Toll road financier Maquarie's shares buckle under risky investments
August 01, 2007
By Chris Oliver
HONG KONG-- Shares of Macquarie Bank Ltd plunged more than 10% in Sydney trading Wednesday, a day after the bank warned some of its high-yield funds could see sharp losses owing to the continuing fallout from the U.S. subprime mortgage market.
Analysts said the declines were fueled by concerns the global widening in yield spreads could spell an end to the era of cheap financing and negatively impact Macquarie's business model.
"There's investor fear that what's been happening in the debt markets means the debt taps are going to be turned off and that could impact upon deal flow and ultimately fees generated," said Mike Younger, an equities analyst with Citigroup in Melbourne.
Macquarie, which has A$36.6 billion ($31.13 billion) under management, earns about 40% of its income from packaging assets into specialty funds which it then sells to investors. It also charges annual management and advisory fees on the packaged funds. About 60% of its income comes from traditional investment banking. It was Australia's leading mergers-and-acquisition advisor last year after advising on its own deals, which include the purchase of Duquesne Light Holdings, the French toll road operator APRR and Copenhagen Airport.
Macquarie shares fell 10.7% A$73.70 ($62.47) in late Sydney trading, down $A8.80 from Tuesday's close. The declines eliminated A$2 billion in market value, according to reports.
In a statement to the Australian Stock Exchange late Tuesday Macquarie said investors in two Fortress Investment Ltd. high-yield funds could face losses of up to 25% in July. The funds, which had collected A$230 from investors, operated at seven times leverage to create a fund of between A$1.2 billion and A$1.3 billion, according to a Macquarie spokesman.
The funds could lose A$300 million, the Australian newspaper reported earlier Wednesday.
Fortress said it has had to sell some of its holdings to reduce leverage so that the loan to value ratio meets covenants on the borrowings it has.
The funds were hit by sharp losses after its underlying loan portfolio declined 4% between June 29 and July 30.
"The pricing changes that have come through the U.S. market has effectively taken 4% off the investment return of those particular funds, but because Macquarie has them geared at six to seven times, it has actually seen a 25% decline in the assets under management over the last month," Younger said.
Los-Angeles-based Four Corners LLC, which is two-thirds owned by Macquarie Bank, manages the Fortress funds' portfolio. Macquarie said the funds do not have any direct exposure to the U.S. sub-prime mortgage market, but problems in the sector weighed on the prices of all credits.
Macquarie Fortress Notes, which are traded on the Australian Stock Exchange, plunged 24% to close at 18 Australian cents Wednesday.
A marketing brochure described the Macquarie Fortress Notes as investing in U.S. senior secured loans with a forecast yield of 10.1%.
"The portfolio continues to be adversely impacted by price volatility in the U.S. credit market," said Peter Lucas, director of Macquarie Fortress Investments, in the statement. "There have been no defaults in the portfolio and no reason to believe that the loans in the portfolio will not continue to pay their periodic interest and repay the principal outstanding at par."
Lucas added the fund may have to make additional assets sales to reduce leverage. Macquarie does not have any direct exposure to the funds, a spokesman said.
Fortress is the third Australian fund manager to report distress relating to the brewing turmoil in the U.S. sub-prime mortgage sector. Sydney-based fund managers Basis Capital and Absolute Capital have frozen investors money in some troubled funds which had subprime investments.
© 2007 Dow Jones Company, Inc.
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