Wednesday, October 24, 2007
Merrill lynch Q3 2007
Overall
--EPS -$2.82 share (2.3 bil), $3.17 per share last year, est -$0.5 per share
--net revenue 0.577 bil decreased 94% from 9.8 bil last year
--One time after tax charge 1.1 bil due to the merger of ML investment mgr and BlackRock
Credit Metrics (AAA)
capital market/FICC (50% revenue)
--CDO/subprime: write-down $7.9 bil in FICC business, larger than 4.5 bil disclosed at pre-release.
a.ABS/CDO exposure 15.2 bi Q3 07, 32.1 bil Q2 07, writedown $6.9 bil, >30%
*** high grade 8.3 Q3 07, 16 bil Q2 (est), writedown 1.9 bil, ratio 20%
*** mezzanine 5.3 Q3 07, 10 bil Q2 (est), writedown 3.1 bil, 40%
*** CDO-squared 0.6 Q3, 1.2 bil Q2(est), writedown 0.8 bil, 50%
*** retained interest 1 bil Q3, 2 bil Q2(est), writedown 1.1, 50%
b.Subprime exposure 5.7 bil Q3 07, 8.8 bil Q2 07, writedown $1 bil, >= 10%
--This exposure consists of residential whole loans, warehouse lending, residential mortgage-backed security positions, and residual
--lending commitments writedown $967 mil gross, 463 mil net. Exposure 31 bil at the end of Q3 07, 53 bil Q2 207. -3%
--Others
Evaluation
--10y spread increased 10 bps to 177 bps
--5y CDS increased 5 pbs to 95 bps, 7y 84.5 (arbitrage strategy, buy 7y and sell 5y)
Market comments:
--loss since 2001
--it spent 1.3 bil purchasing First Franklin Financial Corp, a home lending company. It will write off 0.1 bil
--downgraded the same day by SP from AA- to A+, Moody and Fitch
Peer Group
BSC
--CDO/CLO/VIE: 2.5 bil consolidated, 6% of total VIE. max exposure to loss from CDOs and CLOs was 437 mil
--Level 3: onl,uy loss -255 mil out of 9.5 bil lvl 3 asset? < too low
--Evaluation: A+, 10y 194 bps, 5y CDS 102
GS
--CDO/CLO. 1.71 bil loss, exposure (unconsolidated 65.5 bil where CDOs/CLOs 32.9 bil) < 6%
--Level 3, loss of cas hinstruments 1.6 out of 45 bil <6%, hedging impressive as MS
--leveraged loan 6.8 bil, included in 45 bil level 3.
--Evaluation: AA-, 10y 142 bps, 5y CDS 55 bps
MS (benefit from heding 7 bil offset 1.9 bil loss in Level III asset, Fair value disclosures)
--Q3 2007 Level III begin 35.3 bil of corproate and other debt, loss -1.8 bil 6%
--VIE/CDO: exp 41.5 bil unconsolidaed (26.6 bil credit and real estate, Morgage and ABS 6.3 bil), max exposure to loss 20.9 bil (18.9 bil credit and real estate, 1.7 bil structued transactions, 0.249 bil morgtgage an ABS)
--Retained Interest: 6.2 bil (noninvestment-grade 3.1 bil)
--loan commitments : 726 mil mark down of leveaged loan commitments, exposure 104 bil (43 bil non investment grade) < 2% ratio
214 mil of mar down of CD
--Evaluation: AA-, 10y 148 bps, 5y CDS 59.5
LEH
--level 3.
a.Mortgage and MBS, unreliazed .829 bil out of 12 bil, 7%
b.derivate performance 542 mil out of 1.3, far less impressive than MS and GS
c.corporate debt 3.6 bil, no unrealized loss?
--Evaluation: A+, 10y cash 191 bps, 5y CDS 98.8 bps
Comments
--BSC questionable disclosure in level 3 asset looks like it is overstating the asset value, short
--MS, GS, conservative disclosure and appropriate hedging
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