Merrill may write down $5.4 billion in Q2: Lehman

By Elinor Comlay and Tenzin Pema

NEW YORK/BANGALORE (Reuters) - Merrill Lynch & Co MER.N will likely write down $5.4 billion of securities in the second quarter, mainly due to its exposure to bond insurers, an analyst at Lehman Brothers wrote on Friday.

The quarterly write-down estimate, one of the highest yet for Merrill Lynch, helped sink the company's shares as much as 2.8 percent and highlighted concerns the broker may need to raise capital.

Lehman analyst Roger Freeman raised his write-down view by $3 billion for Merrill, making his estimate the highest among Wall Street analysts. Analysts to date have expected write-downs to range from $3.5 billion to $4.2 billion.

Freeman looked at how recent rating agency downgrades of bond insurers would affect Merrill Lynch, which offloaded some of its risk on bond insurers. With the bond insurers seen as weaker, their protection is not worth as much to Merrill.

Merrill is likely to have to raise capital if it does write down this exposure, because the charges will leave Merrill Lynch with low capital levels relative to the industry, said Brad Hintz, analyst at Sanford C. Bernstein.

Raising capital may also be necessary to maintain credit ratings, Hintz said. Standard & Poor's cut Merrill's debt rating one notch earlier this month.

"Merrill does not want to see their rating go down again," Hintz said.

But Merrill Lynch Chief Executive John Thain may find raising capital difficult, Hintz said.