TOKYO Mizuho Financial Group Inc (8411.T), Japan's second-biggest bank, is in talks to invest more than $925 million in Merrill Lynch & Co Inc MER.N, sources said on Tuesday, amid speculation the U.S. bank is looking to further boost its capital.
Mizuho unit Mizuho Corporate Bank is negotiating a purchase of more than 100 billion yen ($925 million) worth of Merrill's preferred shares, according to two executives with direct knowledge of the talks.
The Nihon Keizai business daily reported earlier on Tuesday that Mizuho was considering buying up to 140 billion yen worth of preferred shares.
Mizuho spokeswoman Masako Shiono said she was unable to comment. A Merrill Lynch spokesman in Tokyo, Tsukasa Noda, also declined to comment.
The executives, who spoke on condition of anonymity because the plan is still confidential, said the preferred shares would likely be convertible into common shares.
The deal would mark a turnaround for Japanese lenders, which just a few years ago were courting overseas rivals for help.
"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. And those tend to be sovereign funds and Asian financial institutions."
In December, Merrill secured as much as $7.5 billion by selling a stake in itself to Singapore's government and an asset manager.
The Financial Times said on Monday that Merrill was seeking about $4 billion in a second capital raising, and the Kuwait Investment Authority was likely to be a significant investor.
A TALE OF TWO CITIES
Unlike their New York competitors, Tokyo's big banks have avoided the worst of the credit crisis, due to smaller investments in subprime-related products.
Mizuho has about $7.4 billion invested in products related to residential mortgage-backed securities (RMBS) with $982 million of that exposed to subprime mortgages.
Merrill, which is due to report earnings on Thursday, will likely see losses of around $15 billion on its subprime-related investments, almost twice its original estimate, the New York Times said on Friday.
In October the bank booked a third-quarter net loss of $2.3 billion on subprime investments.
At current market capitalization the deal would give Mizuho about a 2 percent stake in Merrill, if all the preferred shares were converted into common stock.
It would also mark the first time since 1989 that a Japanese bank has invested in a U.S. rival, according to data from Nomura Securities.
"The fact that it (Mizuho) can invest this much money means that it is capable of taking care of others," said Takeshi Osawa, senior fund manager at Norinchukin Zenkyoren Asset Management.
Just a few years ago many Japanese lenders were on the verge of collapse and needed injections of public funds.
Since then, Japan's lenders have cleaned up their non-performing loans, boosted their earnings and taken tentative steps towards once again expanding overseas.
Threadgold said the deal would also allow Mizuho to obtain the stock at a discount.
"They're probably going to get (the stock) at a very opportune time, and I suspect that it will turn out to be a good investment."
(Additional reporting by Yuko Kubota)