mbl brace for sub prime loss

Now they are all coming out of the woods.....not a surprise....

MacBank: brace for sub-prime loss

THE Australian fallout from the sub-prime loan crisis in the US worsened substantially last night after Macquarie Bank revealed that retail investors faced losses of up to 25 per cent in two of Macquarie's high-yield investment funds.

Macquarie, known colloquially as the millionaires' factory because of the headline-grabbing size of its executives' pay packets, said last night that two of its funds which were marketed to smaller investors could lose a quarter of their value, or more than $300 million.

The director of Macquarie Fortress Investments, Peter Lucas, said in a statement to the market that the average price of assets in the portfolios had fallen by 4 per cent in the month to July 30 but because of loans made against the funds, which have about $1.3 billion invested, they could lose a quarter of their value.

He also warned that the funds faced possible margin calls from their lenders if they could not sell enough assets to reduce leverage.

Macquarie becomes the third similar fund to get into trouble after Basis Capital and Absolute Capital froze investors' money, but it could mark a new, dangerous phase as the Fortress funds did not in fact have any direct exposure to US sub-prime mortgages.

The funds are invested in senior secured US corporate loans. The listed Macquarie Fortress Notes fund has about $140 million of investors' money and the unlisted Macquarie Fortress Fund $80 million. But because the funds borrowed approximately six to seven times that amount to invest in loans, the potential losses are greatly magnified.

Mr Lucas said the underlying assets were "fundamentally healthy" but the "supply demand imbalances" in the senior loans market sparked by the sub-prime mortgage turmoil were causing price volatility. "This price volatility is not related to defaults in the underlying Fortress Notes portfolio," he said.

"There have been no defaults in the portfolio and there is 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."

Analysts have expressed fears that the recent credit crunch in world debt markets, which has driven investors to shun risk, could affect assets that do not have the problems of sub-prime mortgages, where defaults are soaring.

Mr Lucas said the situation in the senior loans market had deteriorated significantly in just the past week. "The price movement we have seen in the last week has been unprecedented," Mr Lucas said. "We didn't expect this to happen."

He said the previous biggest fall in prices was 3.3 per cent in 2002 and that was over five months.

He said the funds had been forced to sell assets to reduce leverage and remain in compliance with the lenders borrowing covenants but hadn't been very successful because of market conditions.

Leverage on the funds was down slightly but there had not yet been any margin calls.

"However, a continued deterioration in senior loan prices as we have seen in recent days could result in non-compliance," Mr Lucas said.

Margin calls at Basis Capital, whose funds were also highly geared, have seen its Basis Yield Fund lose half its value as banks sell the underlying assets to recover their money.

While the price of Fortress Notes on the stock exchange is expected to fall on the news, the judgment of investors on the unlisted fund might not be felt until the end of September because redemptions are restricted to quarterly.

In the last quarter Macquarie Fortress Notes paid an annualised yield of 10.8 per cent. Mr Lucas said a decision hadn't been made regarding an interest distribution for the current quarter.