Merrill Lynch Debt Ratings Cut on 3rd Qtr Loss

NEW YORK (Reuters) - All three major rating agencies on Wednesday cut their ratings on Merrill Lynch MER.N after the investment bank reported its first loss in six years.

Merrill wrote down $7.9 billion for bad bets on risky subprime mortgages and related securities, sparking a steep selloff in the stock market. For details, see [nN24485186]

Standard & Poor's called the loss "startling." All three agencies brought into question the U.S. investment bank's risk management capabilities.

"The jump in the write-down suggests that management did not fully understand their exposures," Peter Nerby, senior vice president at Moody's Investors Service said in a statement.

"Management allowed a sizable concentration to develop and the resulting markdowns overwhelmed the benefits of Merrill Lynch's business and revenue diversification," he said.

Earlier, Merrill Lynch Chairman and CEO Stan O'Neal said that write-downs on collateralized debt obligations followed errors of judgment in business and risk management.

S&P and Fitch Ratings both cut the bank one notch to "A-plus," the fifth highest investment grade, from "AA-minus." Moody's cut the bank a notch to "A1," also its fifth highest rating, from "Aa3."

More write-downs at Merrill could be coming if the world's largest brokerage further cuts the value of its remaining $20.9 billion exposure to collateralized loan obligations and subprime mortgages.

Merrill Lynch Chairman and Chief Executive Stan O'Neal said on a conference call the company is still working to resolve the impact of loans to people with weak credit.

Ratings cuts usually increase costs for companies to borrow in the market.

NEGATIVE OUTLOOK

The three agencies also have a negative outlook on the Merrill Lynch, indicating an additional ratings cut is likely over the next several quarters.

"The significantly greater-than-anticipated loss primarily reflects a reconsideration of the marks used as the basis for the valuation of the company's outsized positions in collateralized debt obligations and subprime mortgages," S&P said in a statement.

"The absolute size of the loss related to CDOs and subprime mortgages, and management's miscues regarding the valuation of its positions, further heighten our concerns regarding the company's risk management practices and business strategy," S&P said.

Fitch Ratings agreed, and warned the bank's revenues are likely to fall.

"Fitch anticipates liquidity and pricing challenges to prevail in the market over the intermediate term potentially resulting in lower revenues, investment write-downs and/or fewer principal trading opportunities," Fitch said.