Little wonder amid all the cataclysmic events roiling markets that the meltdown earlier this week in the shareprice of Australia’s Macquarie bank was reported as just another meltdown story, triggered by what appeared to be a loss of confidence that also took a far heavier toll on Macquaries’ smaller rival Babock & Brown.
But the headline news masked a story that is as intriguing as the battle over short-selling in major markets.
Macquarie’s warnings in late July that its solid run of record-breaking profit growth may be ending were widely registered. And the modest to lacklustre trajectory of its share price since then reflected that view. But central to Macquarie’s woes this week have been local media reports implying the investment bank was on the verge of collapse.
It all began with a report in The Australian newspaper on Wednesday that claimed Macquarie must refinance A$45bn ($36.4bn) in debt by March next year – which combined with other dire predictions of Macquarie’s impending crisis.
Macquarie Group shares plunged by 23 per cent to a 5 and a half year low on fears about its ability to refinance billions of dollars in debt, with analysts at JP Morgan saying the slump shows the investment bank is “irrevocably broken”. Asic, the Australian securities regulator, then issued a statement ASIC saying it had extended a probe launched in March this year into “market manipulation” and warned it would crack down on people spreading false rumours (does this sound familiar?):
Recent volatility in the market has seen an increase in the number of complaints about false rumours and market manipulation. Asic looking into alleged false rumours about a number of companies, including Macquarie Group Limited.
Macquarie then hit out at The Australian, in a statement to the Australian Stock Exchange, claiming The Australian’s report that Macquarie needs to refinance A$45bn of debt and could have difficulty refinancing a required A$5bn by March 2009 was “false and inconsistent with information provided to the market by the group”.
And Crikey, the Australian-based news and comment website, took up the cudgels:
Commentator and Crikey founder Stephen Mayne took the paper to task with an attack on its journalistic standards, while Crikey proprietor Eric Beecher penned a critique on online business site, Business Spectator.
The Australian hit back on page three today with an attack on Crikey but appeared to back off – slightly by amending the headline on Friday’s report in business section, which was initially headlined in the newspaper version: “Macquarie irrevocably broken: analyst”, but was changed in the online version to “Macquarie mauled as hedge funds attack”.
The article however, led:
One of Macquarie Group’s most ardent broker supporters has dubbed the investment bank as “irrevocably broken” after its share price dived 23 per cent to a five-year low yesterday and its five-year credit default swap spreads blew out again.
In a report released yesterday morning, JPMorgan analyst Brian Johnson said that while he did not agree with the view of short sellers, “the direction of Macquarie’s share price is telling us Macquarie is irrevocably broken”.
He said it was hard to identify a catalyst to turn Macquarie’s price direction around, but noted that binges of short selling had previously been followed by bouts of short covering.
In a separate comment, Eric Beecher, publisher of Crikey, writes on Friday:
Yesterday in Crikey we drew attention to the The Australian ‘s story earlier in week, which alleged Macquarie had to refinance $45 billion of debt by March next year and would have difficulty raising $5 billion in debt in the next six months. It was a story based on questionable information that was never checked with Macquarie. A story that carried a tone of alarm about Macquarie’s future funding capacity and contained the word “fears” in its headline and opening sentence. The writer didn’t offer Macquarie the opportunity to reply to the hand grenade it was about to lob on its front doorstep during probably the most volatile week in financial markets since 1929.
Regardless of where the escalating media punch-up is heading, in Lex’s view, Macquarie’s protestations that it is not Lehman Brothers are sound:
“It does no proprietary trading, has significantly less leverage at corporate level and – so far – has not been obliged to take big writedowns.” But, warns Lex, Macquarie relies on term-funding and carries assets the value which is deteriorating on an almost daily basis.
The latest fears revolve around funding needs. Macquarie has total funded assets of A$73bn on its balance sheet, of which A$21bn is cash and liquid assets and A$27bn relates to assets with a duration of more than one year. On the funding side, it relies on term debt for around A$20bn, of which roughly one-fifth matures in each of the next five years. With credit default swap rates soaring and a downgraded outlook from S&P, the chances are it must cough up more for refinancing.
As worrying is the depleted value of assets on the balance sheet. Macquarie had A$6.3bn of equity investments on its balance sheet as at end-March, a time when the bounce inspired by the Bear Stearns rescue lifted share prices. Since then, the value of holdings has shrunk – and Macquarie has steadily added to its portfolio. In the case of Macquarie Infrastructure Group, for instance, Macquarie has almost doubled its holding from below 9 per cent in January (when the share price was over A$3) to over 17 per cent. MIG’s share price on Thursday closed at A$1.95.
The damage to equity is magnified by leverage in the funds: on average, total debt/total assets in the funds stands at 56 per cent. Like other banking business models in the current environment, this one looks vulnerable.
Even more so, it would seem, if local Australian media reports have anything to do with it.