Merrill Loses $4.65 Billion - Downgraded by Moody's
July 18 (Bloomberg) -- Merrill Lynch & Co. declined in New York trading after the third-biggest U.S. securities firm reported a wider-than-estimated second-quarter loss on $9.7 billion of credit-market writedowns.
Moody's Investors Service cut Merrill's credit rating and the shares fell more than 4 percent. The net loss of $4.65 billion, or $4.97 a share, that the firm posted yesterday exceeded its $1.96 billion first-quarter loss, while rivals Goldman Sachs Group Inc. and Morgan Stanley stayed profitable. Merrill earned $2.14 billion in the second quarter of 2007, before the credit contraction led to losses that now stretch over 12 months.
Chief Executive Officer John Thain cut about 4,200 jobs in the first half of the year and is selling assets to replenish the firm's capital. Merrill completed the $4.43 billion sale of its stake in Bloomberg LP and said it signed a letter of intent to sell a controlling interest in Financial Data Services Inc., a mutual-fund administrator valued at $3.5 billion, to an undisclosed buyer.
Thain ``has to do a lot to reassure investor confidence,'' Ryan Lentell, an analyst at Morningstar Inc. in Chicago said in a Bloomberg Television interview.
Analysts' estimates ranged from a loss of 93 cents a share to a loss of $4.21 a share, according to a survey by Bloomberg. Merrill's charges from the credit crisis now exceed $46 billion.
Trailing Rivals
The firm's shares fell $1.37, or 4.5 percent, to $29.36 at 9:44 a.m. in New York Stock Exchange composite trading, down from $52.97 at the end of 2007. Analysts at Citigroup Inc., Oppenheimer & Co. and Wachovia Corp. had predicted the company would book at least $5 billion of writedowns in the quarter.
``Clearly the size of the loss was a surprise,'' Jeff Harte, an analyst at Sandler O'Neill & Partners in Chicago, said in a Bloomberg Television interview. ``It still leaves people with the question of when are these marks going to stop and does Merrill Lynch have enough capital to weather the storm.''
Harte has a ``hold'' rating on Merrill shares.
Goldman Sachs, the biggest U.S. securities firm by market value, reported earnings of almost $2.1 billion for the three months ended May 30. Morgan Stanley, the industry's second- largest company, posted $1 billion of net income. Both are based in New York.
Merrill yesterday confirmed the sale of its 20 percent stake in Bloomberg LP, the parent of Bloomberg News. Merrill said it's financing the sale to Bloomberg Inc., the parent of Bloomberg LP.
BlackRock Stake
The deal, when combined with gains from the Financial Data Services transaction, may boost Merrill's capital and stave off further rating downgrades. At the end of June, the firm's ratio of Tier 1 capital to risk-weighted assets -- a measure scrutinized by regulators -- stood at 7.5 percent, Thain said yesterday on a conference call with investors. With the transactions, that figure climbs to 9.5 percent, he said.
Thain, 53, abandoned an effort to sell Merrill's 49.8 percent share of fund manager BlackRock Inc. In a statement yesterday, BlackRock said the two firms ``agreed to extend and strengthen our global distribution agreement.''
``We have consistently for the last couple of quarters replaced any losses with new capital,'' Thain said on the conference call.
``We will look at all our different options,'' he said when asked whether he'd consider additional asset sales. ``You know we have a $1 trillion balance sheet. There are in fact other options.''
`Really Big Marks'
Money-losing collateralized debt obligations -- securities packaged from other bonds, many linked to subprime mortgages -- continue to cause Merrill's biggest writedowns. The firm was one of the largest underwriters of CDOs before the credit crisis hit last year, and Merrill was stuck with more than $46 billion of them on its books when buyers fled the market.
The firm's remaining CDO holdings fell to $19.9 billion at the end of June from $26.3 billion at the end of March, according to the firm's statement yesterday. The majority of the reduction resulted from $3.5 billion in writedowns.
``They had really big marks against things that we hoped had been marked down enough,'' Harte said.
Thain said buyers are still offering prices for CDOs that are too low to justify a sale.
``I don't think we want to do dumb things,'' Thain said. ``We've been pretty balanced in terms of what we sold, and at what prices we sold them. We have not liquidated stuff at any prices we could get.''
