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Merrill to write down $5.5bn, post Q3 loss |
NEW YORK: Merrill Lynch has said it would write down $5.5bn for bad bets on subprime mortgages and leveraged loans, becoming the only major Wall Street brokerage to take a loss from turmoil in the credit markets.
Merrill said it would post a third-quarter loss of up to 50¢ a share after writing down $4.5bn in collateralised debt obligations (CDO) and subprime mortgage holdings. Merrill had been expected to earn $1.43 a share in the third quarter, according to Reuters Estimates.
This loss would be the first for Merrill since the fourth quarter of 2001, according to Reuters Estimates data.
It is also taking writedowns, on a gross basis, of $967mn related to all non-investment grade lending commitments, regardless of the timing of funding or closing, the company said.
Washington Mutual Inc and Sovereign Bancorp issued warnings on Friday. Citigroup, UBS and Deutsche Bank have issued similar warnings.
Moody’s and Fitch Ratings lowered Merrill’s outlook to “negative” from “stable”. Their current ratings are the fourth-highest investment grade. “The core issue is whether or not it is going to be enough. Merrill had huge exposures to the mortgage sector, the CDO sector and the collateralised loan sector,” said Sean Egan, managing director of independent credit ratings firm Egan-Jones Ratings.
But investors seemed satisfied with the Merrill announcement.
“Once the institution comes clean and gives you some transparency ... the market can start to look ahead”, said Bill Hackney, a managing partner at Atlanta Capital Management. Hackney said his firm, with $8.7bn under management, was adding to its Merrill holdings as the subprime crisis unfolded.
Merrill shares closed up $1.89 at $76.67 on the New York Stock Exchange on Friday. Merrill shares fell to $66.95 on Aug. 16 from a January high of $98.68.
Deutsche Bank analyst Michael Mayo said in a research note that while he was “somewhat frustrated” by Merrill, he had a “buy” rating on the stock.
Merrill chief executive Stan O’Neal said in a statement that fourth-quarter outlook for revenue remained “difficult to predict,” but he said he sees evidence of long-term growth trends in its global businesses.
Merrill was expected to have earnings of $2.20 a share in the fourth quarter, and revenue of $8.8bn, according to Reuters estimates.
“We can do a better job of managing this risk, as we have done with other classes”, O’Neal said in the statement.
Merrill said the writedowns primarily affected its fixed income, currencies and commodities (FICC) businesses.
The company said it expects to report revenue growth “in excess” of 20% over the 2006 third quarter in each of its other business lines, and “solid” revenue performance from the rest of its FICC businesses.
“It’s still going to end up being the second most profitable year in Merrill Lynch’s history”, said Chuck Carnevale, chief investment officer and co-chief executive at Great Companies. “The company is not dying or going out of business.”
In a filing with the US Securities and Exchange Commission, Merrill said a majority of the losses related to CDOs held within its structured credit business. The lead CDO underwriter in 2006 and 2007, Merrill said in the filing it had “significantly” reduced its exposure to this asset class.
Merrill's announcement follows the ouster of two top executives from its fixed income business. – Reuters |
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