Dec. 26 (Bloomberg) -- Merrill Lynch & Co.'s agreement to sell most of its commercial-finance unit to General Electric Co. looks like a winner for both companies.

For Merrill Lynch, the third-largest U.S. securities firm, the benefits from the sale may go further than freeing up about $1.3 billion in capital, an amount disclosed in a statement.

The firm's commercial-lending business -- including Merrill Lynch Capital, the unit involved in the sale to GE -- has become increasingly reliant on companies without investment-grade credit ratings, according to filings.

Merrill can ill afford to take this kind of a financial risk after writing down $8.4 billion of mortgage-related holdings last quarter. The New York-based firm has turned to Temasek Holdings Pte., an investment arm of Singapore's government, and Davis Selected Advisors LP for as much as $6.2 billion in funds.

GE, one of only seven U.S. companies with the highest possible credit rating, is better positioned to weather any losses that may occur.

The purchase also enables the Fairfield, Connecticut-based company's GE Commercial Finance unit to expand at a time when CIT Group Inc., the largest independent U.S. company in the industry, is back on its heels.

CIT posted losses in the last two quarters as the collapse of the subprime-mortgage market battered its home-loan business, now closed. The New York-based company's share price has tumbled 56 percent this year. Dell Inc., the world's second-largest maker of personal computers, agreed last week to buy CIT's 30 percent stake in a financing joint venture for $306 million.

Wrong Direction

GE will add about $10 billion of loans and $5 billion of financing commitments after the purchase is completed in next year's first quarter, according to the statement.

These figures are equivalent to 16 percent and 8.5 percent, respectively, of Merrill's commercial lending as of Sept. 28. The overall totals appeared in a quarterly filing, which didn't break out the Merrill Lynch Capital numbers.

Borrowers with investment-grade credit quality -- at least BBB, as defined in the filing -- accounted for 35 percent of the dollar value of loans outstanding. The figure was 51 percent at the end of last year. Commitments made to higher- quality companies also dropped in percentage terms, to 68 percent from 77 percent.

Most of these loans and commitments were secured, limiting Merrill's possible losses. Even so, the percentages went in the wrong direction, especially for a firm grappling with subprime- related financial damage.

Help for Business

While Merrill and GE didn't disclose the purchase price in their agreement, the amount may be pocket change relative to the Temasek and Davis investments. Temasek will put in as much as $5 billion for a stake of less than 10 percent. Davis, a New York-based money manager, will buy $1.2 billion of stock.

Whatever the price, Merrill's retreat from commercial lending may help its business along with its finances. For GE, which has avoided the kind of multibillion-dollar hit on subprime loans that Merrill suffered, the purchase is a competitive plus.

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Citigroup Inc.'s securities unit is distinguishing itself from its peers by avoiding knee-jerk ``buy'' recommendations on newly public hedge funds.

Och-Ziff Capital Management Group LLC received a ``hold'' rating from Prashant Bhatia, an analyst at the New York-based firm, in his first report, dated Dec. 23.

``Investment performance has meaningfully deteriorated'' at Och-Ziff, Bhatia wrote. ``Concentration risk'' is another reason for concern, the report said, noting that 95 percent of assets under management are in three funds.

Fortress Investment Group LLC, the first U.S. hedge-fund manager to go public, has had a ``hold'' rating since Bhatia made his initial recommendation on the firm in May.

Citigroup helped manage the initial public offerings of Och-Ziff and Fortress, both based in New York. Every other co- manager that covers them has maintained a ``buy'' rating or the equivalent from the start, according to data compiled by Bloomberg.

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CME Group Inc., the world's largest futures market, dropped from a record close in pre-Christmas stock trading after a dozen brokerages said they would start a competing exchange. The track record of would-be rivals suggests the shares may soon rebound.

Bank of America Corp., Barclays Plc, Citadel Investment Group LLC, Citigroup, Credit Suisse Group, Deutsche Bank AG, eSpeed Inc., Getco Holding Co., JPMorgan Chase & Co., Merrill Lynch, Peak6 Corp. and Royal Bank of Scotland Group Plc are all investing in the electronic market, according to a statement.

The exchange, as yet unnamed, plans to start next year by taking on the Chicago-based company in U.S. Treasury contracts. Even Eurex AG, Europe's biggest derivatives exchange, failed to crack that market.

Eurex sold a 70 percent stake in its U.S. futures unit after a two-year effort to compete with the Chicago Board of Trade, now part of CME, in Treasury futures. All-electronic markets started previously by ESpeed and BrokerTec Global LLC, now a unit of ICAP Plc, were also unsuccessful.

(David Wilson is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: David Wilson in New York at dwilson@bloomberg.net

Last Updated: December 26, 2007 00:01 EST