Temasek’s Merrill losses could exceed $2bn

January 8, 2009
Singapore Democrats

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Saskia Scholtes & Greg Farrell
Financial Times

Temasek, the Singapore state investment fund, is sitting on significant paper losses related to its stake in Merrill Lynch, the investment bank acquired by Bank of America last week.

The state agency’s unrealised losses could amount to more than $2bn, excluding any hedges, according to a Financial Times analysis based on publicly available filings.

The loss is emblematic of the damage the financial crisis has wrought on sovereign wealth fund investments in the banking sector and helps explain why funds have been reluctant to commit further capital to banks.

Some 40 per cent of Temasek’s portfolio is in the financial sector, and it has suffered paper losses on other investments, including Barclays, Bank of China and China Construction Bank.

Temasek on Monday disclosed it had converted its 13.7 per cent stake in Merrill into BofA shares following the acquisition.

On December 31, the last day of trading before the deal closed, Temasek’s remaining stake in Merrill, for which it paid an average of $23 a share, had dropped to $12.10.

After ploughing $5bn into Merrill between December 2007 and February 2008, and with a further $900m commitment last summer, Temasek owns 189m BofA shares, according to Monday’s disclosure. At Wednesday’s opening price, they were worth $2.7bn.

However, Temasek appears to have sold more than 30m shares of Merrill stock in the first and third quarters of 2008, according to regulatory filings. Even if Temasek sold at the lowest possible prices in these periods, the sales would have generated a modest profit to defray some of Temasek’s unrealised loss.

Temasek declined to comment.

It could have been worse. Temasek’s initial investment allowed it to buy more than 104m shares at $48 per share.

But after Merrill was forced to raise further capital in July, the terms of Temasek’s original investment were reset. This effectively bought Temasek 151m new shares in Merrill for just under $6 per share, bringing the average price paid per Merrill share to a little over $23.

Temasek’s investment suffered again in September, as Merrill shares plunged on concerns about the US banking sector.

But any losses seemed to vanish when BofA agreed to buy Merrill in an all-stock deal which valued the latter at $29 a share. BofA’s shares have since slumped, however.