Macquarie Shares Slammed As World Financial Markets Grind To A Halt

The Age

Friday September 19, 2008

Eric Johnston, financial services editor

A CRISIS of confidence has swamped Macquarie Group, intensifying speculation the stand-alone investment bank may be forced into an alliance with a commercial bank.

Macquarie shares yesterday suffered a record daily loss, slumping more than 23%, marking a significant challenge for new chief executive Nicholas Moore to win back investor support.

The dive followed a rout among investment banks on Wall Street, triggered by concerns their access to fresh funding had been cut off.

Macquarie shares have lost as much as 65% this year and are far from its level of near $97 a share in May last year.

Commonwealth Bank and National Australia Bank were among those most speculated to be prepared to do a deal with Macquarie, either through an alliance or equity stake.

This would follow lightning sales of securities giant Merrill Lynch to Bank of America, while Wall Street powerhouse Morgan Stanley is reportedly in talks with several banks.

A Macquarie spokeswoman declined to comment on whether talks were taking place.

Macquarie executives including chief financial officer Richard Sheppard yesterday organised a hook-up with the bank's brokers, attempting to quell concerns about its financial health.

Mr Sheppard told the brokers the investment bank had no problem trading or with credit exposures, but this failed to stem the slump on opening. Likewise, Mr Moore pushed ahead with a scheduled lunch meeting with several investors.

Any unwinding of Macquarie - unthinkable just days ago - would not only be a financial nightmare, but would represent a major headache for governments here and globally.

Through its fast-growing asset management business - held mostly through its satellite funds - Macquarie owns and operates billions of dollars of essential infrastructure including airports, toll roads, communication towers as well as Britain's biggest water utility.

"The direction of Macquarie's price is telling us Macquarie is broken," said JPMorgan analyst Brian Johnson. "With the hedge funds driving the agenda, it is hard to identify a catalyst to turn Macquarie's price direction around."

Still, analysts say the pulverising dished out to Macquarie's share price does not reflect its financial health.

Even if lack of market confidence started to erode Macquarie's ability to do business, the investment bank's "strong financial position would cushion the immediate impact", said Patrick Winsbury, an analyst with Moody's in Sydney.

Macquarie has no exposure to the US housing market. Unlike global giants such as UBS or Citigroup, it has not needed to make any write-downs on complex credit instruments.

Several events have combined to drive down Macquarie shares. The rapid demise of Wall Street giants Lehman Brothers and Merrill Lynch this week has raised fears that stand-alone investment banks are unable to resist severe market pressure.

This has even spread to Wall Street stalwart Morgan Stanley, which has reportedly entered into alliance talks with commercial banking giant Wachovia.

Meanwhile, with credit markets expected to be closed down over the next few months, doubts are growing that investment banks can raise funds for their standard deal making.

Credit ratings agencies have tempered their view on Macquarie in recent days, with investment house Moody's the latest to lower its outlook to "stable" from "positive".

On Wednesday, Standard & Poor's warned there was a one-in-three chance that Macquarie's "A minus" credit rating could be downgraded.

For its part, Macquarie says it has access to more than $21 billion in cash and liquid assets. "We can't see the refinancing challenge because we don't think we need to do anything," Macquarie chief financial officer Greg Ward told BusinessDay.

The cost to protect Macquarie's debt from default has soared. Credit default swaps on Macquarie's senior bonds traded at a record 900 basis points last night, according to Bloomberg data. This is now starting to mirror those of Lehman Brothers and Merrill Lynch before their demise.

Contracts on most Australian banks are trading at about 130 basis points.

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