Merrill sets $5.7 billion write-down, to sell stock

By Christian Plumb and Jonathan Stempel

NEW YORK (Reuters) - Merrill Lynch & Co MER.N said on Monday it will take a $5.7 billion third-quarter write- down as it unloads huge amounts of risky debt, and raise $8.5 billion by selling new stock.

The Wall Street investment bank and brokerage announced its plans less than two weeks after posting a $4.9 billion second- quarter loss, hurt by more than $9 billion of write-downs.

Merrill said its stock sale includes $3.4 billion to Singapore's state-run Temasek Holdings Pte Ltd TEM.UL, one of its largest investors, and may grow to $9.8 billion to meet demand. Management also plans to buy 750,000 shares, it said.

Monday's write-down and plans to raise capital may raise further questions about Chief Executive John Thain's ability to turn around Merrill. The company has lost $19.2 billion in the last year and suffered more than $40 billion of write-downs from subprime mortgages and other risky debt.

"Are things that much worse than we were led to believe?" said James Ellman, president of Seacliff Capital in San Francisco. "If people were going to believe Thain when he said Merrill raised more capital than it needed to and had taken conservative marks on its securities book, I'm not sure they're going to believe him tomorrow morning."

During a conference call on July 17, Thain said: "Right now we believe that we are in a very comfortable spot in terms of our capital."

Earlier this month, Merrill completed the sale of its 20 percent stake in Bloomberg LP, the news and financial data company, to Bloomberg Inc for $4.43 billion.

Merrill declined to comment further on the stock offering. The company's market value was about $23.9 billion as of Monday's close, based on reported shares outstanding.

Lenders including Merrill, Citigroup Inc (C.N) and UBS AG (UBSN.VX) have announced more than $400 billion in write-downs and credit losses since the global credit crisis began a year ago.

Temasek had invested $5 billion in Merrill in December and February at $48 per share, but Merrill shares have fallen by about half since then.

To satisfy provisions under the earlier investment agreement, Merrill said it agreed to pay Temasek $2.5 billion and Temasek agreed to reinvest that amount without some protections in case Merrill raises more capital.

Merrill shares rose 42 cents to $24.75 in after-hours electronic trading. They fell $3.19, or 11.6 percent, to $24.33 in regular trading, and were down 54.7 percent this year through the market close.

WRITE-DOWNS

Merrill said it agreed to sell $30.6 billion of collateralized debt obligations (CDOs), a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds for $6.7 billion. This will result in a $4.4 billion write- down, Merrill said.

In addition, Merrill said it agreed to help bail out bond insurer Security Capital Assurance Ltd SCA.N by agreeing to accept a $500 million cash payment in exchange for canceling some credit default swaps and ending related litigation.