Monday, July 28, 2008

LATE ANNOUCEMENT: Merrill to Issue $8.5 Billion in New Stock

Merrill Lynch said late today that it plans to issue $8.5 billion in new common stock. Note: Most of the new common stock will be issued for various obligations and thus will show very little in terms of positive cash flow for Merrill. Singapore's state-run Temasek Holdings Pte Ltd TEM.UL,has agreed to buy $3.4 billion of the new shares, Merrill added.

However, in satisfaction of Merrill Lynch’s obligations under the reset provisions contained in the investment agreement with Temasek, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering and is part of the $3.4 billion Temasek investment.

The firm is also forcing conversion of its convertible preferred stock.

$5.4 billion of the $6.6 billion of outstanding mandatory convertible preferred holders have agreed to exchange their outstanding preferred stock for approximately 195 million shares of common stock, plus accrued dividends payable in cash or stock at the option of the holder. A holder of $1.2 billion of outstanding mandatory convertible preferred has agreed to exchange their securities for new mandatory convertible preferred securities with a reference price of $33.00. The reset feature for all securities exchanged has been eliminated.

The firm also said it sold a big chunk of its U.S. super senior asset-backed security collateralized debt obligations, cutting its exposure in this area by $11.1 billion compared to the end of June. Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.

Merrill shares fell 5.7% to $22.94 during after-hours trading on Monday.

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