This just in from Trader Joe, over at the Stool Pigeons Wire at Capitalstool.com.

Excerpt from the Merrill SEC filing –

CDO Sale:

On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.

Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days.

My translation of the above:

Merrill sends over the CDOs to Lone Star and receives $6.7 billion, but Loan Star gets 75% financing so the net to Merrill is (6.7 X 75%) $1.675 billion.

Thus Merrill ends up with $1.675 billion in cash and a loan outstanding to Lone Star in the amount of $5.025 billion.

Of course there is nothing to be found regarding the specific terms of the loan, but what may be important is the following: The purchaser will not own any assets other than those sold pursuant to this transaction

My translation: Lone Star set up a separate LLC (the purchaser) for this transaction and Merrill’s only recourse is those same assets that it was trying to dump.

For Lone Star this nets out to a $1.675 billion payment for the control AND UPSIDE on the $30.6 billion of assets.

Thus, Merrill received $1.675 billion and is still exposed to the residual $5.025 billion which it MAY have to take as a future write-down should the loan to the LLC go to non-perform.

Again, without the loan term sheet its impossible to tell what’s going on in detail, but the bottom-line, in the worst case scenario Merrill just sold this $30.6 billion basket of dog poop for $1.675 billion or 5.47385 cents on the dollar, not the 22 cents as widely reported.