Macquarie in the spotlight amid $5bn refinancing Adele Ferguson | September 17, 2008
AUSTRALIA'S biggest investment bank, Macquarie Group, took a pummelling on the debt and equity markets yesterday on fears that it would struggle to raise more than $5 billion in debt in the next six months.
The stock closed 7 per cent lower at $36.80 as its subordinated debt blew out to 500 basis points and its senior debt ballooned to 320 basis points, indicating the riskiness the market is now attaching to the stock and its capacity to refinance debt, sell assets and maintain earnings.
To put it in perspective, some of the big US investment banks, such as Citigroup's, senior debt was attracting 300 basis points, while JPMorgan's senior debt was 200 basis points.
The reality is that by March next year Macquarie needs to refinance $45 billion of debt. While most of it will be relatively easy, more than $5 billion could prove difficult to get away at a decent price and decent length of time. In addition, Macquarie has $3 billion invested in listed funds, and as of yesterday if it was marking to market the value of the listed funds, it would be writing down an additional $400 million.
And as at March 31 it had about $2.8 billion of assets available for sale. Given some of the largest assets are in real estate, the chances of selling them in this climate are slim.
Meanwhile, its poor cousin, Babcock & Brown, was slaughtered another 49 per cent to 80c yesterday as the group moved closer to breaching its loan covenants on a $2.9 billion debt facility.
The group's European wind assets hold the key to its survival. If it can't soon find a buyer for these assets, it will sound the death knell of the entire empire.
These assets have been up for sale for months but have so far failed to find a buyer. They are worth up to $4 billion, which would more than repay corporate debt.
In these uncertain times the worst thing a company can do is have too much debt, hold a portfolio of declining asset values, lack transparency and fail to provide earnings outlooks.
Babcock & Brown and Macquarie Group have these characteristics in spades and if they want to escape a further stock price battering, they will need to start selling assets and do some swift refinancing deals.
In both cases, given the deteriorating markets, the chances of an earnings downgrade are a virtual certainty, unless they start selling assets.
Given Babcock's perilous state the best it can hope for is fire sale prices.
Macquarie is in far better shape than Babcock, with better assets and a more diversified portfolio of businesses, but is increasingly coming under pressure to sell assets.
It doesn't help that it has hardly sold a thing since its March 31 balance date.
According to a recent report by Wilson HTM, it has more than $700 million of "held for sale" assets, including an offshore oil and gas barge and vessel provider, and New World Gaming Partners, a joint venture with Consolidated Media and casinos in Canada.
Wilson HTM banking analyst Brett Le Mesurier believes a profitable sale of the casinos would be tough based on the Toronto stock exchange's consumer discretionary index and Crown both losing hefty market value in the past few months.
As the financial Armageddon continued yesterday, the Babcock & Brown and Macquarie Group model is out of date and needs fixing -- immediately.
Assets are sourced, purchased, debt-funded and then either on-sold or plonked into a satellite fund from which management fees derive.
Babcock has $15.6 billion in assets, $11.5 billion of interest-bearing liabilities and deposits and $2.5 billion in equity.
This means it has a ratio of equity to assets of 16 per cent, which is no longer sustainable -- or acceptable -- and which is too low for an investment-grade credit rating.
Macquarie's ratio of equity to assets isn't much better and the equity and credit markets no longer feel comfortable with this sort of risk.
MQG Price at posting:
$36.12 Sentiment: Hold Disclosure: Held
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