Korea's KIC Converts $2 Billion to Merrill Common Stock

Korea Investment Corporation (KIC) said on Tuesday it had converted $2 billion worth of preferred Merrill Lynch stocks into common shares, more than two years ahead of schedule.


The conversion was made on Monday when the Wall Street bank said it would take a $5.7 billion third-quarter write-down as it unloaded huge amounts of risky debt and raise $8.5 billion by selling new stock.

The announcement came less than two weeks after the U.S. investment bank posted a $4.9 billion second-quarter loss, hurt by more than $9 billion of writedowns.

"After renegotiations with Merrill Lynch, we decided to make the $2 billion conversion earlier than the previously agreed timeframe," the KIC said in a statement. "With the conversion, Merrill Lynch would be able to boost its capital soundness and KIC would be compensated for its valuation losses."

It declined to say how large a stake its 72,243,217 Merrill common shares would represent, citing Merrill's new fund-raising plan.

The stocks will be traded freely from Jan. 15, 2009, after a minimum two-month mandatory ownership period following the conversion.

In January, the government-owned fund said it would buy $2 billion in preferred Merrill stock that could be converted into 3 percent of the U.S. investment bank, as part of Merrill's $6.6 billion capital-raising plan.

The investment represented KIC's first foray into the ranks of sovereign wealth funds buying into subprime mortgage-hit Wall Street banks, as major banks continue turning to sovereign funds for capital injections as the global credit crisis deepens.

Under the original agreement, KIC was supposed to swap the shares into common stocks in mid-October, 2010, with a base price of $52.40 each.

But the fund had faced heavy criticism for the share purchase after Merrill's share price tumbled 54.7 percent this year to $24.33 as of Monday's market close.

It said Merrill's aggressive bad asset clearance and new capital plans would turn its share price higher in the long term.

Apart from the share conversion, KIC has earned a total of $88.5 million in dividends from Merrill.