DBRS Downgrades Merrill Lynch

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 |  About: Merrill Lynch & Co. Inc. (MER)
by: FP Trading Desk

DBRS has downgraded all of its long-term credit ratings for Merrill Lynch & Co. (MER) and warned that any future sizable losses will likely result in another downgrade. DBRS lowered its rating to A (high) from AA (low), saying Merrill’s expected $5.7-billion pre-tax write-down exceeded its forecast.

The ratings agency said:

After a sequence of quarterly losses that have needed to be offset by various capital raising actions, asset reductions and asset sales, DBRS views Merrill Lynch’s financial flexibility as considerably reduced. While successful in lowering the company’s risk profile, this combination of actions continues to draw down the company’s potential resources.

In terms of Merrill’s sale of $30.6-billion in ABS CDOs to an affiliate of Lone Star Funds for $6.7-billion, DBRS noted that Merrill still has some indirect exposure through its 75% financing for the transaction.

Merrill’s $8.8-billion in gross exposure to ABS CDOs, along with its large exposure to other problematic asset classes suggest the potential for more write-downs ahead, DBRS said, noting that “the general operating environment remains very difficult.”

It also said any sale of investment management firm Blackrock could result in a ratings downgrade.

The ratings agency said:

BlackRock is a core business and any sale or partial sale would be a signal that Merrill is running out of capital raising options.

If Merrill’s underlying earnings remain solid, it proves to deal well with risk in various asset classes and returns to profitability by the end of the year, DBRS said Merrill’s rating could revert to “stable.”