Merrill may see another downgrade on writedowns

By Anastasija Johnson

NEW YORK (Reuters) - Forecasts for huge second quarter writedowns at Merrill Lynch & Co. MER.N have intensified concerns Moody's Investors Service may cut its debt rating, compounding the brokerage's problems with higher borrowing costs.

Analysts expect the No. 3 Wall Street investment bank to record as much as $5.8 billion of writedowns when it reports second quarter results later this month, after writing off more than $30 billion on complex mortgage backed securities in prior quarters.

To help offset those write-downs, Merrill Chief Executive John Thain is widely expected to raise capital by selling assets, but at least one rating agency has indicated that may not be enough to save its ratings.

Moody's Investors Service has had Merrill's fifth-highest investment grade rating of "A1" on review for a downgrade since mid-April, and a cut seems all but certain. A rating cut could affect approximately $261 billion of Merrill's long-term debt.

S&P already downgraded Merrill one notch to "A" in June after reviewing the industry's funding model in the wake of Bear Stearns' collapse in March.

"It's highly probable that Moody's would move down its rating," said Richard Bove, analyst Ladenburg Thalmann & Co. Inc. "The likelihood is high because Merrill is going to take a major hit on its earnings in the second quarter."

A Merrill Lynch spokeswoman declined to comment.

Standard & Poor's has a negative outlook, which typically indicates only a long-term risk of a downgrade, but the agency has said it could cut the rating if Merrill posts additional large losses.