Merrill Lynch

( MER), which has suffered billions of dollars of credit-related writedowns in recent quarters, set plans to sell a large chunk of the asset-backed securities on its books and raise new equity capital through a stock offering.

The brokerage firm said after the close of trading Monday that it will sell $30.6 billion of U.S. super senior ABS collateralized-debt obligations to an affiliate of Lone Star Funds for $6.7 billion. At the end of the second quarter, the CDOs were carried at $11.1 billion, and in connection with the sale, Merrill will record a pretax writedown of $4.4 billion in the third quarter.

All told, the move will cut Merrill's domestic super senior ABS CDO long exposures from $19.9 billion on June 27 to $8.8 billion.

The company also agreed to terminate its ABS CDO hedges with a unit of

XL Capital

(XL) - Get Report

and expects to discuss settling additional hedges with other monoline counterparties.

Aside from the CDO sale, Merrill said it would offer new stock to the public in an effort to raise $8.5 billion. The underwriters will have the option to sell an additional $1.3 billion of stock if demand is sufficient.

Temasek Holdings, Merrill's largest shareholder, has agreed to buy $3.4 billion of the stock, part of which will require regulatory approval. Merrill's executive management will buy around 750,000 shares.

"The sale of the substantial majority of our CDO positions represents a significant milestone in our risk-reduction efforts," said John Thain, chairman and CEO of Merrill, in a press release. "Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position by issuing common stock."

Because of the transactions, Merrill expects to record a total pretax writedown in the third quarter of roughly $5.7 billion, including the $4.4 billion for the loss on the sale of the CDOs. The company will also take a $500 million loss on the termination of the hedges with XL Capital and a maximum $800 million loss on the potential settlement of other hedges.

Also in the third quarter, Merrill will likely record an expense of $2.5 billion related to a reset payment to Temasek and $2.4 billion of additional dividends as part of a plan to exchange certain existing mandatory convertible preferred stock for common stock.

Shares of Merrill initially fell more than 5% in after-hours trading, but then erased the bulk of the losses. Recently, Merrill was down 0.3% at $24.25. In the regular session, Merrill dropped 11.6% to $24.33. Ratings issues financial strength ratings on each of the nation's 8,600 banks and savings and loans which are available at no charge on the

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This article was written by a staff member of