There are so many questions about Merrill Lynch's sale of its CDO portfolio that have gone unanswered. For starters, is the seventy-five percent financing a recourse loan or a non-recourse loan? Is it secured by the assets Merrill just sold? And, most importantly, how did the value of the portfolio drop nearly 40% in just a few weeks?
After the jump, Antony Currie of BreakingViews explains: "Pricing is about as clear as mud."
Posted by guest , Jul 29, 2008 1:10PM
not sure when the street is going to bitch slap these banks for attempting to fool investors, but it will happen...
Posted by guest , Jul 29, 2008 1:14PM
The pricing of the assets didn't drop 40% in two weeks. MER im sure had pretty solid indications as to where pricing was going to be with Lone Star and are now hiding behind the "we didn't have a deal" bullshit. Bottom line is management didn't want to take the loss at earnings time. Valuation control there and elsewhere is either crap or just get overridden by senior management with their earnings management bias.
While the big 4 accountants sit there quietly and say nothing.
Please dont think its any better at JPM and GS. They have done a better job with risk positioning, but their pricing for books purposes are crap.
Posted by guest , Jul 29, 2008 2:06PM
I read it as only recourse to the acquiring special purpose entity, so Lonestar only on hook for equity put in.
From Lonestar's point of view, they are buying a call on this portfolio for 6c with a strike of 22c. Depending on volatility and time horizon assumed, I would view the underyling value being priced from 10c to 25c which would mean to me Merrill could still be facing future write downs on this "sold" CDO exposure.
Posted by guest , Jul 29, 2008 2:10PM
Does anyone actually read press releases?
Q: "Is it secured by the assets Merrill just sold?"
A: from MER's press release yesterday:
"Merrill Lynch will provide financing to the purchaser for approximately 75% of
the purchase price. The recourse on this loan will be limited to the assets of
the purchaser. The purchaser will not own any assets other than those sold
pursuant to this transaction. The transaction is expected to close within 60
days."
Posted by DrederickTatum , Jul 29, 2008 2:29PM
I'm stunned. Merrill sells a book of "superior" CDO's to Lonestar at 22 cents on the dollar. Merrill thens give a recourse loan to Lonestar for 16.5 cents of the 22 cent price. MER then admits that Lonestar will have no other collateral.
So Lonestar gets 5.7Bil at assets for 5% purchase price. It also enjoys 100% of the proceeds with Merrill taking virtually all of the risk.
I hope I am misunderstanding this... because if that is what it takes to off-load a CDO book, then its apocalypse time.
The whole thing is mind-boggling... This is so much money, it makes no sense that MER didn't disclose this earlier on teh conference call. And this is notwithstanding the 2.5 Bil charge MER took on the re-cap as well. Do do this deal, there's no way MER didn't know two weeks ago that they had adequate liquidity.
Posted by CNote , Jul 29, 2008 2:31PM
Rock on. Robbing Peter to pay... well, Peter.
I honestly hope that Lone Star defaults on this. Giving it back to Merrill 6 months down the road, and forcing them to take a provision hit on top of the $25+ billion market hit they've taken would be insult to injury. Then Merrill's MTM would be a kick to the junk after the insult after the injury.
They'd be like me in 4th grade.
Posted by guest , Jul 29, 2008 2:44PM
it was a very long press release, you have to admit.
Posted by DrederickTatum , Jul 29, 2008 2:52PM
@6 - There had to be a holding period right? Maybe like a ballon payment arrangement set out 1-2 years?
At least then MER can hope the CDO market returns enough so that Lonestar can sell these assets and pay back the loan.
Posted by guest , Jul 29, 2008 3:16PM
Watching MER trade up almost 4% makes me think of the Thain singing "don't stop believin....".
And then i remember that on Aug 1, 2007, BSC fell 8% to around $106 and Krammer ranted. And every month since then, according to most market watchers, and financial CEO's the bottom has been put in.......
Posted by guest , Jul 29, 2008 3:30PM
This time it's different. Ha,ha.
Posted by guest , Jul 29, 2008 4:00PM
@2:31
You should coin "a kick to the junk after the insult after the injury" like Pat Reilly coined "3-peat" and make t-shirts.
Posted by guest , Jul 29, 2008 4:02PM
@2:31
You should coin "a kick to the junk after the insult after the injury" like Pat Reilly coined "3-peat" and make t-shirts.
Posted by guest , Jul 29, 2008 4:02PM
@2:31
You should coin "a kick to the junk after the insult after the injury" like Pat Reilly coined "3-peat" and make t-shirts.
Posted by guest , Jul 29, 2008 4:11PM
ML quantitative group is composed of a bunch of idiots, most probably all the models are wrong.
Posted by Bulging Bracket , Jul 29, 2008 4:12PM
@4:02 you should coin the triple post! all-star baby!
Posted by guest , Jul 29, 2008 4:36PM
Anyone know anything about Loanstar?
Posted by guest , Jul 29, 2008 5:04PM
just google Loanstar dude you can find out a lot.
jeez.
Posted by guest , Jul 29, 2008 6:17PM
This post comes from Barry @ Big Picture. Actual price on the cdo's was $0.055 on the dollar. What does that do to possible future C writedowns?
Actual Merrill CDO Sale: 5.47% on the Dollar
Posted by Barry Ritholtz on Tuesday, July 29, 2008 | 03:43 PM
in Credit | Derivatives | Mathematics | Valuation
An active trader pointed us to this very familiar looking off-balance sheet shenanigan found in the following paragraph regarding Merrill's CDO Sale.
Direct from yesterday's press release:
"On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.
On a pro forma basis, this sale will reduce Merrill Lynch’s aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral – 2005 and earlier. . .
Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days."
Let's take this apart:
• Merrill appears to be moving $30.6 billion dollars of bad paper off of their books.
• This paper was carried at a value of $11.1, meaning there was almost $20B in prior related write downs.
• After this transaction, Merrill’s ABS CDO exposure in theory drops from $19.9 billion to $8.8 billion (hence, the $11.1B number).
• The $6.7B purchase price relative to the $30.6B notational value is 21.8% on the dollar
However:
• Merrill is providing 75% of the financing –- and MER’s only recourse in the event of default is to retake the CDO paper back from the buyer.
• While Merrill hopes to be made whole, the reality is they still have potential exposure to these ABS CDOs via the financing;
• Actual sale price = 5.47% on the dollar
Less than five and half cents on the dollar? That's an even cheaper sale than originally advertised.
What this transaction actually accomplishes is getting the paper -- but not the full liability -- off of Merrill's books.
How very Enron-like !
Posted by guest , Jul 29, 2008 10:07PM
I can imagine what Thain is telling his staff behind closed doors.
"So what bitches? This is how the game is played! Play hard, play smart and don't get hurt. You think I got to where I am today by telling the truth??!! Screw the existing shareholders. I can do whatever I damn pleases 'cause Paulson and Cox have my back!"