The euphoria in financial stocks yesterday seems to have been largely built on the idea of that "cathartic vomit." The idea was that by writing down assets once again and selling off CDOs to Lone Star for 22 percent of their original value, Merrill Lynch had finally purged itself of the junk on its books. Never mind that we've heard that particular tune three times before. Everyone wanted to dance to it again.
But the morning after lots of people are having second thoughts. For starters, Merrill Lynch's financing for the deal is troubling. They put up 75% of the money used to buy the assets, and the loan is apparently non-recourse. This means that if the CDOs drop too much in value, Lone Star can basically put them back to Merrill rather than pay off the financing.
In a report entitled "On Second Thought ... " Bank of America analyst Jeffrey Rosenberg explained that "Merrill now finds itself effectively in the position of having sold off its upside but retaining its downside."
In other words, this alleged sale seems like yet another sleight of hand by Merrill's management, a way to move the CDOs from one column on the balance sheet to another while no one is looking.
Merrill CDO sale not as good as it looks: analyst [Reuters]
Posted by guest , Jul 30, 2008 12:59PM
Mustard is the new Mayo.
Posted by guest , Jul 30, 2008 1:01PM
Not good boys and girls
Posted by guest , Jul 30, 2008 1:06PM
30,600,000,000 Notional
11,100,000,000 ML carrying value
6,700,000,000 LS Purch. Price
22% % of Par
1,675,000,000 Lone Star Cash Paid
5.5% % Par Paid in Cash
5,025,000,000 ML Loan subject to further w/d
What a fucking joke!
Posted by guest , Jul 30, 2008 1:06PM
It's John Thain that is posting all the mayo comments hoping to distract everyone for Merrill's problems.
Posted by Anal_yst , Jul 30, 2008 1:19PM
"sleight of hand while no one is looking"
Uh, except everyone and their mother was looking, who the f&ck did they think they were fooling? There has to be more to this story (or Thain, et al needs to explain it better), as there is no way senior management could have been as stupid as they appear to be in doing this deal. (at least I hope not)
Posted by guest , Jul 30, 2008 1:30PM
what are the historical default rates of subprime vs prime? where can i get this from?
Posted by I am a Dude , Jul 30, 2008 1:49PM
Carney, the correct term is 22 cents on the dollar, not 22% of orig value. "value" and "orig value" are all relative and these markets, meaningless
Posted by guest , Jul 30, 2008 1:55PM
Yes, this is only partial risk transfer, so ML is clearly not off the hook; however, in terms of providing a mark for CDO pricing, this is landmark event. Lone Star is betting $1.7Bn that they got the pricing right. Isn't that sufficient validation for the 22% valuation?
Posted by I am a Dude , Jul 30, 2008 1:58PM
ML is financing 75% of the deal
Posted by guest , Jul 30, 2008 2:05PM
anal, methinks mgmt is smoke screening it as a temporary patch, counting on the stupidity of others (it's working), and that thain realizes this is the endgame, and is trying very hard to fake someone into buying them, asap.
-retail
Posted by guest , Jul 30, 2008 2:11PM
@8:
Lone Star's $1.7Bn is sufficient validation of a 5.5% valuation (1.7/30.6) rather than a 22% valuation...
Posted by guest , Jul 30, 2008 2:15PM
@ 1:55 it is not a 22% valuation. It ia a 5.47% valuation.
After accounting for the fact that Merrill is lending the purchaser 75% of the purchase price Merrill is recieving 5.5 cents on the dollar for the crap. Better yet these CDOs are mostly 2005 and before. So Merrill is still the proud owner of their 2006/2007 (the most toxic vintages) CDOs.
And yet as i write this the stock is up.
Posted by guest , Jul 30, 2008 2:19PM
@11 and @12, how is lone star making money if the CDOs are worth less than 22%? they are putting real money in. you're confusing risk transfer with valuation.
Posted by guest , Jul 30, 2008 2:26PM
Not nearly enough detail to even understand the context of the trade. What CDO assets are in there? ABS CDO? sub-prime, prime, Alt-A? Lev loans, HY CDS? Given Merrill's past pipeline it likely ABS CDO... Is this on the senior most part of cap structure? Any mezz in there? Is it 20-100 or 0-10 on the 20-100? Its easy to look at the numbers and say its absurd but until you know the assets and the attachment point and all the terms of the financing its hard to say who got hosed. However, I would bet its not Lonestar. Ludicrous Speed! May the Schwartz be with you Princess Vespa!
Posted by guest , Jul 30, 2008 2:30PM
@13:
We're not confusing risk transfer w/ valuation at all. Lone Star set up a SPV for the purposes of purchasing these CDO's and put in the $1.7B they used to purchase the $30B stash. The terms of the agreement stipulate that ML's recourse on the 75% loan is limited to the assets of the purchaser (the SPV). Once ML takes the $1.7B out of the SPV and delivers the $30B of shit, that basket becomes the only recourse for repayment of the loan. So if they fall to 0, Lone Star loses the $1.7B they invested and ML gets to take their crap back as repayment for their $5B loan. Should the CDOs miraculously recover (and there is no maturity date set for the loan), Lone Star can sell them, repay the loan w/ the proceeds and walk off with any excess. As BofA's analyst said, this is essentially a 5.5% call option on the CDOs.
-11
Posted by guest , Jul 30, 2008 2:48PM
Massive dilution to fund a Divie?
The board of directors of Merrill Lynch & Co., Inc. (NYSE:MER) declared a regular quarterly dividend of 35 cents per common share payable September 3, 2008, to shareholders of record on August 14,
2008.
Posted by I am a Dude , Jul 30, 2008 2:49PM
@15 thanks for the insight.
which entity did the $5b loan go to?
can lone star strip any assets out of the SPV?
Posted by guest , Jul 30, 2008 3:02PM
Thain during negotiations...
http://alphaville.ftdata.co.uk/lib/inc/getfile/1654.png
Posted by guest , Jul 30, 2008 3:09PM
"Merrill Lynch board declares quarterly dividend of 35 cents"
I guess what's an extra couple hundred million when you're in this deep.
What a joke.
Posted by guest , Jul 30, 2008 3:12PM
ML's press release regarding the transaction:
http://ml.com/index.asp?id=7695_7696_8149_88278_101366_103431
Posted by guest , Jul 30, 2008 3:33PM
@15 this is about as insightful as saying that the equity of a company is an option on its assets (which it is). Would that make you question the value of the equity? Lone Star will lose money if the assets are worth anything less than 22%. Doesn't that mean that are convinced that they are worth more? It could be way less an then indeed ML's recovery is only 5%, but that is beside the valuation point.
Posted by guest , Jul 30, 2008 4:45PM
Every investment bank on the street owns these assets in spades. They all need to write them down before their balance sheets reflect anything like reality.
Posted by guest , Jul 30, 2008 4:45PM
Every investment bank on the street owns these assets in spades. They all need to write them down before their balance sheets reflect anything like reality.
Posted by guest , Jul 30, 2008 5:06PM
You guys do too much quant. Makes no sense to transfer an asset at 22c or 5c
when its all upside. The real reason is this: " I don't wanna stand in front of the press every two weeks and explain things, get the f... s... off my books!" ...and the shareholders bleed. That's how WS works. Mega egos...
Posted by guest , Jul 31, 2008 11:31PM
Barge deal? Try lonestarbarge.com. I think its Bayley there with O'Neal and Thain in the pic sipping on some Cristal?