May 1, 2009
By MERAIAH FOLEY
Macquarie Posts Decline in Annual Profit
SYDNEY — The largest Australian investment bank, Macquarie Group, posted its first fall in annual profit in 17 years Thursday, citing billions of dollars in losses stemming from the global slowdown.
Macquarie said net profit for the year that ended March 31 had fallen 52 percent to 871 million Australian dollars, or $635 million, from a record 1.8 billion dollars the year before. The widely expected result fell just short of the bank’s February profit forecast of 900 million dollars.
Later in the day, the bank confirmed it had raised 540 million dollars in an institutional placement of new shares at 27 dollars per share, Reuters reported.
Though Macquarie and other large Australian banks have been largely insulated from the pain suffered by their counterparts on Wall Street and in Europe, the result released Friday was the investment juggernaut’s worst since 1992, during the country’s previous recession.
Macquarie blamed “testing global market conditions” for the result, which included 2.5 billion dollars in one-time losses. Listed among the write-downs were 1.47 billion dollars in losses associated with managed funds and infrastructure assets; 496 million dollars in bad loans, mostly for property and mineral investments; and 248 million dollars in costs from the sale of its Italian mortgage business.
On the upside, Macquarie touted its relatively healthy balance sheet, with cash and liquid assets totaling 30.8 billion dollars and total capital of 10.2 billion dollars, which is 3.1 billion dollars more than the minimum required by Australian regulators.
Nevertheless, the bank requested Thursday that trading in its shares be halted while it considered plans to raise additional capital. There were no further details of the plans in the bank’s statement to the Australian Securities Exchange on Friday, but the Macquarie chief executive, Nicholas Moore, warned of continued uncertainty ahead.
“While there were some early signs of markets stabilizing in March and April,” Mr. Moore said, “significant uncertainties remain, and it is still too early to make any judgments on sustained market improvements.”
Until now, Macquarie has been one of the few banks around the globe that have not approached its shareholders for more money since the financial meltdown began last year.
Tim Schroeders, a portfolio manager at Pengana Capital, said that the announcement made Thursday was more of a reflection of changing banking conditions than a sign of trouble at Macquarie.
“The leverage that was previously in the banking system prior to the global financial crisis is no longer prudent, and as a result, banks are requiring more capital and returning less on that capital,” he said. “There are going to be adjustments required to reposition the business to be optimally profitable over the next 10 years.”
Read more in the New York Times
Showing posts with label Macquarie. Show all posts
Showing posts with label Macquarie. Show all posts
Friday, May 1, 2009
Friday, August 3, 2007
Macquarie Bank model cannot last: Chanos and Mark Colvin on Australian Radio National
Read article or listen online
By Stephen Long - PM - Wednesday, May 30, 2007
MARK COLVIN: Jim Chanos was the first big US investor to expose Enron as a fraud.
Tonight, he's told PM why he thinks that Macquarie Bank is a 'house of cards'.
Macquarie's staff have made billions by buying assets around the world and spinning them off into funds and trusts controlled by the bank. The bank collects fees all along the line.
But Mr Chanos says this economic model can't last. His key concern is that the Macquarie Bank funds pay their shareholders not out of income they earn, but from borrowed money.
They continually revalue their assets, then borrow against the asset values to fund payments to investors.
He also says the structure encourages serial overpaying for assets, and that Macquarie is relying more and more on unsustainable self-dealing between the bank and its funds to make money.
This report from our Economics Correspondent Stephen Long.
STEPHEN LONG: Jim Chanos has made a fortune picking stocks that are ripe for a tumble.
He was the first big investor to say Enron was a fraud.
He's not saying there are crooks at Macquarie Bank. Simply, that the model that's made the bank billions is unsustainable.
JIM CHANOS: I guess the heart of our criticism of the bank is the model itself, this so-called Macquarie model.
STEPHEN LONG: The Macquarie model is now world famous. The bank scours the world buying assets, everything from toll roads to bowling alleys, and selling them into separate trusts that the bank controls.
This generates triple fees for Macquarie Bank: one for the up-front purchase; a second for selling the assets into the trust; then ongoing management and performance fees from the funds.
There's been much discussion in Australia about whether this raises a conflict of interest.
Jim Chanos' critique is more fundamental.
