Merrill may write off 5.4 billion in Q2

By Elinor Comlay and Tenzin Pema

NEW YORK/BANGALORE (Reuters) - Merrill Lynch & Co (MER.N: Quote, Profile, Research, Stock Buzz) will likely write down $5.4 billion of securities in the second quarter, mainly due to its exposure to bond insurers, an analyst at Lehman Brothers wrote on Friday.

The quarterly write-down estimate, one of the highest yet for Merrill Lynch, helped sink the company's shares as much as 2.8 percent and highlighted concerns the broker may need to raise capital.

Lehman analyst Roger Freeman raised his write-down view by $3 billion for Merrill, making his estimate the highest among Wall Street analysts. Analysts to date have expected write-downs to range from $3.5 billion to $4.2 billion.

Freeman looked at how recent rating agency downgrades of bond insurers would affect Merrill Lynch, which offloaded some of its risk on bond insurers. With the bond insurers seen as weaker, their protection is not worth as much to Merrill.

Merrill is likely to have to raise capital if it does write down this exposure, because the charges will leave Merrill Lynch with low capital levels relative to the industry, said Brad Hintz, analyst at Sanford C. Bernstein.

Raising capital may also be necessary to maintain credit ratings, Hintz said. Standard & Poor's cut Merrill's debt rating one notch earlier this month.

"Merrill does not want to see their rating go down again," Hintz said.

But Merrill Lynch Chief Executive John Thain may find raising capital difficult, Hintz said.

Merrill cannot easily issue more common equity, because investors who gave money to Merrill in December and January must receive substantial extra compensation if Merrill raises additional capital at too low a price.

At the same time, however, if Merrill decides to sell off assets to raise money, the company may be giving up future sources of revenue.

Merrill's Thain said he would consider selling the company's 20 percent stake in media and information company Bloomberg, which he valued at around $5 billion to $6 billion earlier this month.

To some investors, that move makes sense.

"We have confidence in what John Thain is doing," said Ben Wallace, a securities analyst at investment advisor Grimes & Company, which owns Merrill shares.

Lehman Brothers said it increased its write-down estimate for Merrill after looking at the company's exposure to repackaged debt known as collateralized debt obligations.

Freeman widened his second-quarter loss estimate to $2.78 a share from 64 cents. For 2008, he sees higher losses of $2.99 a share from his prior view of a loss of 53 cents.

The analyst cut his price target to $44 from $47 and rates the stock "equal weight."

Merrill shares closed at $33.05 Thursday on the New York Stock Exchange. Through Thursday, they have plunged 38 percent this year.

In midday trading on Friday, Merrill's shares were up 2 cent at $33.03 after falling as low as $32.11.

(Reporting by Tenzin Pema in Bangalore and Elinor Comlay in New York; Editing by Jarshad Kakkrakandy and Andre Grenon)