Merrill to raise $6.6 billion

The Merril Lynch headquarters in New York in a file photo. Merrill Lynch said on Tuesday it would issue $6.6 billion in preferred shares to investors, including the Kuwait Investment Authority, as the subprime-hit bank looks to shore up its capital base.

TOKYO/NEW YORK (Reuters) - Merrill Lynch & Co. Inc's MER.N scramble to raise capital -- spurred by huge mortgage losses -- continued on Tuesday with a $6.6 billion offering of preferred shares to a group that includes U.S., Japanese and Kuwaiti investors.

The size of the capital infusion signals that Merrill's mortgage-related losses in the fourth quarter could be at the high end of estimates of $15 billion, Lehman Brothers analysts said in a research note.

Merrill shares fell 3 percent to $54.27 in morning trade on the New York Stock Exchange. The stock is down 42 percent over the past year.

Within the past month, the world's largest brokerage has announced plans to raise $12.8 billion from outside investors. Merrill is anxious to raise capital after taking an $8.4 billion write-down in the third quarter, and with expectations the company will take an additional and even larger hit on Thursday when it report's year-end results.

The company is in a bind after bets on securities underpinned by risky subprime mortgages imploded on the watch of then-Chief Executive Stan O'Neal. Merrill's gross exposure to subprime and collateralized debt obligations is about $27.2 billion.

The latest capital infusion for Merrill underscores the growing importance of Asian financial institutions in bailing out high-flying Wall Street companies waylaid by rising mortgage defaults and falling U.S. housing prices.

"How the times have changed. It's a mere five years since Merrill was investing in Mizuho," said David Threadgold, a banking analyst at Fox-Pitt, Kelton in Tokyo.

"The people with money are the people who haven't been dragged down themselves by the subprime," Threadgold said. "And those tend to be sovereign funds and Asian financial institutions."

Analysts expect Merrill's mortgage-related losses to range anywhere from $10 billion to $15 billion in the fourth quarter.

In contrast, Tokyo's big banks have avoided the worst of the credit crisis, mostly because of smaller investments in subprime-related products.

Mizuho has about $7.4 billion invested in products related to residential mortgage-backed securities, with $982 million of that exposed to subprime mortgages.

O'Neal's replacement, John Thain, a Goldman Sachs veteran who was CEO of NYSE Euronext (NYX.N), on December 24 unveiled a deal with Singapore's Temasek Holdings and U.S. money manager Davis Selected Advisors to raise $6.2 billion from newly issued common stock.

Merrill also freed up $1.3 billion in capital from the sale of most of its middle-market lending business to General Electric Co.'s (GE.N) commercial finance arm.

The latest deal would amount to about a 14 percent stake in the Merrill Lynch, based on its current market capitalization.

The mandatory convertible preferred stock offering is priced with an annual dividend yield of 9 percent and conversion premium of 17 percent over the reference stock price of $52.40. Investors include the Kuwait Investment Authority, Korean Investment Corp and a unit of Mizuho Financial Group Inc (8411.T), Japan's second-largest bank.

"These transactions make certain that Merrill Lynch is well-capitalized," Thain said in a statement. He also said he hopes the investment from Mizuho leads to deeper relationships with wealthy clients in Japan and China.

Other investors include TPG-Axon Capital, the New Jersey Division of Investment, the Olayan Group, and T. Rowe Price Associates Inc. on behalf of various clients.

The offering has a maturity of 2 3/4 years. The $52.40 reference price reflects a three-day average closing price from last week, but is 6 percent below Monday's close of $55.97.

Merrill said the preferred stock deal would have a lock-up period of one year, where investors would not be permitted to sell, transfer or hedge it, directly or indirectly.

(Editing by Steve Orlofsky)