article

All,

For your interest, see attached a fairly prominent article on Macquarie Bank in today's Wall Street Journal. The article appears on the front page of the Money & Investing section, page C1.

A link to a PDF of the article is in the first link below as well.

Rgds,

Alex

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https://monitoring.mediasource.com/RatioImages/15158/1692002.pdf
http://online.wsj.com/article/SB118763286795503127.html?mod=todays_us_money_and_investing

Macquarie Sees Benefit of Tight Credit
By JACKIE RANGE
August 21, 2007; Page C1

SYDNEY, Australia -- Can Australia's smartest outsmart the current crisis?

Macquarie Bank Ltd. soared by buying airports, rail systems and toll roads around the world, hiving them off to separate funds, then charging fees to manage the projects. The bank also made hay as an adviser during the mergers-and-acquisitions boom. Along the way, the bank developed a reputation as the cleverest that Sydney -- an up-and-coming financial center -- has to offer.

But recently, short-sellers, emboldened by criticism of Macquarie by noted U.S. hedge-fund manager Jim Chanos, attacked its shares. Though the bank has no exposure to U.S. subprime mortgages, two of its small investment funds were hurt by the subsequent meltdown in the corporate-bond markets, further spooking investors.

Some shareholders now wonder whether the bank can maintain its track record of growth or if it will fall victim to the creeping rot in global financial markets stemming from the U.S. subprime-mortgage industry troubles. Between May 21 and Aug. 16, Macquarie's shares fell 34%, some of the steepest declines of any financial institution anywhere during that time.

In an interview in the former General Post Office here -- a building 50%-owned by the Macquarie Office Trust -- Chief Financial Officer Greg Ward contended that an era of tighter credit isn't a bad thing for the bank. Macquarie's purchases traditionally have been made with the bank's own balance sheet and then involve some debt financing when the assets are transferred to the separate funds. Mr. Ward said the current problems in the debt markets could work to Macquarie's advantage by scaring off rival bidders such as private-equity firms that are more reliant on raising funds for purchases.

"I think that will actually end up benefiting us," he said. "We can buy assets today, even in the new market."

Mr. Ward, 39 years old, acknowledged that fewer mergers and acquisitions mean fewer advisory fees. "Not much we can do about that," he said. But the bank's diversification -- it also reaps trading commissions in times of market volatility as well as management fees from infrastructure projects -- should help cushion the impact.

Indeed, amid a broad rise in Asian stocks yesterday, Macquarie rebounded, rising 9.3% to A$70.75 (US$56.46). It also said it secured a long-planned A$8 billion bank debt facility that would allow it to build its international business. And it received permission from an Australian banking regulator to restructure its operations in a way that could free up capital for expansion.

Macquarie began as the Australian arm of British merchant bank Hill Samuel & Co. in 1969. It got its own banking license and started business as Macquarie in 1985 and is named for a former governor of Australia. Under Chief Executive Allan Moss -- who last week celebrated 30 years at the bank -- the institution fosters an entrepreneurial and aggressive spirit. The bank declined to make Mr. Moss available.

Since entering infrastructure investing in 1996, Macquarie has snapped up everything from Rome's airport to the M6 highway in the United Kingdom to Chicago's commuter-rail system, becoming one of the largest private managers of infrastructure in the world, with a rapid increase in revenue and profit to match.

For the year to March 31, it posted revenue of A$7.18 billion, compared with A$757 million in 1998. It has posted net-profit growth every year for the past 15 years, and for the year it had net profit of A$1.4 billion, up 60% from the previous year.

For the bank's supporters, the share-price dive has been unwelcome after a lengthy hot streak.

"I think the fall from grace has been largely unjustified," said Robert Patterson, managing director of Adelaide-based Argo Investments Ltd., an investment firm that manages about A$4.5 billion. Mr. Patterson's firm owns 1.4% of Macquarie's shares and hasn't bought or sold shares in the past six months.

Skeptics worry that Macquarie's ability to continuously snap up new infrastructure assets may be hurt if sellers -- typically governments and municipal authorities -- decide they may not get top dollar now and forgo sales.

Analysts at ABN Amro said in a recent research note that the "biggest threat" to the bank "appears to be a potential slowdown in asset growth." Macquarie currently has assets valued at more than A$200 billion under management. Still ABN, which has done investment-banking work for Macquarie, rates the bank's shares a "buy."

"It may mean in the short term that some vendors want to wait ... until markets improve, and they feel like they can get a better price," Mr. Ward said. But if the difficult market persists, eventually they may have to adjust their expectations for the sale price. Many vendors aren't solely interested in raising money, but in transferring assets off the public books.

Another worry is that the bank might have to sell assets currently sitting on its balance sheet at a loss. Macquarie has assets valued at less than A$500 million on its balance sheet. The bank already is selling some of them and doesn't anticipate showing any losses.

Assets held in Macquarie's funds are typically "marked to model" -- that is, their prices aren't based on market prices but on what models using estimates of future profits say they are worth. When the funds' assets are revalued higher, they report the gain in price as revenue. The dividends that the funds pay to investors have sometimes been funded not by the cash the assets they hold generate, but debt the funds have taken on. In a less certain debt environment, critics say that may no longer be possible.