Singapore's Temasek invests $900 million more in Merrill

SINGAPORE Tue Jul 29, 2008 7:00am EDT

SINGAPORE (Reuters) - Singapore sovereign wealth fund Temasek Holdings TEM.UL will pump an additional $900 million into Merrill Lynch MER.N as part of the debt-laden U.S. investment bank's latest $8.5 billion fund-raising effort.

Temasek said on Tuesday that Merrill will give it a rebate of $2.5 billion on its original $4.4 billion stock purchase following the U.S. firm's decision to sell new shares.

Temasek will plough that money, plus another $900 million, back into new Merrill stock, potentially increasing the state-run fund's stake in one of the best-known U.S. banks to more than 10 percent.

The fund had been facing huge paper losses on its initial investment in Merrill at $48 per share as banking stocks slid this year amid writedowns on risky debt.

The rebate, announced less than two weeks after Merrill posted a $4.9 billion second-quarter loss, effectively reduces the cost of Temasek's existing shares in the U.S. bank by more than half to $21 a share, according to Reuters calculations.

Neither Merrill nor Temasek disclosed the price at which the new Merrill shares would be offered.

Merrill shares fell 11.6 percent on Monday to $24.33. After the market close, the company said it will take a further $5.7 billion in debt-related writedowns in the third-quarter and raise $8.5 billion by selling new stock.

Sovereign wealth funds from Asia and the Middle East have become more influential in financial markets after pouring billions of dollars into Merrill and other big banks on Wall Street and Europe that were reeling from losses related to the U.S. mortgage market.

But many wealth funds are now smarting from huge losses and facing growing public criticism at home as the value of those investments continues to slide.

Singapore's government has said the investments by Temasek, and by its larger sister fund GIC in banks including Citigroup (C.N) and UBS USBN.VX would give good long-term returns.

But another major Asian sovereign wealth fund, the Korea Investment Corporation (KIC), said it may shy away from further investments in U.S. banks, as it struggles to avoid losses from its $2 billion investment in Merrill.

KIC chief executive Chin Youngwook told a news conference on Tuesday that it had posted about $800 million in valuation losses before it converted its preferred Merrill shares into common stocks on Monday, more than two years ahead of schedule.

"We learned a lot of good lessons from the investment in Merrill Lynch," Chin said, when asked about its interest in Lehman Brothers LEH.N and other U.S. investment houses.

"I think we may have to approach cautiously."

SINGAPORE RAISES ITS BET

Temasek had invested a total of $5 billion in Merrill Lynch in December and February, but Merrill shares have fallen by about half since then. The deal had a feature that required Merrill to compensate the Singapore investor should the U.S. firm subsequently raise new capital at a lower price.

"Temasek's point of view is that this opportunity is not going to be repeated," said Arjuna Mahendran, Singapore-based head of investment strategy at HSBC Private Bank.

"From a long-term investor's point of view, getting access to the U.S. financials market is best done through strategic stakes," he added.

"Temasek confirms its commitment of $3.4 billion in the public offering by Merrill Lynch, a portion of which is subject to regulatory approval," spokeswoman Myrna Thomas said in a statement. "The commitment includes a sum of $2.5 billion arising from a re-set payment."

The sovereign wealth fund's latest purchase of Merrill Lynch shares is subject to approval by U.S. regulators as it could result in Temasek's owning more than 10 percent of the U.S. broker.

According to Reuters data, the Singapore wealth fund owns 86.95 million Merrill Lynch shares, or about 8.85 percent of the firm.

But the Singapore fund's stake could rise to as much as 15 percent if other investors shun Merrill Lynch's latest fund-raising exercise.

A stake of that size may raise some concerns among U.S. politicians about the level of foreign ownership at one of the nation's best-known banks.

"Merrill needs big, strong investors, and it will be good for sentiment. These are the guys who are unlikely to bail out at the first sign of trouble," said Singapore-based Song Seng Wun, regional economist at CIMB, Malaysia's largest investment bank.

"At the end of the day, we are unlikely to see the Merrills of this world collapse -- that will cause the depression of the 21st century," Song said.

Temasek said it managed about $108 billion as of March 2007. According to Morgan Stanley, it manages $159 billion and is the world's seventh-largest sovereign wealth fund.

(Additional reporting by Yvonne Cheong and Koh Gui Qing; Editing by Neil Chatterjee & Kim Coghill)

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