Kuwait set to invest as Merrill seeks $4bn
By Henny Sender and Ben White in New York and Stephanie Kirchgaessner in Washington
Published: January 13 2008 19:29 Last updated: January 13 2008 19:29
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Merrill Lynch is seeking about $4bn in a second capital raising, as the hole in the US investment bank’s balance sheet continues to grow.
The Kuwait Investment Authority is expected to be a significant investor in the new deal, which could be announced as soon as midweek, according to people familiar with the matter. Other investors could come from Europe.
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KIA, which may also invest as much as $2bn or $3bn in Citigroup, is emerging as an large source of rescue finance on Wall Street. Once among the most conservative of sovereign wealth funds, KIA is changing its strategy in order to move more quickly than competitors and seize opportunities amid the turmoil in the US credit markets, these people say. Both Merrill and KIA declined to comment.
Both the price and the terms of the deals at Citi and Merrill are still being negotiated.
The latest round of capital raising comes at the start of a round of earnings reports during which big US banks and brokers are expected to reveal as much as $40bn in further mortgage-related writedowns. Action taken by Citi and Merrill will be closely watched by other institutions
Citi is expected to announce a writedown of close to $20bn and present plans to raise as much as $14bn in new capital from the Chinese and public market investors as well as the KIA. Analysts expect Vikram Pandit, Citi’s recently installed chief executive, to slash the dividend 40 per cent or more to improve Citi’s capital position.
The infusion would follow the $7.5bn Citi raised from the Abu Dhabi Investment Authority in late November.
Merrill Lynch on Thursday is expected to announce a writedown of $10bn to $20bn. Brad Hintz, Sanford Bernstein analyst, said a writedown of more than $20bn “would significantly increase leverage and would threaten the credit ratings of the firm”.
Any new capital infusion from the KIA and others would follow the $6.4bn Merrill raised last month from Temasek, the Singapore government fund, and Davis Selected Advisors, a New York-based asset manager.
More positive news is expected to come from JPMorgan Chase on Wednesday. The bank, which has avoided the worst of the mortgage problems thus far, is expected to report earnings of 93 cents per share, a decline of 14 per cent from last year.
JPMorgan is in a strong position and is thought likely to pursue a significant US acquisition to expand its domestic consumer business. Often mentioned candidates include Washington Mutual and SunTrust.
News that Citi is seeking further financing from sovereign wealth funds comes as some analysts in Washington say the state-controlled funds could soon face closer scrutiny.
Chuck Schumer, the New York senator and influential Democrat, quickly blessed an investment last year in Citi by Abu Dhabi. But last week, Mr Schumer expressed a hint of caution at reports that the US bank might receive more foreign government investment.
“Because sovereign wealth funds, by definition, are potentially susceptible to non-economic interests, the closer they come to exercising control and influence, the greater concerns we have,” he said.
While few predict that investment could be blocked, one Washington attorney who works on cross-border transactions says he believed minority investments could become subject to reviews by the inter-agency Committee on Foreign Investment in the US (Cfius)that investigates foreign takeover of US assets.
“It is one thing if you have one or two of these smallish deals,” the attorney says. “It is quite another thing, when institutions are being propped up by a bunch of investors, all from the same three states.”
So far, Citi and private equity groups that have received minority investments have not submitted their transactions to a voluntary review by Cfius. That could change if the political temperature increases on such deals.
Copyright The Financial Times Limited 2008