Merrill Lynch & Co. Inc. has announced still more writedowns and plans to raise more capital, as it moves to exit more of its outstanding collateralized debt obligation (CDO) positions.

Late Monday, the giant Wall Street brokerage firm said it expects to record a pre-tax write-down in the third quarter of 2008 of approximately US$5.7 billion. This writedown is comprised of a US$4.4 billion loss associated with the sale of the firm’s CDOs, a US$500 million net loss on the termination of hedges with XL Capital Assurance and an approximately US$800 million maximum loss related to the potential settlement of other CDO hedges with certain monoline counterparties.

The charges come as the firm announced the sale of U.S. super senior ABS CDO securities, resulting in an exposure reduction of US$11.1 billion, and an agreement to terminate ABS CDO hedges and plans to seek more terminations/

Merril Lynch also plans to issue new common shares with gross proceeds of approximately US$8.5 billion, including an agreement that Temasek Holdings will purchase US$3.4 billion of common stock and the purchase of approximately 750,000 shares by executive management.

In the third quarter, Merrill Lynch also expects to record an expense of US$2.5 billion related to its reset payment to Temasek and US$2.4 billion of additional dividends as a result of the exchange of certain existing mandatory convertible preferred stock for common stock.

“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 Lynch, in a 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. The actions we announced both today and on July 17 will materially enhance the company’s capital position and financial flexibility going forward.”

The firm also announced that a US$500 million holder of the mandatory convertible preferred stock has decided not to exchange their shares into common stock.

DBRS has downgraded all its long-term ratings for Merrill Lynch following the broker’s latest move to reduce risk and raise additional capital.

The rating agency says that this action follows Merrill’s announcement of another sizable write-down associated with its problematic ABS CDO portfolio, and its plan to raise US$8.5 billion in equity to cover the expected US$5.7 billion pre-tax loss related to CDO exposure and to bolster its capital position. ‘This write-down exceeded DBRS’s expectations and quickly follows second quarter results, which were published on July 17,” DBRS notes.

“After a sequence of quarterly losses that have needed to be offset by various capital raising actions, asset reductions and asset sales, DBRS views Merrill Lynch’s financial flexibility as considerably reduced,” it says. “While successful in lowering the company’s risk profile, this combination of actions continues to draw down the company’s potential resources.”

DBRS also notes that the ongoing equity issuance by Merrill to cover losses “is becoming increasingly difficult and has considerably reduced the company’s financial flexibility. Given this situation, any future sizable losses will likely result in a ratings downgrade.”

Even with the significant reduction in ABS CDOs, Merrill still has US$8.8 billion in gross exposure to these assets and other large exposures remain to other problematic assets classes, it adds. “As a result, the potential for more future write-downs exists as the general operating environment remains very difficult.”

As DBRS previously noted, any sale of BlackRock would be viewed negatively and could result in a ratings downgrade. “BlackRock is a core business and any sale or partial sale would be a signal that Merrill is running out of capital raising options,” it says. “Additional rating pressure could arise from deteriorating operating performance of the company’s core businesses, a weakening capital position and/or from a deteriorating liquidity profile.”

“Conversely, if Merrill continues to generate solid underlying earnings, while mitigating the risk exposures in various asset classes and returns to profitability by the end of the year, the ratings trend could revert to stable,” it says.