Merrill Lynch has planned a series of moves to improve its capital position, including the sale of problematic mortgage-related CDOs for $6.7 billion, according to yesterday’s release.

An affiliate of Lone Star Funds, an investor in non-performing loans and real estate,
has agreed to buy the super-senior asset-backed security CDOs, which valued $11.1 billion at the end of the second quarter.

Merrill said it expects to take a third quarter pretax write-down of about $4.4 billion as a result of the deal, which chairman John Thain said will greatly reduce the company’s risk.

Other moves to improve capital include: the termination of ABS CDO hedges with a monoline guarantor; issuance of new common shares with gross proceeds of $8.5 billion through a public offering in which Temasek Holdings has agreed to purchase $3.4 billion in common stock; exchange of all outstanding mandatory convertible preferred securities for common stock or new preferred securities, which eliminates the reset features in the original securities; and purchase of 750,000 shares of common stock in the public offering by executive management.

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