Until not too long ago this $30.6 B worth of super senior toxic crap was valued at over $11 B and is now in what can only be called a 'get us the hell out' distress sale with a government entity wealth fund. Said entity is also participating in a share offering, several billions of which is also coming from Merrill in penalties from prior offerings with resets based on share performance. Yikes!
As the IMF said today, this credit crisis is just not over yet at all, thereby taking down the US equities market and in particular the financial sector. Our cynical view is that there was knowledge of the coming Merrill announcement during the day in select trading circles as well.
There is no predicting how the Wall Street wiseguys will try to wrap this tomorrow. Is this finally the 'kitchen sink' mother of all writedowns for Merrill? Is this a sign of the bottom? We tend to think this shows what a farce the writedowns have been to date, and what accounting legerdemain underlies the valuations of several US financial companies. This does not bode well for a few of Merrill's Wall Street cousins. There may not be an indedependent investment bank standing by the time this is over, and north of fifty percent fewer hedge funds.
We are not sure about that. But we are reasonably confident that the credit crisis is going to come on with the relentless force and fury of a pyroclastic flow [1] and ignite a new bonfire of the vanities.
Get out of its way. Minimize your exposure to the financial system at your earliest convenience and seek the highest financial ground. The strategy now is the protection of wealth, the conservation of capital.
[1] A pyroclastic flow is a common and devastating result of some volcanic eruptions. The flows are fast-moving currents of hot gas and rock which travel away from the volcano at speeds generally greater than 80 km/h (50mph). The gas can reach temperatures of about 1,000 degrees Celsius (1,800 F). The flows normally hug the ground and travel downhill, destroying everything that they overtake.
Merrill to take $5.7 billion mortgage asset write-downMon Jul 28, 2008 6:31pm EDT
By Christian Plumb and Jeffrey Benkoe
NEW YORK (Reuters) - Merrill Lynch & Co Inc said it expects to take a $5.7 billion pretax write-down in the third quarter due to losses on the sale of mortgage assets and plans to raise at least $8.5 billion by selling new common shares.
Merrill said Singapore's Temasek Holdings Pte Ltd TEM.UL would buy $3.4 billion of the offering. Merrill has already taken billions of dollars in write-downs in past quarters and said it sold key holdings including a 20 percent stake in Bloomberg when it announced second-quarter earnings.
Merrill said on Monday it would pay $2.5 billion as required under a previous stock sale to state-run Temasek, along with $2.4 billion in required dividends to preferred shareholders. In previous deals to raise capital, Merrill had agreed that if it sold shares at too low a price in the future, it would reimburse investors.
The No. 3 Wall Street investment bank's shares were down 5 percent in after-hours trading after retreating 12 percent to $24.33 in the main trading session on the New York Stock Exchange.
Merrill also said it agreed to sell collateralized debt obligations with a face value of $30.6 billion for $6.7 billion to an affiliate of private equity fund Lone Star. (These are U.S. "super senior ABS collateralized-debt obligations" that are being sold for a little less than 22 cents on the dollar - Jesse)
Merrill Lynch Announces Substantial Sale of U.S. ABS CDOs, Exposure Reduction of $11.1 Billion
Monday July 28, 5:25 pm ET
Merrill Lynch Announces Initiatives to Further Enhance Capital Position
Original release from Merrill with Two Pro Forma Attachments
NEW YORK--(BUSINESS WIRE)--Merrill Lynch today announced a series of actions to significantly reduce the company’s risk exposures and further strengthen its capital position. These actions include:
-Announced substantial sale of U.S. super senior ABS CDO securities, resulting in an exposure reduction of $11.1 billion from June 27, 2008 (ABS CDOs are defined as collateralized debt obligations comprised of asset-backed securities).
-Agreement to terminate ABS CDO hedges with monoline guarantor XL Capital Assurance Inc. (“XL”) and settlement negotiations with other monoline counterparties
-Plans to issue new common shares with gross proceeds of approximately $8.5 billion through a public offering launched today (excluding a fifteen percent, or approximately $1.3 billion, option granted to the underwriter to purchase additional shares of common stock to cover over-allotments)
-Agreement that Temasek Holdings will purchase $3.4 billion of common stock in the public offering, a portion of which is subject to receipt of regulatory approvals
-Exchange of all of the outstanding mandatory convertible preferred securities for common stock or new preferred securities, which eliminates the reset features in the original securities
-Purchase of approximately 750 thousand shares of common stock in the public offering by executive management
“The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts,” said John A. Thain, Chairman and CEO of Merrill Lynch. “Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position by issuing common stock. The actions we announced both today and on July 17 will materially enhance the company’s capital position and financial flexibility going forward.”
