rating from A1 to Aa3 - putting the New York investment firm in a stronger position to compete with commercial banks. The upgrading comes when investment banks are escalating their invasion of commercial banks' traditional turf. Commercial banks typically are rated higher than investment banks, thanks to their more diverse business and more stable income streams. The rating change put Merrill just one investment grade lower than J.P. Morgan & Co., whose equity base, at $10 billion, is $3.5 billion larger than Merrill's. "A major commercial bank has advantages on the capital front," said Blaine Frantz, a financial institutions analyst at Citicorp Securities, "but the brokerage firms are staffing up to be able to provide credit and syndicate loans. Both the investment and commercial banks are developing one-stop shopping capabilities. The advantage that Merrill has is in its distribution and investor base." Haig Nargesian, a senior analyst at Moody's, called the move "a part of the growing recognition of Merrill's business franchises as unique. The diversity of their businesses is not just retail but also institutional." In reaction to the upgrading, spreads on Merrill's three-year debt tightened to 34 basis points over comparable Treasury notes, from 37. For seven-year debt, the spread tightened to 50 basis points over Treasuries, from 55. In January, Moody's revised its outlook on Merrill to "positive" when it became clear the firm's reputation had survived publicity surrounding the Orange County bankruptcy. The wealthy California county filed for bankruptcy after suffering losses on derivatives contracts it had bought from Merrill. The investment bank has emerged as the top player in worldwide debt and equity offerings and investment grade underwriting, leading the Securities Data Co. rankings for seven years. For the first half of this year, it was the top merger and acquisition adviser. Moody's estimated that the firm has a 20% market share in investment grade debt and 14% market share in high-yield debt.

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