Lex feels a great “unwinding of infrastructure funds” coming on. Australia, “home of the gear-them-up, spin-them-off model”, is in damage limitation mode and Macquarie Bank – long known as the “Millionaires Factory” – is under big pressure.
But when it comes to any ill fortune that befalls Macquarie, Australia’s biggest and by far most successful investment bank, it’s more likely to turn into a schadenfreude fest. Macquarie’s share price on Wednesday fell the most in seven months in Sydney trading, after UBS lowered its rating on the stock, saying the global credit squeeze threatens revenue, reports Bloomberg.
What’s more, credit-default swaps tied to Macquarie’s subordinated bonds gained 35bp to 405bp in afternoon trade as the risk of Macquarie defaulting on its bonds rose to the highest in five months. The contracts, which rise as perceptions of credit quality deteriorate, are at the highest since March 25, Bloomberg noted.
Macquarie’s shares dropped 9.6 per cent to close at A$41.61, extending its slide in the past year to 45 per cent. The fall has been long and largely incremental. But the trigger for Wednesday’s slide was a note from Sydney-based UBS analyst Jonathan Mott, who cut his rating on the stock to “neutral” from “buy” and his 12-month price estimate to A$48 from A$60.
Macquarie’s share price has tumbled since recently appointed chief executive Nicholas Moore in July reiterated his warning that the firm’s 16-year streak of rising annual profit (a record A$1.8bn for the past year) may be ending, as volatile markets cut the value of investments and squeezed trading revenue.
In his note, Mott warns that the global credit crunch “is now entering its second year with few signs of easing, world growth is deteriorating and the bear market is seemingly entrenched”. All this, he reckons, “is placing ongoing pressure on Macquarie’s businesses and outlook.”
Declining asset values will weigh on Macquarie’s earnings, Mott adds. Macquarie generated A$976m from the sale of assets in fiscal 2008, equivalent to 12 per cent of total revenue, according to UBS. That’s less than the A$1.4bn it made a year earlier, equivalent to 20 per cent of revenue, noted Bloomberg.
Much to the chagrin of its competitors, Macquarie – which pioneered the model of bundling up assets into funds that are then spun off, often into publicly traded funds – has so far avoided the troubles that have caused more than $500bn of losses and writedowns in the finance industry, and has been sticking to its strategy – and making very healthy profits.
But in May, the company posted its slowest profit growth in two years as it wrote down A$293m ($252m) after the value of European assets declined.
“At the very least, we believe that it will be difficult for Macquarie to repeat the excellent revenue generation from profit on disposal of investments it has seen during the last few years,” Mott said.
Mott is among four analysts who rate Macquarie “neutral” or “hold”, according to Bloomberg data. Eight recommend buying the shares, while none recommend selling.
Bloomberg notes that Babcock & Brown, the Australian asset manager that has adopted the same fund model as Macquarie, has slumped 91 per cent this year as investors question its business strategy. Babcock last week replaced its chief executive officer after posting its first drop in profit. And the FT reports that on Tuesday, one of Babcock’s key funds, BBI, announced it would slash dividends and speed up the selling of assets to pay down debt.
Like its Babcock peers, funds under the Macquarie group last week moved to dispose of assets and reduce debt. Macquarie Communications Group, for example, is using proceeds from an asset sale to redeem exchangeable bonds. Just as pertinent, notes Lex, “chastened funds run and partially held by the self-styled ‘Millionaires’ Factory’ are now not even paying Macquarie for executing these related-party transactions.
Management fees are dwindling alongside equity under management (A$49.5bn at end-June compared with A$56.2bn in September). Performance fees, too, are evaporating. Last year one-fifth of its income came from management and transaction fees and asset sales at its specialist funds, including real estate.
But in comparison with Babcock’s woeful tale, Macquarie is stronger on several counts, notes Lex, including its balance sheet. However…. tighter credit markets and receding confidence haunt Macquarie and its funds too – hence its efforts at de-risking the model.
Oh – and Macquarie investors are not the only ones fretting, Lex reminds us. Two of last week’s disposals entail tipping assets into unlisted sister funds.
The new owners must wonder what they are getting. MCG’s sale of its interest in a cellular network towers business is a case in point. MCG barely washed its face on the asset, acquired last year, and was eager to distance itself from the business’ voracious capital expenditure requirements.
Short-sellers, which Macquarie attracts in droves, view the group as a house of cards. Macquarie might be under marginally less pressure than Babcock & Brown to prove them wrong, but it is certainly fighting the same battles.
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.