Merrill Lynch (MER) is selling them for $6.7 billion to Lone Star Capital. In other words, it is getting just 21, almost 22 cents per dollar. This set price has implications for other banks that are holding similar assets in terms of how low they have to write down their values.
Merrill Lynch is providing financing for 75% of the transaction. So the CDO’s get off the books, but until Lone Star pays off Merrill for the CDOs, the company seems to have just replaced a liability on its book with another one.
Also announced, Merrill Lynch (MER) will be selling $8.5 billion worth of stock to raise fresh capital. Temasek Holdings, a Singapore sovereign wealth fund that is already Merrill Lynch’s largest shareholder, will purchase $3.4 billion of common stock in the offering. Addition shares will be purchased by Merrill Lynch’s executive management team.
This is despite the fact that Merrill Lynch (MER) insinuated in prior releases, that it did not need to raise capital in the near future.
The offering is being conducted as a public offering and as such, will further dilute the holdings of current shareholders.
