NEW YORK (Reuters) - Whether or not Merrill Lynch & Co (MER.N: Quote, Profile, Research, Stock Buzz) can break even in the second half of 2008 will be a key determinant in whether the bank can stabilize its credit ratings or risk another downgrade, Standard & Poor's analyst Scott Sprinzen said on Friday.
Wall Street's third-largest investment bank on Wednesday posted a much larger-than-expected $4.89 billion quarterly loss, its fourth consecutive earnings decline.
If the bank is downgraded again by S&P or Moody's Investors Service, it will need to post billions in additional collateral against its trades. Sanford Bernstein analyst Brad Hintz estimated last month that an extra downgrade would cost the bank an additional $3.9 billion in collateral.
Standard & Poor's has a negative outlook on Merrill, indicating it is more likely than Moody's, which has a stable outlook, to cut the rating over the coming one-to-two years.
"If they fail to break even in the second half, then that's an important benchmark, but it's not an automatic trigger for a downgrade," Sprinzen said in an interview.
S&P would also consider other criteria, including Merrill's earnings prospects for 2009 and their capital position, Sprinzen said. "We don't want to draw a line in the sand or set up some test or trigger that would automatically indicate a downgrade."
S&P affirmed Merrill on Wednesday at "A," the sixth-highest investment grade, but said its leeway for further earnings disappointments at its current rating has diminished.
"If net earnings after write-downs in the second half of 2008 are materially below break-even -- either due to substantial write-downs or deterioration in operating performance -- we will reassess the rating," S&P said.
S&P cut Merrill's rating on June 2 as part of a broad review of financial institutions.
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