JIM CHANOS: The underlying economics, in my opinion, are flawed. Being the top bidder for these assets and then flipping them into the trusts leads to an unsustainable economic engine at the trust level. And when that breaks down all of the fees and whatever's being paid begin to break down.
STEPHEN LONG: Macquarie's funds pay their investors out of borrowed money and that's one of Jim Chanos' key concerns.
They revalue the assets they own then borrows money against the re-valuations to fund the payments to investors, a strategy that could founder when, inevitably, the period of cheap credit and asset price inflation comes to an end.
JIM CHANOS: And this is the real crux of the problem on an ongoing basis. If you look at the financial accounts of the trusts you'll see that in almost all the cases the companies are using Australian re-valuation accounting which is legal under GAAP (Generally Agreed Accounting Principles) in your country to write up the value of the assets annually and put that through operating income and into equity.
STEPHEN LONG: And your worry then is that the payments to the stockholders are being funded essentially by debt and re-valuation not out of income.
JIM CHANOS: Re-valuating and borrowing against that stream. So you need willing lenders, you need a credit environment that looks the other way, or you need a credit environment where the people lending are just lending on reputation and not numbers.
STEPHEN LONG: The man who blew the lid on Enron has other concerns, too. He says the fee structure encourages serial overpaying for assets because Macquarie gets fees based on the size of the assets it spins into its trusts.
He says the Macquarie model relies increasingly on unsustainable self-dealing between Macquarie and its funds.
And then there's the huge levels of debt and leverage.
JIM CHANOS: Capital gains alone in the fiscal year 2007, the year ending March 2007, capital gains alone of Macquarie flipping these types of assets into the trusts and elsewhere accounted for half, roughly half, of the pre-tax income of the bank. And that alone should be enough to call into question the quality of earnings.
STEPHEN LONG: If we came to the end of this extraordinary period we've been in, of cheap credit and escalating asset prices, asset price inflation, where would that lead Macquarie in terms of those capital gains?
JIM CHANOS: Well, I think that they would be greatly diminished or non-existent.
STEPHEN LONG: Although they're perfectly legal and transparent, Jim Chanos says the techniques Macquarie Bank uses have some similarities to those used by Enron.
JIM CHANOS: Let's just say, Stephen, I'm apparently not the first one to make those observations. That's exactly what they appear to be doing.
STEPHEN LONG: Macquarie Bank's boss Allan Moss says short of complete disaster, people will keep driving on toll roads no matter what.
Jim Chanos says that misses the point.
JIM CHANOS: All I would tell your listeners, Stephen, is simply just go in to the trusts, financial statements, and simply extract out the asset re-valuation number which is basically management's guess as to how much, what the asset's worth and just see what the cash flows look like if you take that out.
In many cases the cash flows are diminished or actually go negative. That's the simple litmus test to the Macquarie model.
STEPHEN LONG: Well, Jim Chanos, how concerned should we be that pension funds in Australia are major investors in the Macquarie Bank trusts?
JIM CHANOS: Well, if I was a pensioneer, in your country and my pension fund accounts owned some of these trusts, I would urge the managers to look at the financial accounts closely and not just look at the yield they're getting but look at how that yield is being received.
Is it actually from the economic output of the assets or is it from asset re-valuation which is simply writing up the paper value of the assets and borrowing the money against it.
These pension funds, which are answerable to the pensioneers in your country, if they're comfortable with that, well, great. If I was a pensioneer I wouldn't be.
STEPHEN LONG: Plenty of people disagree. Brian Johnson of JPMorgan is Australia's top rating banking analyst. He says Jim Chanos will join a long line of people who've lost money betting against Macquarie.
BRIAN JOHNSON: A lot of money is being lost basically shorting Macquarie Bank over the years. And while the model is certainly not without risk, the fact is the size of this potential market is absolutely massive.
STEPHEN LONG: So take your pick. Macquarie is either poised to run the world or heading for trouble.
MARK COLVIN: Stephen Long.
We were told Macquarie Bank's Chief Financial Officer, Greg Ward, would respond to Stephen Long's story, but he is yet to call.
By Stephen Long - PM - Wednesday, May 30, 2007
MARK COLVIN: Jim Chanos was the first big US investor to expose Enron as a fraud.
Tonight, he's told PM why he thinks that Macquarie Bank is a 'house of cards'.
