Merrill on Verge of Downgrade, Ponders Asset Sale

Merrill Lynch is looking at selling stakes in BlackRock or Bloomberg, and the size of the sale will depend on the size of the investment bank's second quarter loss, a person briefed on the matter said Wednesday.

Merrill Lynch
Merrill Lynch

The comments come amid concerns about Merrill Lynch's earnings report, due out next week. Analysts have steadily increased their forecasts for the level of writedowns expected from the company, and Fitch Ratings said Wednesday it has placed Merrill Lynch and its units on Rating Watch Negative.

If current analysts' estimates of writedowns of as much as $6 billion are accurate, Merrill could need to raise roughly $5 billion of capital, the person said.

That level could be reached by selling the 20 percent stake in Bloomberg, which Merrill Chief Executive John Thain said last month could be worth about $5 billion to $6 billion.

Or it could reach the goal by selling some portion of the 49.8 percent stake in BlackRock , the largest publicly traded U.S. asset management company, could be sold, the person said. The BlackRock stake is worth about $10 billion based on current share prices.

A sale of a portion of both stakes is also conceivable, he added.

Determining exactly how much capital Merrill would try to raise is difficult, because companies often seek more funds than they need.

A Merrill Lynch spokeswoman declined to comment, citing a quiet period ahead of the earnings report.

Fitch anticipates a fourth consecutive quarterly loss in second-quarter 2008 due to ongoing writedowns, the majority of which are related to residential mortgage, bond insurance and ABS-CDO positions. At the end of the first-quarter, Merrill's exposure to these and other higher risk assets as a percent of capital was significant relative to peers.

Fitch's rating action results in part from diminished expectations that Merrill's fixed income, currency and commodities operations will attain a sustainable level of core profitability in the near-term. Losses in this segment of the investment bank underpin the recent quarterly losses, and could continue to overwhelm income contributions from other business segments.

In addition, the current environment limits the volume and scope of many traditional investment banking opportunities. These reduced revenue opportunities, coupled with Merrill's ongoing negative mark-to-market adjustments, significantly constrain the company's earnings prospects.

Other segments in the investment bank continue to perform, however.

Merrill Lynch has recorded more than $30 billion of writedowns since the third quarter of last year. The third largest U.S. broker-dealer is expected to have suffered in the second quarter as bond insurers lost their top ratings and the structured credit market weakened.

Thain hinted last month that he would rather sell the Bloomberg stake than the interest in BlackRock, which he called a strategically important asset.

"Bloomberg is just a very good investment," he said.

Merrill Lynch sold its investment management business to BlackRock in 2006 in exchange for shares in the asset manager, whose funds it distributes. The company plans to keep its strategic relationship with BlackRock even if it sells part of its stake, a person close to Merrill said last week.

Asset sales make more sense for Merrill Lynch because issuing equity would be too expensive, analysts said. When the company raised more than $12 billion in December and January, it agreed to compensate those investors for future share issuances at too low a price.

If Merrill issued more than $1 billion of shares now, it would have to pay the December and January investors about $4 billion in cash or stock.

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