Macquarie Under Scrutiny As Rating Cut Looms

The Age

Thursday September 18, 2008

Eric Johnston, Financial Services Editor

MACQUARIE Group is expected to come under more pressure after ratings agency Standard & Poor's revised down its outlook for the investment bank, warning dislocated global markets could affect its balance sheet.

The move came as Macquarie's shares fell to their lowest in over four years, slumping 7.8%, as concerns spread about a potential funding shortfall for the investment bank.

Given the heightened state of nerves among investors, the Australian Securities and Investments Commission yesterday stepped up warnings against spreading false rumours to hurt stock prices.

The corporate watchdog said it was investigating rumours about a number of companies including Macquarie, whose shares took a beating over the past week. Macquarie executives denied the investment bank had lodged a formal complaint.

Macquarie tried to distance itself from the problems hitting its Wall Street rivals, saying it had ready access to more than $20 billion and had no need to return to credit markets soon.

"Funding markets are going to be very disruptive over the next quarter and we don't have any plans to do any issuance because we don't need to replace anything," Macquarie Group chief financial officer Greg Ward told BusinessDay.

Doubts have been growing over Macquarie's reliance on debt to fund its growth.

Smaller rival Babcock & Brown has stumbled badly, with its shares yesterday plummeting to new lows after a key funding vehicle had its credit rating cut a notch. Babcock's shares have slumped more than 97% this year, forcing it to drastically scale back its business.

Standard & Poor's yesterday warned there was now a one-in-three chance of Macquarie's A- credit rating being cut.

The negative outlook reflected a potential weakening in Macquarie's business due to the increasing dislocation of global financial markets, Standard & Poor's said.

Analysts believe Macquarie is likely to direct all its energy into "protecting its balance sheet" to avert a crisis in confidence that gripped global investments banks such as Lehman and Merrill Lynch.

European investment banks such as UBS were also facing a loss of confidence as concern rose over heavy losses and strained balance sheets.

Macquarie's shares fell $2.87 to $33.93, the lowest since August 2004. Its shares have lost 26% this month amid the credit squeeze that has wiped $12 billion from its capitalisation.

Macquarie said it could borrow $3.8 billion through an unused credit facility and had this year doubled its liquid assets to $20 billion.

Still, the cost to protect Macquarie's senior bonds against default, as measured by credit-default swaps, surged to a record, showing investors think the company is less likely to repay debt.

Contracts on Macquarie's senior debt increased about 75 basis points to trade at an all-time high of 600 basis points. Contracts on most Australian banks are trading at around 130 basis points.

Unlike Babcock, Mr Ward said Macquarie was a bank regulated by the Australian Prudential Regulation Authority. He also said it had no exposure to US real estate markets.

Babcock & Brown International, an offshoot of Babcock & Brown, was cut one notch to BB from BB+, which is likely to increase funding costs for the already struggling group. Babcock's shares fell 12% to 92.

© 2008 The Age

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