Share Sales
Other writedowns included $1.3 billion on residential mortgages, $1.7 billion on securities held in its U.S. banks and $348 million on junk-grade corporate loans. The firm also reduced the value of bond insurance contracts by $2.9 billion.
The charges left Merrill with negative revenue of $2.12 billion in the second quarter, compared with $9.46 billion of income a year earlier.
Revenue at the company's brokerage, the world's biggest with 16,690 financial advisers, fell 3 percent to $3.2 billion.
Thain, who joined Merrill in December, has sold about $18 billion of common and preferred shares to bolster capital, and overhauled risk-management as the company booked more than $37 billion of credit-market losses in the previous three quarters. The company's stock has fallen 57 percent since Thain became CEO Dec. 1.
Banks and brokers have taken more than $435 billion of writedowns and credit losses since the beginning of last year as mortgage-backed securities, CDOs, leveraged loans and other fixed-income assets lost value. Merrill's charges are now second only to those at Citigroup Inc., the largest U.S. bank.
Moody's Downgrade
New York-based Citigroup today reported a smaller-than- estimated second-quarter loss of $2.5 billion after $12 billion in writedowns and increased bad-loan reserves during the period.
Moody's downgraded Merrill's long-term credit rating one level to A2, the sixth-highest available, and gave the debt a stable outlook. Standard & Poor's, which cut Merrill's rating on June 2 to A, the sixth-highest, today affirmed that assessment and said the outlook remains negative.
Second-quarter fixed-income trading revenue was negative $8.07 billion and equity-trading revenue was $1.73 billion, down from $2.15 billion a year earlier. Debt underwriting generated $367 million in revenue, down 22 percent, while stock underwriting revenue fell 38 percent to $338 million.
The investment-banking business is grappling with a plunge in fees from advising companies on mergers and stock and bond sales, as CEOs and corporate treasurers hunker down for a recession.
Thain also broke off talks with Silverstein Properties Inc. about relocating the investment bank's headquarters to a skyscraper under construction at the World Trade Center site in downtown Manhattan. Discussions between Merrill, Silverstein and the Port Authority of New York and New Jersey, which owns the site, ``ended over economic terms,'' Port spokesman Steve Coleman said yesterday in a statement.
To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.
Moody's Investors Service cut Merrill's credit rating and the shares fell more than 4 percent. The net loss of $4.65 billion, or $4.97 a share, that the firm posted yesterday exceeded its $1.96 billion first-quarter loss, while rivals Goldman Sachs Group Inc. and Morgan Stanley stayed profitable. Merrill earned $2.14 billion in the second quarter of 2007, before the credit contraction led to losses that now stretch over 12 months.
Chief Executive Officer John Thain cut about 4,200 jobs in the first half of the year and is selling assets to replenish the firm's capital. Merrill completed the $4.43 billion sale of its stake in Bloomberg LP and said it signed a letter of intent to sell a controlling interest in Financial Data Services Inc., a mutual-fund administrator valued at $3.5 billion, to an undisclosed buyer.
Thain ``has to do a lot to reassure investor confidence,'' Ryan Lentell, an analyst at Morningstar Inc. in Chicago said in a Bloomberg Television interview.
Analysts' estimates ranged from a loss of 93 cents a share to a loss of $4.21 a share, according to a survey by Bloomberg. Merrill's charges from the credit crisis now exceed $46 billion.
Trailing Rivals
The firm's shares fell $1.37, or 4.5 percent, to $29.36 at 9:44 a.m. in New York Stock Exchange composite trading, down from $52.97 at the end of 2007. Analysts at Citigroup Inc., Oppenheimer & Co. and Wachovia Corp. had predicted the company would book at least $5 billion of writedowns in the quarter.
``Clearly the size of the loss was a surprise,'' Jeff Harte, an analyst at Sandler O'Neill & Partners in Chicago, said in a Bloomberg Television interview. ``It still leaves people with the question of when are these marks going to stop and does Merrill Lynch have enough capital to weather the storm.''
Harte has a ``hold'' rating on Merrill shares.
Goldman Sachs, the biggest U.S. securities firm by market value, reported earnings of almost $2.1 billion for the three months ended May 30. Morgan Stanley, the industry's second- largest company, posted $1 billion of net income. Both are based in New York.
