the future of axq

Everyone seems to have gone quiet on this post, but I expect many of us are wondering the same thing.

- FY08 loss of almost AUD50m.
- The SG warehouse facility ends on 30 September.
- AXQ has declared they do not anticipate paying a 30 September dividend.
- S&P has today downgraded AXQ MTNs from AA- to A-.

Its not a nice picture, the share price is languishing at around 5 cents, compared to a most recent NTA of 51 cents if I recall correctly. As at 30 June 08, the portfolio had a mark to market value of UAD830m and par value of AUD890m. MAX held around AUD140m par value in residential mortgage backed securities, AUD83m par value in CDOs (mark to market 60.5), Mobius AUD120m par value, Financial institutions 187m par value (21 per cent), 78m par value in aircraft leases, and 211m in property including secured loans, commercial mortgaged backed securities, and real estate investment trust securities. This includes 136m in local CMBSs in RRT.

Key issues facing AXQ include but are not limited to
- The SG warehouse facility: the extent that MAX cannot repay the warehouse notes to SG in full before 30/9/08, then SG is entitled to amend the interest rate on the outstanding Warehouse Notes to the then current market interest rate. As the repricing and/or refinancing of the outstanding Warehouse Notes would (based on current market conditions) likely be at considerably higher pricing levels than currently paid, distributions to MAX shareholders will be reduced. From the 30/6 balance sheet, MAX has a maximum of AUD45m that it can pay back on the loan, given the RRT sale on Bridge Street has not progressed. For me, this means SG will be repricing around AUD178m in warehouse notes this time next week. Note SG can also make MAX new issue MTNs and use the proceeds from this to refinance the warehouse notes by 31 December 2008.
- AXQ faces a number of potential asset write downs including exposures in Centro, Mobius, and, to a lesser extent in risk terms, RRT.

Assuming it proceeds in some form, AXQs NTA should improve as a result of the US financial system bailout. The extent of AXQ NTA improvement will depend on the bail out price paid for mortage backed assets. If the price paid for mortgage backed assets is their market value, then potentially mortgage backed stocks and financial institutions will not improve in value substantially, and neither will AXQ NTA. If, on the other hand, a premium to the market price is paid, which of course is required if the current capitalisation and liquidity problems are going to be fixed in the US, then AXQs NTA could improve substantially. Of course, an improving NTA backing is not going to solve the warehousing problem AXQ faces, nor necessarily improve shareholder returns.

So going forward, what is the best way to unlock the NTA value in AXQ for shareholders? In my mind, AXQ has three options: on-market buy back, delist, or wind up.

On market buy back: in their 3/12/2003 AXQ Review Allco noted it had "set aside funds to acquire up to AUD10m of units of AXQ on the market over the next 12 months." For me, this line suggested Allco would provide price support for AXQ; this of course never occurred. The question is the extent to which Allco could be obligated to buy back shares in AXQ before 30/12/08. Alternatively, AXQ could use some of its free cashflow for an on-market buy back. At the moment AXQs market capitalisation is just AUD8 million.
Delisting: the AFR reported today that EBI is doing this and proposing that shareholders can redeem untis at a 7.5 percent discount to NTA now, or later with a semi-annual redemption at the NTA on the set date. Now that would be a nice outcome for AXQ shareholdrs.....
Winding up: The key issue here is how much of the NTA would be returned to shareholders, and I cant get an accurate handle on it. In an earlier post I talked about the procedures for winding up AXQ. After payments to itself and creditors, AXQs constitutions states it then must pay "holders of CPUs in accordance with the CPU Terms and then any remaining funds will be distributed to the Unitholders." There were up to 100m CPUs issued by MAX at AUD1 per CPU. The constitutions states on winding up that CPUs can be redeemed at par value if AXQ determines this. This is potentially a very large issue because it implies there could be nothing left for shareholders if AXQ is wound up given total equity of less than AUD100m as at 30/6/2008. I have attempted to get AXQ to tell me how many CPUs are issued and their plans for redeeming CPUs on winding up, but they have not given me a response.

So I am hoping this post will generate some discussion. Around this time last month I was in contact with Alexandra Ballard at Allco who said AXQ would be releasing a presentation to accompany the FY08 results that would address key issues for the trust. Of course, this didn't eventuate. Hopefully AXQ will provide some clear and proactive guidance in the near furture.