Wednesday, Fitch Ratings, Ltd., downgraded the credit ratings of Merrill Lynch & Co., Inc. (MER) and its subsidiaries following a review of the investment banking industry.
Fitch said it was placing the Wall Street investment bank's 'A+' long-term Issuer Default Ratings, or IDRs, on Rating Watch Negative, the fifth-highest investment grade level, while affirming the short-term IDR and Individual ratings.
A Negative Rating Watch indicates a potential downgrade over a shorter term, as opposed to an Outlook, which is meant to convey changes in fundamental trends.
The international credit rating agency attributed lowering the rating for Merrill based on assumptions that the company would post its fourth consecutive loss in the second quarter, due to ongoing write-downs, most of which were related to residential mortgage, monoline and ABS-CDO positions.
Fitch in its statement said, "This rating action results in part from diminished expectations that Merrill's fixed income, currency and commodities operations will attain a sustainable level of core profitability in the near-term. Losses in this segment of the investment bank underpin the recent quarterly losses, and could continue to overwhelm income contributions from other business segments.
In addition, the current environment limits the volume and scope of many traditional investment banking opportunities. These reduced revenue opportunities, coupled with Merrill's ongoing negative mark-to-market adjustments, significantly constrain the company's earnings prospects."
Merrill's retail brokerage, private client and equities businesses were expected to remain highly competitive, generating core earnings. The geographic diversity of the company was also afforded a positive rating. However, Fitch pointed out that although the company maintained high league table rankings in several advisory and underwriting categories through June, industry volumes were bound to decline.
Fitch expressed concern about Merrill's funding profile and said that although Merrill maintained an excess liquidity pool at the parent level to satisfy unanticipated or extraordinary cash needs, the pool had increased, exceeding $80 billion at March 31, 2008.
The credit rating agency said that it would continue to monitor Merrill's market and credit risk exposures with the expectation of additional mark-to-market losses through the remainder of fiscal year 2008.
Fitch also affirmed ratings for Lehman Brothers (LEH), Goldman Sachs (GS), and Morgan Stanley (MS).While the outlook on Lehman and Morgan Stanley is negative, Goldman's was rated stable.
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