Merrill yesterday confirmed the sale of its 20 percent stake in Bloomberg LP, the parent of Bloomberg News. Merrill said it's financing the sale to Bloomberg Inc., the parent of Bloomberg LP.
BlackRock Stake
The deal, when combined with gains from the Financial Data Services transaction, may boost Merrill's capital and stave off further rating downgrades. At the end of June, the firm's ratio of Tier 1 capital to risk-weighted assets -- a measure scrutinized by regulators -- stood at 7.5 percent, Thain said yesterday on a conference call with investors. With the transactions, that figure climbs to 9.5 percent, he said.
Thain, 53, abandoned an effort to sell Merrill's 49.8 percent share of fund manager BlackRock Inc. In a statement yesterday, BlackRock said the two firms ``agreed to extend and strengthen our global distribution agreement.''
``We have consistently for the last couple of quarters replaced any losses with new capital,'' Thain said on the conference call.
``We will look at all our different options,'' he said when asked whether he'd consider additional asset sales. ``You know we have a $1 trillion balance sheet. There are in fact other options.''
`Really Big Marks'
Money-losing collateralized debt obligations -- securities packaged from other bonds, many linked to subprime mortgages -- continue to cause Merrill's biggest writedowns. The firm was one of the largest underwriters of CDOs before the credit crisis hit last year, and Merrill was stuck with more than $46 billion of them on its books when buyers fled the market.
The firm's remaining CDO holdings fell to $19.9 billion at the end of June from $26.3 billion at the end of March, according to the firm's statement yesterday. The majority of the reduction resulted from $3.5 billion in writedowns.
``They had really big marks against things that we hoped had been marked down enough,'' Harte said.
Thain said buyers are still offering prices for CDOs that are too low to justify a sale.
``I don't think we want to do dumb things,'' Thain said. ``We've been pretty balanced in terms of what we sold, and at what prices we sold them. We have not liquidated stuff at any prices we could get.''
Share Sales
Other writedowns included $1.3 billion on residential mortgages, $1.7 billion on securities held in its U.S. banks and $348 million on junk-grade corporate loans. The firm also reduced the value of bond insurance contracts by $2.9 billion.
The charges left Merrill with negative revenue of $2.12 billion in the second quarter, compared with $9.46 billion of income a year earlier.
Revenue at the company's brokerage, the world's biggest with 16,690 financial advisers, fell 3 percent to $3.2 billion.
Thain, who joined Merrill in December, has sold about $18 billion of common and preferred shares to bolster capital, and overhauled risk-management as the company booked more than $37 billion of credit-market losses in the previous three quarters. The company's stock has fallen 57 percent since Thain became CEO Dec. 1.
Banks and brokers have taken more than $435 billion of writedowns and credit losses since the beginning of last year as mortgage-backed securities, CDOs, leveraged loans and other fixed-income assets lost value. Merrill's charges are now second only to those at Citigroup Inc., the largest U.S. bank.
Moody's Downgrade
New York-based Citigroup today reported a smaller-than- estimated second-quarter loss of $2.5 billion after $12 billion in writedowns and increased bad-loan reserves during the period.
Moody's downgraded Merrill's long-term credit rating one level to A2, the sixth-highest available, and gave the debt a stable outlook. Standard & Poor's, which cut Merrill's rating on June 2 to A, the sixth-highest, today affirmed that assessment and said the outlook remains negative.
Second-quarter fixed-income trading revenue was negative $8.07 billion and equity-trading revenue was $1.73 billion, down from $2.15 billion a year earlier. Debt underwriting generated $367 million in revenue, down 22 percent, while stock underwriting revenue fell 38 percent to $338 million.
The investment-banking business is grappling with a plunge in fees from advising companies on mergers and stock and bond sales, as CEOs and corporate treasurers hunker down for a recession.
Thain also broke off talks with Silverstein Properties Inc. about relocating the investment bank's headquarters to a skyscraper under construction at the World Trade Center site in downtown Manhattan. Discussions between Merrill, Silverstein and the Port Authority of New York and New Jersey, which owns the site, ``ended over economic terms,'' Port spokesman Steve Coleman said yesterday in a statement.
To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.
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