Merrill Lynch said on Monday it will take a $5.7 billion third-quarter write- down as it unloads huge amounts of risky debt, and raise $8.5 billion by selling new stock.
The Wall Street investment bank and brokerage announced its plans less than two weeks after posting a $4.9 billion second- quarter loss, hurt by more than $9 billion of write-downs.
Merrill said its stock sale includes $3.4 billion to Singapore's state-run Temasek Holdings, one of its largest investors, and may grow to $9.8 billion to meet demand. Management also plans to buy 750,000 shares, it said.
Monday's write-down and plans to raise capital may raise further questions about Chief Executive John Thain's ability to turn around Merrill. The company has lost $19.2 billion in the last year and suffered more than $40 billion of write-downs from subprime mortgages and other risky debt.
"Are things that much worse than we were led to believe?" said James Ellman, president of Seacliff Capital in San Francisco. "If people were going to believe Thain when he said Merrill raised more capital than it needed to and had taken conservative marks on its securities book, I'm not sure they're going to believe him tomorrow morning." (See the accompanying video for the "Fast Money" traders' take on developments at Merrill.)
During a conference call on July 17, Thain said: "Right now we believe that we are in a very comfortable spot in terms of our capital."
Earlier this month, Merrill completed the sale of its 20 percent stake in Bloomberg LP, the news and financial data company, to Bloomberg Inc for $4.43 billion.
Merrill declined to comment further on the stock offering. The company's market value was about $23.9 billion as of Monday's close, based on reported shares outstanding.
Lenders including Merrill, Citigroup and UBS have announced more than $400 billion in write-downs and credit losses since the global credit crisis began a year ago.
Temasek had invested $5 billion in Merrill in December and February at $48 per share, but Merrill shares have fallen by about half since then.
To satisfy provisions under the earlier investment agreement, Merrill said it agreed to pay Temasek $2.5 billion and Temasek agreed to reinvest that amount without some protections in case Merrill raises more capital.
Merrill shares rose 42 cents to $24.75 in after-hours electronic trading. They fell $3.19, or 11.6 percent, to $24.33 in regular trading, and were down 54.7 percent this year through the market close.
Merrill said it agreed to sell $30.6 billion of collateralized debt obligations (CDOs), a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds for $6.7 billion. This will result in a $4.4 billion writedown, Merrill said.
In addition, Merrill said it agreed to help bail out bond insurer Security Capital Assurance by agreeing to accept a $500 million cash payment in exchange for canceling some credit default swaps and ending related litigation.
Merrill said the settlement, together with the potential settlement of other CDO hedges, will result in a $1.3 billion writedown.
It also said holders of $5.4 billion of convertible preferred shares have agreed to swap their holdings for about 195 million common shares.
"The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts," Thain said in a statement. He said the sale and the stock issuance "will materially enhance the company's capital position and financial flexibility going forward."
Thain became chief executive last December following the ouster in October of his predecessor Stanley O'Neal.
Merrill still has wide exposure to mortgage debt.
As of June 27, it said it had exposures of $33.7 billion to U.S. prime mortgages, $1.01 billion to U.S. subprime mortgages, $1.54 billion to "Alt-A" mortgages and $7.45 billion to non- U.S. residential mortgages.
William Smith, president of Smith Asset Management Inc in New York, said Merrill fetched a "horrendous" price for the CDOs.
"The problem here is with Thain. You can throw him into the credibility problem camp now," Smith said. "It's tough to call the bottoms on these things because it seems like it's never ending, but this could be viewed as the watershed."
Temasek was not immediately available for comment.
Merrill shares closed 11.6 percent lower in the New York session Monday, but was up 13 percent in after-hours trading.