Analyst says Merrill Lynch at risk of credit downgrade

NEW YORK—Merrill Lynch & Co.'s ratings are at risk of being downgraded by credit ratings agencies due to its sale of $2.55 billion in preferred equity announced Tuesday, a Bernstein Research analyst said Friday.

In general, ratings firms don't want more than 25 percent of a firm's capital to come from preferred stock and hybrid debt, and Merrill is "well over the limits," analyst Brad Hintz said in a note to clients. He doesn't think that the company will get much equity credit from the ratings agencies.

To date, the company has written down about $29 billion related to the credit crisis -- one of the highest totals on Wall Street -- and has raised $12.8 billion through common and preferred stock offerings over the past five months to rebuild capital.

Given depressed earnings, a weak economy, troubled collateralized debt obligations on its balance sheet and its stretched equity, there is a "strong chance Merrill will face a credit rating downgrade this year from at least one of the rating agencies," he wrote.

A credit rating decrease is likely to increase borrowing costs and create the need for the company to put up more collateral for certain transactions, he said.

Hintz cut his price target to $45 from $50. He rates the shares "Market Perform."

Shares of the New York-based company rose $1.29 to $49.38 in afternoon trading.