Fitch Puts Merrill Lynch on Negative Credit Watch

Fitch says may cut Merrill Lynch debt rating
Wed Jul 9, 2008
12:22pm EDT

NEW YORK, July 9 (Reuters) - Fitch Ratings said on Wednesday it may cut Merrill Lynch & Co Inc's debt rating due to expected ongoing write-downs and diminished prospects for earnings.

Merrill's rating was the only one placed on review for downgrade as Fitch completed its evaluation of investment banks, affirming the ratings of Lehman Brothers, Goldman Sachs, and Morgan Stanley.

Fitch now rates Merrill "A-plus," the fifth-highest investment grade and the same as Lehman's rating, while Goldman Sachs and Morgan Stanley are rated one notch higher at "AA-minus."

Fitch said Merrill's exposure to mortgage-backed debt and downgraded bond insurers at the end of the first quarter was significant relative to its peers and expressed concerns about the level of the brokerage's long-term debt maturing over the next 12 months.

The rating firm said it expects the No. 3 Wall Street investment bank to report a fourth consecutive quarterly loss on July 17. It cited losses in fixed income, currency and commodities operations, which may "overwhelm" income from the better-performing retail brokerage, private client and equities businesses.

Just like its rivals, Merrill faces declining investment banking business opportunities due to the current negative credit environment, Fitch added.

"These reduced revenue opportunities, coupled with Merrill's ongoing negative mark-to-market adjustments, significantly constrain the company's earnings prospects," Fitch said in a statement.

The world's largest brokerage has recorded more than $30 billion of write-downs since the third quarter of last year and Wall Street analysts forecast up to $6 billion of additional charges in the second quarter.

To offset those write-downs, Merrill Chief Executive John Thain is widely expected to raise capital by selling assets, which could include the company's stakes in BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz) and Bloomberg LP. For details, click on [ID:nN09380419]

Fitch said monetizing these assets could generate "incremental capital," adding that current market conditions also limit attractive sales opportunities for other assets.

Although Merrill has over $80 billion in excess liquidity at the parent company level to cover unanticipated cash needs and has broad access to retail and institutional investors, Fitch expressed concerns about its funding profile. Merrill faces $73 billion of long-term debt maturing over the next 12 months, according to Fitch.

"Fitch believes the investor base may be becoming saturated and financial flexibility may be more limited in the future. Satisfying additional capital needs with more equity or unsecured term debt may prove costly," the rating firm said.

Fitch said the rating outlook on Lehman and Morgan Stanley is negative, while Goldman's is stable. The outlook indicates the likely direction of the rating in one to two years.

Reporting by Anastasija Johnson, Editing by Dan Grebler