Merrill Lynch: How far will the impairments go?


Analysts believe that the new depreciations recorded by the broker during this second quarter could reach 6 billion dollars. They expect even more losses given its exposure to uncertain claims.

Poor Merrill Lynch. Wasn’t it just three months ago that investors were buying shares of the third-largest US brokerage long before its first-quarter earnings announcement? Not this time. Since early May, Merrill shares have depreciated by 45%. Listing at 26.50 on July 11, the stock then hit its lowest price in 9 years as investors continued to flock to the stock in the days following the release of the company’s results on July 17.

What changed ? At the time, optimistic investors hoped the worst was over. Now they know that’s not the case.

The taste for subprime credit continues to cloud Merrill’s balance sheet. Indeed, the company has some of the most embarrassing assets on the market. As of March 31, Merrill said it had $6.7 billion in exposure to complex mortgage-backed debt securities (MBS) and bond-backed bonds (CDOs), which remain difficult to value. They are almost impossible to sell. Normally, hard-to-collect debt specialists collect them at negotiated prices. However, with a large number of credit products downgraded in one way or another, buyers are ignoring the unreasonably complicated ones and sticking to simple products such as high yield bonds. “Given the importance of their exposure, further write-downs seem inevitable,” said Scott Sprinzen,

Compounding the problem, Merrill hedges $3 billion with credit insurers such as MBIA and Ambac Financial. In June, the specialized agencies downgraded the company’s financial credit rating; which could lead Merrill to set aside additional cash reserves to cover the possible inability of insurers to pay its debts. Like Lehman Brothers, which lost $600 million in the second quarter, Merrill is likely to consider that the indices used to hedge its exposure to certain assets will no longer be able to match current assets. This could lead Merrill to announce more losses.


Unfortunately for Chairman and CEO John Thain, credit issues will continue to plague Merrill’s strong asset management and retail businesses which, continuing to grow rapidly, accounted for $3.6 billion in revenue over the past year. first quarter of 2008. Merrill is also represented globally, with more than a third of its sales coming from Europe and only 19% from the United States. Unlike trading and fixed income securities, asset management activities do not require huge investments. Also, Merrill would like to be able to rely on these activities to generate a high return on equity, of the order of 10% to 20%.

But that plan could be jeopardized if Merrill is forced to raise more than the $15.5 billion raised since the credit crunch that began a year ago. This will depend on the extent of the write-downs estimated at $6 billion by analysts. Earnings per share estimates range from a loss of $0.70 to $4.21, according to Oppenheime analyst Meredith Whitney. These forecasts thus reflect the disparity in the conclusions of analysts on the depreciations that Merrill will register.

Issuing common stock would be the best way to raise cash quickly, but Thain has promised investors he won’t cut their quotas, a promise he probably wishes he had never made. If he keeps his word, Thain would resort to selling Merrill’s two most valuable assets: his stakes in Bloomberg and BlackRock.


Estimates vary, but Merrill’s stake in Bloomberg is believed to be around $5 billion but fetch $300 million according to a Deutsche Bank report. However, selling its shares in Bloomberg would be a more acceptable solution than selling Merrill’s 49% stake in BlackRock. Bloomberg is profitable, but not essential to Merrill’s core business. BlackRock has strategic value for Merrill, particularly for its forward-looking positioning on asset management for better profitability.

A forced sale would force Thain to reconsider the company’s plans and delay economic recovery. “It would be a real failure if they were to sell BlackRock,” says Brad Hintz of Alliance Bernstein. “I hope it doesn’t come to that.”

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