Merrill shocks Wall Street with $8.5bn share sale
Tuesday 29 July 2008
Merrill Lynch, the investment banking giant that has lost more than $40bn (£20.1bn) on its mortgage investments since the start of the credit crisis, shocked Wall Street last night with plans to raise $8.5bn in new shares.
As part of a sweeping financial restructuring, the company is dumping most of its remaining holdings in risky mortgage derivatives and tapping the Singapore government for an emergency $3.4bn cash infusion.
Existing shareholders will have their stakes in the company viciously diluted by the new share sale, and anger last night immediately focused on John Thain, chief executive since last November, who had promised on more than one occasion in recent months that Merrill did not need to raise new equity capital.
Instead, he had told shareholders he would raise money through selling assets, such as Merrill's 20 per cent stake in the Bloomberg financial information business, which it offloaded this month for $4.4bn.
Mr Thain gambled yesterday that the dramatic new moves to rid Merrill of its toxic mortgage portfolio would be enough to restore confidence, and that they would be seen as a once-and-for-all clean up of the company.
A portfolio of mortgage derivatives known as collateralised debt obligations (CDOs) that Merrill had valued at $11.1bn as recently as a fortnight ago, were offloaded last night for $6.7bn. Before the credit crisis struck, that portfolio had been worth $30bn.
"The sale of the substantial majority of our CDO positions represents a significant milestone in our risk-reduction efforts," Mr Thain said. "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 $8.5bn share sale will be substantially dilutive to existing shareholders, since it equates to more than a quarter of Merrill's current market capitalisation. Temasek, the investment arm of the Singapore government is contributing $3.4bn to the fundraising, adding to the $4.4bn it invested in the company last December and underscoring again the new global financial power of sovereign wealth funds from emerging market countries. Temasek also contributed £160m to the recent fundraising by Barclays in the UK.
The news of Merrill's financial restructuring came after a day of mounting rumours it was facing new writedowns, just 11 days after it had posted its last results, containing a bigger-than-expected $9.4bn of writedowns. Its shares sunk 12 per cent to their lowest close in almost 10 years.
The firesale of the majority of the remaining portfolio will trigger another $4.4bn writedown for the next quarter's results, and the winding down of hedge positions will add a further $1.3bn.
Risky mortgage derivatives have become all but impossible to value while the US housing market remains in freefall, since their value ultimately derives from the value of the underlying collateral – namely, US houses.
Merrill executives hope the sale of the bulk of its holdings will create some clarity about the value of the company's remaining assets. Some of that optimism was reflected in the share price in after-hours trading last night when the stock, which originally slipped further in the wake of the announcement, staged a modest rebound.
Mr Thain – a former Goldman Sachs executive and most recently head of the New York Stock Exchange – arrived at Merrill last November after the sacking of Stan O'Neal, the former chief executive, who had pioneered the company's push into risky derivatives markets and turned Merrill into one of the biggest issuers of CDOs.
- 1 The difference between a migrant and refugee, in one sentence
- 2 Miley Cyrus calls out hypocrisy of women’s nipples being taboo
- 3 Celebrity Big Brother 2015: Tila Tequila kicked off show after 'describing Hitler as a good man'
- 4 Watch the Supermoon live: How to see the brightest Moon of the year tonight
- 5 iPhone 5c to be discontinued, no iPhone 6c to replace it
Spain accused of 'provocation' after letting Russian submarine refuel off Gibraltar
The difference between a migrant and refugee, in one sentence
Allonautilus scrobiculatus: World's 'rarest' creature spotted for only the third time ever
Miley Cyrus calls out hypocrisy of women’s nipples being taboo
Bangkok Bomb: Thai police name Adem Karadag as suspect arrested over blast that killed 20
Climate change: 2015 will be the hottest year on record 'by a mile', experts say
'Women only' train carriages: Jeremy Corbyn unveils radical move to tackle public harassment
Black holes are a passage to another universe, says Stephen Hawking
Iain Duncan Smith 'should resign over disability benefit death figures', says Jeremy Corbyn
Stock up on canned food for stock market crash, warns former Gordon Brown adviser
Labour leadership: Jeremy Corbyn voters most likely to believe 'world is controlled by a secretive elite'
iJobs Money & Business
£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...
£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...
£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...
£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...