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Merrill's Plan to Offload CDOs 'Suggests Endgame,' Analysts Say
The sale reduces uncertainty for brokers, banks and bond insurers, analysts led by Jeffrey Rosenberg in New York said yesterday in a report. Merrill, the third-biggest U.S. securities firm, also plans to sell $8.5 billion of stock and will book $5.7 billion of writedowns in the third quarter. "Selling off the portfolio at levels below marks creates initial losses but relieves future uncertainty," Rosenberg wrote. "The capital raise, if ultimately successful, could indicate private capital raising ability more broadly for financials. Proving access to raising equity capital would be a clear positive for financial credit spreads, though not necessarily for stock prices." Merrill is selling stock after almost $19 billion of net losses in the past year. The New York-based firm has already raised $30 billion since December in an effort to keep pace with mounting charges on mortgage bonds. Standard & Poor's cut the firm's debt rating last month and signaled that more downgrades were possible. Merrill agreed to sell $30.6 billion of CDOs - the mortgage-related securities that have caused most of the firm's losses - for $6.7 billion and provide financing for about 75 percent of the purchase price. The financing for the sale to Dallas-based private-equity firm Lone Star Funds is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion. CDOs package pools of securities and slice them into pieces with varying risks and ratings. "If others were to follow such a playbook, writedowns on CDO positions could be larger than taken to date with the offset of reduced uncertainty going forward for broker and bank spreads and tightening spread implications for monolines considering their current distressed levels," Rosenberg said in the report. To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net
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July 29 (Bloomberg) - 