More on Merrill’s CDOs, by Greg Newton of NakedShorts.
Those 2007 Merrill CDOs in foole
30 CDOs issued, 29 (and probably 30) in trouble
Derivatives consultant Janet Tavakoli landed an RPG on Merrill Lynch’s we-sort-of-got-the-garbage-off-the-books party yesterday, in a client letter strongly suggesting that more biohazards may be…ahem…lying in the weeds.
So, how did the CDOs that Merrill Lynch brought to market in 2007 perform? As expected, they are dreadful…As of June 10, 2008, of 30 CDOs totaling more than $32 billion in notional amount, 19 have declared an event of default, are in acceleration, or have been liquidated. Ten others are “toast,” as evidenced by downgrades of their “triple A” tranches to junk status, yet I could find no record of a declared event of default (EOD). The remaining CDO has “triple-A” tranches downgraded to junk, but the two topmost tranches are still rated investment grade (the topmost is Aa1 neg/ AAA neg and the formerly “triple-A” tranche below that is Baa2 neg/ BBB+ neg). The EOD may be undeclared due to documents that avoid that declaration so that investors cannot trigger acceleration or liquidation (or the declaration may be pending).
While the main point of Tavakoli’s missive was to point out that the securitization market will remain becalmed until investors regain some trust in the investment banks and CDO managers that gorged at the trough, the assay of Mother Merrill’s 2007 bowel movements is eye-watering. Two things:
- Merrill Lynch said that the stuff it loosely characterized as having “sold” to Lone Star was “US super senior ABS CDO, the majority of which comprises older vintage collateral – 2005 and earlier.” Interesting, as those older vintages were solid gold (although 2005 was probably only 9 ct) compared with the bags of wet newspapers issued in 2007.
- It’s impossible to tell from Merrill Lynch’s entirely legal but deliberately and utterly Delphic disclosures how much of that vintage 2007 vintage is still on the books, and where it’s marked. Good luck, Temasek,** especially now you’ve given up the death spiral part of the earlier deal!
Dead Calm: No One Trusts You
(Don’t miss the table on Page 3)
by Janet Tavakoli
Tavakoli Structured Finance Jul. 30 2008
Merrill Lynch Announces Initiatives to Further Enhance Capital Position
Press release
Jul. 28 2008
**Note: As background, see the WSJ article by Rick Carew and Jason Leow (below), but need to be a subscriber for the full article. – Ilene
Temasek Gets Sweet Deal As Merrill Raises Capital
Excerpt: "Merrill Lynch & Co.’s plans to raise new capital are a great deal for one of its most important investors: Singapore’s Temasek Holdings Pte. Ltd.
On Monday, the Wall Street firm announced plans to raise capital through an $8.5 billion share offering. By participating in the plan, Temasek, an investment firm owned by Singapore’s government, will essentially wipe out much of its paper loss on a previous $5 billion investment in Merrill Lynch thanks to special downside protections it negotiated at the time.
The deal will also raise Temasek’s approximate 9% ownership of Merrill …"
More on Temasek:
Excerpt: "Views in Singapore varied as to whether Temasek was doubling down on a rare opportunity, or digging itself deeper into a hole.
Some took the view that Merrill Lynch was scrubbing itself clean of toxic debt and that weakness in its shares offered a chance to buy at a discount into a leading financial company poised for future growth. Critics of Temasek’s move suggested that more turmoil lies ahead in the financial markets and that stocks like Merrill could fall further.
"There is always a price to pay to get a stake in what is still a leading global financial institution," Song Seng Wun, a regional economist at brokerage CIMB-GK Research told the Business Times, a local daily.
Please continue to ignore the 48-hour delay box. Click here (backup site) for comments, blogroll and archives of Phil’s Favorites. – Ilene