Macquarie's staff have made billions by buying assets around the world and spinning them off into funds and trusts controlled by the bank. The bank collects fees all along the line.
But Mr Chanos says this economic model can't last. His key concern is that the Macquarie Bank funds pay their shareholders not out of income they earn, but from borrowed money.
They continually revalue their assets, then borrow against the asset values to fund payments to investors.
He also says the structure encourages serial overpaying for assets, and that Macquarie is relying more and more on unsustainable self-dealing between the bank and its funds to make money.
This report from our Economics Correspondent Stephen Long.
STEPHEN LONG: Jim Chanos has made a fortune picking stocks that are ripe for a tumble.
He was the first big investor to say Enron was a fraud.
He's not saying there are crooks at Macquarie Bank. Simply, that the model that's made the bank billions is unsustainable.
JIM CHANOS: I guess the heart of our criticism of the bank is the model itself, this so-called Macquarie model.
STEPHEN LONG: The Macquarie model is now world famous. The bank scours the world buying assets, everything from toll roads to bowling alleys, and selling them into separate trusts that the bank controls.
This generates triple fees for Macquarie Bank: one for the up-front purchase; a second for selling the assets into the trust; then ongoing management and performance fees from the funds.
There's been much discussion in Australia about whether this raises a conflict of interest.
Jim Chanos' critique is more fundamental.
JIM CHANOS: The underlying economics, in my opinion, are flawed. Being the top bidder for these assets and then flipping them into the trusts leads to an unsustainable economic engine at the trust level. And when that breaks down all of the fees and whatever's being paid begin to break down.
STEPHEN LONG: Macquarie's funds pay their investors out of borrowed money and that's one of Jim Chanos' key concerns.
They revalue the assets they own then borrows money against the re-valuations to fund the payments to investors, a strategy that could founder when, inevitably, the period of cheap credit and asset price inflation comes to an end.
JIM CHANOS: And this is the real crux of the problem on an ongoing basis. If you look at the financial accounts of the trusts you'll see that in almost all the cases the companies are using Australian re-valuation accounting which is legal under GAAP (Generally Agreed Accounting Principles) in your country to write up the value of the assets annually and put that through operating income and into equity.
STEPHEN LONG: And your worry then is that the payments to the stockholders are being funded essentially by debt and re-valuation not out of income.
JIM CHANOS: Re-valuating and borrowing against that stream. So you need willing lenders, you need a credit environment that looks the other way, or you need a credit environment where the people lending are just lending on reputation and not numbers.
STEPHEN LONG: The man who blew the lid on Enron has other concerns, too. He says the fee structure encourages serial overpaying for assets because Macquarie gets fees based on the size of the assets it spins into its trusts.
He says the Macquarie model relies increasingly on unsustainable self-dealing between Macquarie and its funds.
And then there's the huge levels of debt and leverage.
JIM CHANOS: Capital gains alone in the fiscal year 2007, the year ending March 2007, capital gains alone of Macquarie flipping these types of assets into the trusts and elsewhere accounted for half, roughly half, of the pre-tax income of the bank. And that alone should be enough to call into question the quality of earnings.
STEPHEN LONG: If we came to the end of this extraordinary period we've been in, of cheap credit and escalating asset prices, asset price inflation, where would that lead Macquarie in terms of those capital gains?
JIM CHANOS: Well, I think that they would be greatly diminished or non-existent.
STEPHEN LONG: Although they're perfectly legal and transparent, Jim Chanos says the techniques Macquarie Bank uses have some similarities to those used by Enron.
JIM CHANOS: Let's just say, Stephen, I'm apparently not the first one to make those observations. That's exactly what they appear to be doing.
STEPHEN LONG: Macquarie Bank's boss Allan Moss says short of complete disaster, people will keep driving on toll roads no matter what.
Jim Chanos says that misses the point.
JIM CHANOS: All I would tell your listeners, Stephen, is simply just go in to the trusts, financial statements, and simply extract out the asset re-valuation number which is basically management's guess as to how much, what the asset's worth and just see what the cash flows look like if you take that out.
In many cases the cash flows are diminished or actually go negative. That's the simple litmus test to the Macquarie model.
STEPHEN LONG: Well, Jim Chanos, how concerned should we be that pension funds in Australia are major investors in the Macquarie Bank trusts?