As a result of the transactions announced today, the company expects to record a pre-tax write-down in the third quarter of 2008 of approximately $5.7 billion. This write-down is comprised of a $4.4 billion loss associated with the sale of CDOs, a $0.5 billion net loss on the termination of hedges with XL Capital Assurance and an approximately $0.8 billion maximum loss related to the potential settlement of other CDO hedges with certain monoline counterparties. In the third quarter, Merrill Lynch also expects to record an expense of $2.5 billion related to its reset payment to Temasek and $2.4 billion of additional dividends as a result of the exchange of certain existing mandatory convertible preferred stock for common stock as described under “Common Stock Offerings and Early Conversion of Mandatory Convertible Preferred.”
Pro forma for the transactions announced today, the sale of our interest in Bloomberg L.P. and the expected FDS transaction, Merrill Lynch’s Tier 1 capital ratio, total capital ratio and adjusted “if-converted” book value per share as of June 27, 2008 would have been 10.5%, 16.6% and $22.21. These figures do not include the impact of any exercise of the approximately $1.3 billion over-allotment option.
CDO Sale:
On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.
On a pro forma basis, this sale will reduce Merrill Lynch’s aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral – 2005 and earlier. The pro forma $8.8 billion super senior long exposure is hedged with an aggregate of $7.2 billion of short exposure, of which $6.0 billion are with highly-rated non-monoline counterparties, of which virtually all have strong collateral servicing agreements, and $1.1 billion are with MBIA. The remaining net exposure will be $1.6 billion. The sale will reduce Merrill Lynch’s risk-weighted assets by approximately $29 billion.
Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days.
Termination of Monoline Hedges:
In addition to the CDO sale referenced above, Merrill Lynch also agreed to terminate all of its CDO-related hedges with XL and is in the process of negotiating settlements on certain contracts with other monoline counterparties. These short positions were the hedges on long CDO positions that are part of the announced sale.
Merrill Lynch executed an agreement to terminate all of its CDO-related hedges with XL. The transaction is expected to close in early August 2008. When the transaction closes, all of Merrill Lynch’s CDO-related hedges with XL will be terminated in exchange for an upfront cash payment to Merrill Lynch of $500 million. These hedges had a carrying value of approximately $1.0 billion at June 27, 2008. As a result of this transaction, Merrill Lynch will record a pre-tax loss of $528 million during the third quarter of 2008.
Merrill Lynch is also in the process of negotiating settlements on certain contracts relating to CDO hedges with MBIA and other lower-rated monolines. If Merrill Lynch were to receive no payments in connection with the settlement of these hedges, the maximum loss Merrill Lynch expects to record would be their current carrying value, $0.8 billion.
The hedges described above had a net notional value of $8.4 billion. To reflect the XL termination and the other potential settlements with other monolines, Merrill Lynch will reduce its U.S. super senior ABS CDO short exposures, or hedges, from $15.6 billion at June 27, 2008, to $7.2 billion on a pro forma basis.
Common Stock Offering and Early Conversion of Mandatory Convertible Preferred:
Merrill Lynch plans to raise $8.5 billion through the public offering of common stock announced today (excluding a fifteen percent, or approximately $1.3 billion option granted to the underwriter to purchase additional shares of common stock to cover over-allotments). Temasek Holdings, Merrill Lynch’s largest shareholder, has committed to purchase $3.4 billion of common stock in the offering, a portion of which is subject to regulatory approvals that are expected to be obtained after the closing of the offering. In addition, Merrill Lynch’s executive management team intends to purchase approximately 750 thousand shares of common stock in the offering.
In satisfaction of Merrill Lynch’s obligations under the reset provisions contained in the investment agreement with Temasek Holdings, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price without any future reset protection.(This reminds one of a company going to the vulture capitalists for last gasp financing. They are rolling penalties Merrill owes them from prior fundraising into this latest tranche. - Jesse)
In addition, $5.4 billion of the $6.6 billion of outstanding mandatory convertible preferred holders have agreed to exchange their outstanding preferred stock for approximately 195 million shares of common stock, plus accrued dividends payable in cash or stock at the option of the holder. A holder of $1.2 billion of outstanding mandatory convertible preferred has agreed to exchange their securities for new mandatory convertible preferred securities with a reference price of $33.00. The reset feature for all securities exchanged has been eliminated.
