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17 Jul 2008
Moody's downgrades Merrill Lynch to A2, stable outlook.
Approximately $250 billion in long-term debt affected
New York, July 17, 2008 -- Moody's Investors Service downgraded the senior long-term debt
of Merrill Lynch and Co., Inc ("MER") and its
subsidiaries to A2 from A1. The downgrade follows MER's announcement
of a $4.7 billion second quarter loss. The Prime-1
short-term ratings of Merrill Lynch and its subsidiaries were affirmed.
The outlook on all ratings is stable. This concludes a review begun
on April 17, 2008.
The rating agency explained that the downgrade to A2 reflects Merrill's
fourth consecutive quarter of sizeable losses, resulting principally
from its legacy ABS CDO and sub-prime mortgage portfolios.
MER's sale of its stake in Bloomberg and its intent to sell FDS
will substantially mitigate the impact of the second quarter loss on capital
Moody's also said that MER's financial flexibility is more
limited. "Management's options to sell assets or raise
more common equity to offset unexpected losses are now reduced given the
difficult industry and capital markets environment," said
Peter Nerby, a Senior Vice President at Moody's.
Moody's said that the A2 rating and stable outlook incorporate the
rating agency's estimates for the potential for up to an additional
$10 billion in pre-tax write-downs for the firm.
This risk relates primarily to MER's ongoing exposure to its ABS
CDO and non-prime mortgage portfolios. If losses exceed
this amount then further negative rating actions are likely.
The stable outlook reflects the strong competitive position and diversification
of Merrill Lynch's various franchises, which continue to perform
well. Merrill Lynch holds enviable positions in U.S.
wealth management, asset management and institutional capital markets,
according to the rating agency.
The stable outlook also reflects Moody's opinion of the new management
team at Merrill Lynch, which has valuable experience and expertise
at managing the liquidity, credit and market risks of institutional
capital markets businesses. "The firm is continuing the process
of strengthening risk management through important new hires and organizational
changes", Nerby said. As such, Moody's
expects that future outsized losses in the institutional businesses will
be limited mainly to the legacy ABS CDO and mortgage portfolios.
The affirmation of the Prime-1 rating reflects the firm's
continuing strong liquidity profile. Nerby noted that, "Merrill
Lynch currently maintains a $92 billion liquidity pool available
to the holding company, as well as significant core deposits and
other unencumbered assets". MER's liquidity stress
testing incorporates scenarios that include run-off of secured
financing and fluctuations in prime brokerage customer balances.
Moreover, the firm has a substantial pool of collateral that could
be pledged to the Primary Dealer Credit Facility.
Moody's noted that the recent collapse of Bear Stearns highlights
the vulnerability of the secured funding model of Merrill Lynch and other
investment banks to overall market liquidity. When market liquidity
dries up, collateral becomes harder to value, margin disputes
arise, and pressure on an investment bank's funding increases.
The supportive actions of the Federal Reserve, including the Term
Securities Lending Facility and the Primary Dealer Credit Facility,
have played a critical role to stabilize funding markets in the wake of
the Bear Stearns collapse. These actions have provided at least
an interim solution to industry-wide structural liquidity challenges.
However neither facility is permanent in nature. In the absence
of a more permanent solution Moody's believes that the newly revealed
vulnerability of the secured funding model may warrant negative action
on investment banks that rely on that model.
The long-term ratings of Merrill Lynch & Co.,
Inc. and its subsidiaries were downgraded one notch; the short
term ratings of Merrill and its subsidiaries remain at P-1.
The outlook for all entities is stable. The following is a list
of Merrill's major operating subsidiaries:
Merrill Lynch Bank USA -- deposits to A2 from A1 and bank
financial strength rating to C+ from B-,
Merrill Lynch Bank & Trust Company -- deposits to A2
from A1 and bank financial strength rating to C+ from B-.
Merrill Lynch is a global investment banking and wealth management firm
headquartered in New York that reported a loss of $11.4
billion for the six months ending May 31, 2008.
Peter E. Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service
No Related Data.
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