JIM CHANOS: Well, if I was a pensioneer, in your country and my pension fund accounts owned some of these trusts, I would urge the managers to look at the financial accounts closely and not just look at the yield they're getting but look at how that yield is being received.
Is it actually from the economic output of the assets or is it from asset re-valuation which is simply writing up the paper value of the assets and borrowing the money against it.
These pension funds, which are answerable to the pensioneers in your country, if they're comfortable with that, well, great. If I was a pensioneer I wouldn't be.
STEPHEN LONG: Plenty of people disagree. Brian Johnson of JPMorgan is Australia's top rating banking analyst. He says Jim Chanos will join a long line of people who've lost money betting against Macquarie.
BRIAN JOHNSON: A lot of money is being lost basically shorting Macquarie Bank over the years. And while the model is certainly not without risk, the fact is the size of this potential market is absolutely massive.
STEPHEN LONG: So take your pick. Macquarie is either poised to run the world or heading for trouble.
MARK COLVIN: Stephen Long.
We were told Macquarie Bank's Chief Financial Officer, Greg Ward, would respond to Stephen Long's story, but he is yet to call.
Tuesday, July 24, 2007
Double edged sword of private infrastructure financing
By Faith Chatham - July 24, 2007
Crossposted on EPLURIBUS MEDIA
Many lawmakers and local/regional governmental officals erupted in glee at the prospect of transferring financing of public infrastructure projects to private equity partners. The traditional group of public works hogs at the public money bins jumped cartwheels anticipating funding to flow more rapidly out of other pockets into theirs. Governor Rick Perry spent Texan's hard earned tax money to fly to Europe to court potential European and Australian partners. TxDOT repeated the same old lies: "There is no way to finance roads without tolls."
Crossposted on EPLURIBUS MEDIA
Many lawmakers and local/regional governmental officals erupted in glee at the prospect of transferring financing of public infrastructure projects to private equity partners. The traditional group of public works hogs at the public money bins jumped cartwheels anticipating funding to flow more rapidly out of other pockets into theirs. Governor Rick Perry spent Texan's hard earned tax money to fly to Europe to court potential European and Australian partners. TxDOT repeated the same old lies: "There is no way to finance roads without tolls."
To the public CDAs or Private Public Partnerships for toll roads is presented as being financed by private partners. When we look up close and get real personal and examine specific projects however, the facade doesn't hold up to scrunity. For example, Cintra, if awarded SH 121, would have invested about the same amount of money which Texas taxpayers have already invested in the project (state, federal dollars and local governments investment in right of way). The Federal Government would also loan the private partner additional fund and faciliate borrowing of billions of dollars of tax exempt money from other private lenders. A key phrase to note is tax exempt. That is another way of saying that the tax liabilty will be passed from these lenders to the rest of the taxpayers. Taxes never go away when they are "exempted". They are merely passed along to the next guy up (or more probably) down the ladder!
I've made a number of inquiries about these US government faciliated loans which the changes to U.S. Law allows to enable private equity partners to utilize on public works (highway toll roads) projects. I want to fully understand who holds the bag if the project fails and the "borrower" defaults on the loan. What happens if there isn't the anticipated traffic on a toll road? If the U.S. Government faciliates these tax exempt bonds for the private partner (such as Macquarie or Cintra), does the US Government (i.e. U.S. Taxpayer) stand behind the loan as is the case when a bank forecloses on an FHA home loan or a VA home loan or a Federal Guaranteed Student Loan?
I've asked this question to numerous engineers and officials at TxDOT and RTC meetings and to date have yet to have anyone show me in writing where the US Government isn't standing behind these loans. If a private partner is going to make the profit I think the private equity firm should take the risk. However, I am suspicious. There is a rush across the pond to court American lawmakers and acquire toll road deals. Is one of the edges of the sword that somewhere there are clauses buried in those mountains of fineprint and legalize which transfer the risk to the taxpayers?
Examining Australian sources, another edge to the sword emerges. Most of these equity firms are borrowing from retirement funds. The retirement accounts of working men and women and retirees from all over this nation are invested in bonds and stocks. John L. Goldberg, in "The Fatal Flaw in the Financing of Private Road Infrastructure in Australia" wrote a paper last year which analyzes the cash flow of four private public road infrastructure projects in Australia and probability of solvency/insolvency.
