Nov. 7 (Bloomberg) -- Merrill Lynch & Co., the securities firm being bought by Bank of America Corp., plans to sell about $4 billion of distressed debt in Europe to reduce its holdings of risky securities, two people with knowledge of the matter said.

The assets include mortgages and corporate loans that New York-based Merrill wants to sell by the end of the year, according to the people, who declined to be identified because details aren't public. Sale documents have been sent to potential bidders, they said.

Chief Executive Officer John Thain said last month Merrill will continue to shed its riskiest investments leading up to the close of the Bank of America deal, which the companies said they expect by the end of next month. Financial firms are cutting leveraged loans and some types of mortgages as they seek to shore up capital and reduce leverage.

``The market's appetite for risk has fallen dramatically and continues to fall,'' said Michael Youngblood, a principal at Bethesda, Maryland-based hedge fund Five Bridges Advisors LLC. ``Any sizable transaction that involves multiple asset classes coming to the market at the present moment is likely to face weak demand and yield unsatisfactory results.''

Tim Cobb, a Merrill spokesman, declined to comment.

Merrill's net holdings of U.S. prime residential mortgages totaled $34.6 billion during the third quarter, and other residential mortgage-related exposure was about $5 billion, regulatory filings show. In the third quarter, the company took more than $2 billion of net losses, primarily on the sale of assets tied to residential and commercial mortgages.

CDO Holdings

Merrill's hard-to-value assets declined 5 percent in the third quarter as the company sold collateralized debt obligations that packaged asset-backed bonds, a filing with the U.S. Securities and Exchange Commission showed this week.

So-called Level 3 assets dropped to $61 billion in the three months ended Sept. 26, from $64.2 billion in the previous quarter. Level 3 assets accounted for 7 percent of the firm's total assets, unchanged from the previous three months.

In July, Merrill announced the sale of $30.6 billion of CDOs to an affiliate of the Dallas-based investment firm Lone Star Funds for $6.7 billion. Merrill provided financing for about 75 percent of the purchase price, and the sale valued the CDOs at about 22 cents on the dollar.

Bank of America, based in Charlotte, North Carolina, agreed to buy the firm on Sept. 15 for about $50 billion in an all-stock deal. Each Merrill share will be exchanged for 0.8595 shares of Bank of America.

To contact the reporters on this story: Joyce Moullakis in London at jmoullakis@bloomberg.net

Last Updated: November 7, 2008 10:50 EST