This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Merrill Lynch & Co. (MER) on January 17, 2008.
Management:
Chairman of the Board, Chief Executive Officer: John A. Thain
Chief Financial Officer, Executive Vice President: Nelson Chai
Investor Relations: Sara Furber
Treasurer: Eric Heaton
Key Investor Issues:
- Net revenues were negative $8.2 billion, down from $8.4 billion in the prior-year period.
- The firm reported a net loss of $10.3 billion or $12.01 a share from profits of $2.2 billion or $2.41 a share in 2006.
- The firm enhanced its equity position with two capital issues of $12.8 billion.
Full Year Highlights:
- The firm realized a net loss from continuing operations of $8.6 billion, or $10.73 a share,
- Net revenues were $11.3 billion, down 67 % from $33.8 billion in 2006.
- Net loss was $7.7 billion or $9.69 a share from a profit of $7.5 billion or $8.42 a share in the prior period.
Fourth Quarter Highlights
The firm reported a net loss of $10.3 billion or $12.01 a share from profits of $2.2 billion or $2.41 a share in 2006 following write-downs of $11.5 billion related to CDOs and sub-prime mortgages.
- The loss was also attributed to writedowns of $3.1 billion related to increased credit reserves against financial guarantor counter parties.
- With these write-downs, the firm’s remaining net exposures to CDOs are $4.8 billion and to sub-prime mortgages are $2.7 billion as the company has been actively working to bring down the size of its balance sheet by reducing positions and freeing up liquidity.
- The net loss from continuing operations was $10.3 billion, or $12.57 per diluted share, down from net earnings from continuing operations of $2.2 billion in 2006.
- Net revenues were negative $8.2 billion, down from $8.4 billion in the prior-year period as a result of the aforementioned writedowns.
- Book value per share was $29.37, down from $41.35 at the end of 2006 excluding the impact of the equity and equity-related transactions which closed subsequent to year end.
The company raised $6.2 billion of common stock from Temasek and Davis Advisors and announced an additional $6.6 billion of mandatory convertible securities from Kuwait Investment Authority, and a Mizuho corporate bank.
- With these two capital raises totaling $12.8 billion, the firm has now replaced the equity base and is now well capitalized, both at the parent level and at the regulated subsidiary level.
– It also freed up about $2 billion of additional capital through the sale of the vast majority of the assets of Merrill Lynch Capital and MLIG.
- Focus is also on reducing the type of carry trades that are balance sheet intensive, and moving more of the illiquid assets type of investing into third-party funds, beginning with the case of the Pacific rim real estate fund.
The compay has reinstituted a risk committee, which will meet weekly and, includes the heads of all of the trading businesses.
Exposure composition:
- A significant portion of the underlying collateral for the super senior exposures is comprised of 2006 vintage mortgages.
- These have been valued using cash flow analysis with cumulative loss assumptions primarily between 16% and 21% based upon multiple inputs, including market data and projections for future collateral performance.
- Substantial credit valuation adjustments of negative $3.1 billion were recorded related to hedges with financial guarantors.
- Hedge related credit adjustments were negative $2.6 billion, and the firm had $14 billion of net notional super senior ABS CD exposure that was hedged with financial guarantors, of which the vast majority was against high grade exposures with high attachments.
Within the sub-prime mortgage business, the exposure is $2.7 billion, and the aggregate net write-downs related to these exposures totaled $1.6 billion, enabling it to meaningfully reduce the exposure to the completion of whole loan sales and securitization transactions.
- In addition, the firm took marks of $400 million on the U.S. Alt-A exposures and $500 million on the mortgage exposures outside the U.S., as sub-prime contagion spread to other residential markets.
- Within the commercial real estate business the aggregate net write-downs totaled $230 million and were the result of spread widening and market illiquidity.
- Within leveraged finance, net write-downs of $126 million were recorded with respect to these financing commitments.
U.S. bank and related investment securities portfolio recognized a $1.3 billion of net write-downs through other comprehensive income, and $869 million of net write-downs through the income statement.
- These adjustment primarily relate to U.S. sub-prime and ABS CDO securities and are in line with adjustments made to comparable securities outside the bank''s investment securities portfolio.
- Rates and currencies revenues were down as the benefit of increased volatility was offset by substantially weaker client flows and decreased trading opportunities, particularly in December.
- The MUNI business also experienced sequential declines as issuance slowed amid mono-line credit fears and offsetting these declines was a net benefit of $800 million related to changes in the carrying value of certain long-term debt liability.
Capital and Liquidity Management:
- The firm’s liquidity position remains strong with the holding company’s excess liquidity pool at $80 billion at year end.
- The company’s active management of equity capital included the issuance of 80 million shares of common stock for $3.8 billion in connection with equity investments from Temasek Holdings and Davis Selected Advisors.
- It also issued 37 million shares of common stock for $1.8 billion as well as an outstanding option for an additional 12.5 million shares for a minimum of $0.6 billion in connection with equity investments from Temasek Holdings.
- No share repurchases were made and the pending issuance of shares of common stock to long-term investors.