Goldman wrote:
The repayment of debt is clearly on the minds of the toll road owners and operators as revealed by the recent release of a draft prospectus for the so-called Sydney Roads Group (Macquarie Infrastructure Group, 2006). This group consists of three existing toll roads, the M4, M5 and Eastern Distributor. The financial arrangements are similar to those of the M2. In February 2009, the debt of the M4, currently at about $57.6 m must be paid. The method of doing this is said to involve the use of reserves and a securitization arrangement (Alles, 1999) involving the M4 and M5. This means that future cash flow receivables and/or the asset value of the M5 is to be used as collateral for a new financial structure for refinancing. It should be noted that the M5 has a debt of $515m which has to be repaid or refinanced by June 2010. But in the final prospectus, serious doubts have now been raised about the ability to repay the debt or refinance it on
favourable terms (MIG, 2006).
He concludes that the private investors are using various public private road projects as collateral for other projects, creating a " financial house of cards". Macquaire and Cintra are partners in many projects around the world and have bid on numerous projects in Texas and the DFW area. They are presented to citizens as private partners who will take the responsiblity for risk from the government and taxpayer in exchange for tolls. Citizens' protest that the cost for tolls is higher than those projected if citizens finance road construction with gas tax and public bond financing the old fashioned traditional way goes are unheeded by lawmakers and transportation policy gurus and state and US DOT bureaucrats.
Goldman analyzed their business methodology in Australia and reported:
The data in the financial models attempt to portray the best possible outcome for the consortiums promoting the projects using for example, unrealistic traffic projections, and creative accounting. Despite this attempt the probability of financial failure has been shown to be 100% in every case, in the sense that cash flow will be insufficient to amortize debt. Not only do the models specify unattainable rates of return to investors but the true financial position of the projects is being masked by financial engineering leading to increased debt out of which equity dividends are being paid. Such an approach is unlikely to be sustainable, but may nevertheless lead institutional investors and others to erroneously believe in the long term outcome portrayed by the promoters.
Why does this matter? It matters because citizens deserve to be able to trust the reliability of financial institutions. It matters because retirement accounts are being invested in bonds to finance private equity firms share of investment in public private partnerships for toll roads (and toll bridges and other infrastructure). If the cards begin to fall, and the toll road private investor public partnership CDA financial house crumbles, then as each card will take down an adjacent investor and that one will take down the next. If the model used to predict traffic, fees, maintenance costs for a 50 year toll road project are faulty and the private equity partner does not get the anticipated return on investment, everyone who loaned money on the project will lose. It is very likely that much of those loans will be held by retirement funds! Ouch! When you lose your retirement account, it is difficult for many people to recoup before they are out of the job market. I know. My 401K account dried up a few years ago when utility. telops stocks switched from reliable investments to swindles!
With retirement account investment in private public infrastructure equity partnership (toll roads) we may see scandals which reek of the hot sultry days of Enron investigations and energy sector manipulation which cost trusting investors and employees their life savings and retirement incomes. As the energy grid spread from state to state, we are watching a network of toll corridors spread throughout the North American continent, attracting international partners who are not totally without controversy in their home countries.
Possible remedies
Protection for retirees who invest in PPP/CDAs presents a classic catch-22. Private partnership who claim to remove the risk from taxpayers on infrastructure projects in return for receiving tolls (retrn on investment) should not have their loans guaranteed by the US Government. That is unfair to taxpayers!
Goldberg pointed out:
Recent statements about the use of securitization as a means of debt amortization are unconvincing. In the event of corporate collapse, and in the absence of government guarantees, the trust/company structure of these projects will be used to claim limited liability for the entire structure. But such a claim may be rejected by a court, leaving investors liable.
That brings me back to my original quest. Are there guarantees written into these volumes of contracts, bills, agreements, which transfers the risk from the private partner to the U.S. taxpayer? If you know where the guarantee is that the US Government will not back the tax exempt bonds they faciliate for private partners in public infrastructure projects, please share that with me. I need to see it in writing and be able to verify the source. There are too many inconsistencies in what transportation engineers and TxDOT and regional transporation policy boys have told me about toll roads, CDAs and the benefit to the public for me to really rely on what they tell me without being able to evaluate it and verify it. This is an instance when if it isn't on paper, published in government documents within the public domain then it is probably more urban legend than reality.
Additional articles on these topics are posted on Grassroots News U Can Use
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