Merrill Lynch & Co said last night it will take a $5.7 billion third-quarter write-down as it unloads huge amounts of risky debt, and will raise $8.5 billion by selling new stock.
The Wall Street investment bank and brokerage announced its plans less than two weeks after posting a $4.9 billion second- quarter loss, hit by $9 billion of write-downs in that period.
In a sign of how toxic Merrill's debt holdings have become, it has agreed to sell $30.6 billion of collateralized debt obligations (CDOs), a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds, for just $6.7 billion, or about 22 cents on the dollar.
The fire sale nature of that deal will add to concerns that the global credit crisis, which has already led to more than $400 billion of write-downs and losses at major banks, still has a long way to run.
"What is happening to Merrill and others is death by a thousand cuts. It's painful to see it happen over and over again," said Daniel Alpert, managing director at investment bank Westwood Capital.
Merrill said its stock sale, which includes a $3.4 billion purchase by Singapore's state-run Temasek Holdings, may grow to $9.8 billion. Management also plans to buy 750,000 shares, it said.
Yesterday's write-down and plans to raise capital may raise further questions about the ability of John Thain, who only became Merrill's CEO in December following the ouster of Stanley O'Neal, to turn around the firm.
The company has lost $19.2 billion in the past year and suffered more than $40 billion of write-downs from subprime mortgages and other risky debt. Its shares sank 11.6 per cent in New York Stock Exchange trading ahead of the announcement and are now less than a third of their value a year ago.
The stock was little changed at $24.35 in after-hours electronic trading after dropping $3.19 to $24.33 in regular trading.
Analysts were quick to cut forecasts for Merrill, with Banc of America lowering its price target to $40 a share from $47, and Credit Suisse widening its loss per share estimate to $12.70 from a former view of a loss of $7.
"Are things that much worse than we were led to believe?" said James Ellman, president of Seacliff Capital in San Francisco.
"If people were going to believe Thain when he said Merrill raised more capital than it needed to and had taken conservative marks on its securities book, I'm not sure they're going to believe him tomorrow morning."
On a July 17th conference call, Mr Thain said: "Right now we believe we are in a very comfortable spot in terms of our capital." He has made a series of similar comments over the past seven months.