Macquarie Model Called Into Question

Sydney Morning Herald

Thursday September 18, 2008

Jacob Saulwick

THE ratings agency Standard & Poor's has called into question the entire Macquarie Group business model, as the investment bank discusses how to shore up the corporate regulator's confidence in the company.

As pressure builds on investment banks the world over, S&P has dropped its outlook on the group from stable to negative, warning that its ratings could be lowered if financial conditions deteriorate further, "so as to putsignificant pressure on Macquarie's long-term business model, and the group's funding and liquidity".

The ratings agency maintained its rating on Macquarie but dropped its outlook from stable to negative, implying a one-in-three chance of a downgrade.

"We note in particular the material amount of Macquarie's short-term wholesale debt funding and the reliance of the Macquarie Group's business model on favourable investor sentiment," the credit analyst Sharad Jain said.

Macquarie's chief financial officer, Greg Ward, stressed in a statement that S&P said the group had limited direct exposure to the current market turmoil.

The potential downgrade comes after Macquarie tried to scotch reports it could face difficulty refinancing up to $5billion in debt.

Responding to an article in The Australian, Macquarie told the market yesterday morning that it remained well capitalised, with more than $20 billion in liquid assets.

But Macquarie's reassurance did little to placate investors, nervous about any company associated with once-climbing asset values, complex corporate structures, and high levels of debt.

Macquarie shares were hammered on the stock exchange yet again yesterday and the cost of insuring against its debt sky-rocketed.

The shares dropped $2.87, to $33.93, and have fallen 32 per cent in the past month.

The cost of insuring against Macquarie debt has almost doubled in the past two days.

Last night, the Australian Securities and Investments Commission named Macquarie Group - and no other company - as one of the subjects of its investigations into "alleged false rumours" designed to force down a share price.

The regulator singled out Macquarie despite not providing any new information about the progress of its investigation of rumour-mongering and collusion, Project Mint.

"It was a reminder," an ASIC spokeswoman said last night. Macquarie declined to comment on whether it had approached the corporate regulator over market speculation about its level of debt, but it is understood there have been discussions between the regulator and the bank.

Macquarie has been the subject of intense speculation in the past month.

A recent research report by a UBS analyst questioned the bank's capital reserves.

However, the investment bank invariably comes under pressure whenever confidence erodes in its US peers.

© 2008 Sydney Morning Herald

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