Facing additional writedowns during the first quarter, some analysts are of the opinion that the major banks and brokers may need to do another round of capital raising. For some firms, the new capital will come with a whole set of additional problems related to the first round of capital they raised.
For example, in January when Merrill Lynch (MER) raised $6.6 bln in funds from Korean Investment Corporation, Kuwait Investment Bank, and Mizuho Bank, the price that these funds would convert to stock was set at $52.40. However, one of the stipulations of the agreement was that if MER raised more than $1 bln of funds over the next year with a conversion price below $52.40, then the $6.6 bln in funds raised would also be subject to that new lower conversion price. With the stock now trading at $48.55, if MER is forced to raise additional funds at current levels, this would cause a 1% dilution of the current shareholder base on top of the new funds raised.
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