Merrill Plans to Unload Mortgage-Linked CDOs

Merrill Lynch has planned a series of moves to improve its capital position, including the sale of problematic mortgage-related collateralized debt obligations (with a gross notional value of $30.6 billion) for $6.7 billion. An affiliate of private equity firm Lone Star, which has held investments in two surviving subprime firms, has agreed to buy the super-senior asset-backed security CDOs involved in the sale. Merrill said the ABS CDOs were carried at $11.1 billion at the end of the second quarter. The company said it expects to take a third-quarter pretax writedown of about $4.4 billion as a result of the deal, which chairman John Thain said is a "significant milestone" in Merrill's risk reduction efforts. Other moves the firm is making to improve its capital position include the termination of ABS CDO hedges with a monoline guarantor and settlement negotiations with other monoline counterparties that are expected to result in a maximum loss of $1.3 billion. The Wall Street firm is also issuing new common shares with gross proceeds of approximately $8.5 billion through a public offering in which Singapore investment house Temasek Holdings has agreed to purchase about $3.4 billion in common stock. Merrill Lynch can be found online at http://www.ml.com.