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Millionaire Factory turns corporate dud club

It takes a lot of talent to match the likes of Rodney Adler, Ray Williams and the other incompetents who gave Australia its biggest ever corporate loss of $5.3 billion back in 2001 when HIH Insurance fell over.

But the folk at the Millionaire Factory (AKA Macquarie Group, nee Bank) seem to have done just that.

According to a tally of losses reported from the group’s listed funds so far in the 2009 reporting season, as much money has been lost in Macquarie Group’s satellite funds than was lost in the failure of HIH Insurance.

The toll is depressing and very, very red: Macquarie Infrastructure ($1.7 billion), Macquarie Office, ($1.37 billion), Macquarie CountryWide ($1.4 billion), the Macquarie DDR Trust ($616 million); Macquarie Airports, ($299 million), Macquarie Media ($84 million —  and an auditor’s note questioning MMG’s ‘going concern’) and Macquarie Leisure ($800,000).

That’s around $5.5 billion. Let’s call it a near draw to save the Millionaire at the factory any further embarrassment.

The folk at Macquarie Group should have known better, but greed and poor management have left the investments of millions of Australians under water, with no real chance of an imminent recovery. If and when that day comes, the trusts will be chop distributions to conserve cash because the Macquarie model of borrowing to fund everything from debt is dead and discredited.

Of course, Macquarie would dispute that and and would argue that these are so-called non-cash losses, on paper, such as losses on forex and interest rate hedges and the like.

But the impact of non-cash losses are very real and have a cash impact. They cut the value of the assets in the funds, reduce returns, frighten banks, lead to dilutive share issues and have seen the quoted prices of all the funds plunge. They have forced Macquarie Group to writedown the value of its own holdings in these funds by hundreds of millions of dollars.

Distributions to the investors in these funds have been cut to conserve cash and allow gearing and debt to be reduced. If these were only ‘non-cash’ and ‘statutory’ losses (implying no real impact but we have to report these) why have market prices of all these funds fallen and why have the payments to investors been reduced, and will be cut again in the next year?

Macquarie is trying to untangle itself (at a fat profit) from these dud structures it created and managed. It is getting money from the trusts for creating the mess and for unwinding it. The $345 million or so in paper it will get from Macquarie Airports to end its management rights is nothing short of appalling. The board of Macquarie Airports should hang their collective heads in shame, including the Macquarie Group representatives for suggesting this payout, especially after the 2009 loss of almost $300 million.

So enamoured are management with Macquarie DDR, which owns interests in 80 shopping centres in the US, that it has virtually invited anyone to approach them about taking control.

We believe that MDT’s underlying asset value is not being recognised appropriately by the market and needs a catalyst for unitholders to realise value,” Macquarie DDR Trust CEO, Luke Petherbridge told investors at a briefing in Sydney today.

The review will consider all options … including the potential to provide unitholders with a proposal to acquire 100 per cent of MDT units.”

And why are people not recognising the value in the 80 shopping centres? Because they are in the US where consumers are not spending, commercial property values are under pressure (the trusts investments could get cheaper).

Investors have the example of Macquarie Countrywide which took a huge loss in selling down 75% of its extensive retail interests in the US and departing. That was probably one of the more sensible decisions from a Macquarie fund, even if it cost $1.3 billion in losses.

Macquarie Infrastructure (MIG) is thinking of splitting itself into the good and bad parts: that is the assets with some growth and low debt into a new fund, against those with no growth and lots of debt in the old fund.

Can it be of any surprise that the worst performing assets for the Infrastructure Trust are US toll roads which have been hit by high petrol prices, recession and the credit crunch, with the outlook for the US economy decidedly poor?

MIG’s assets have a total of $35 billion or more in debt attached to them: that’s as much a triumph of Macquarie’s model of financial engineering than anything we have seen from Allco and Babcock and Brown, which both collapsed under huge debts and no assets and cashflow, but nothing as large as the burden MIG is labouring under,

A debt burden of $35 billion would make MIG a medium sized country. Can it call on the IMF for a loan?

Not even BHP Billiton, the world’s biggest mining company, a giant, has that much debt, and it has the cashflows to support it.

6
  • 1
    jchercelf
    Posted Friday, 21 August 2009 at 1:42 pm | Permalink

    Macquarie’s failure may have something to do with the Carr factor - after all he was’the premier for opening National Parks’ and left NSW in an impossible mess - poor infrastructure - transport - hospitals and everything else. Now he is paid to do something or other for Macquarie Bank.

    Good luck you millionaires,

    Joan Croll

  • 2
    jose carreras
    Posted Friday, 21 August 2009 at 2:09 pm | Permalink

    What is really frightening is that even though Macquarie are completely screwing their investors on deals such as the Airport, there will probably still be enough morons around in the future to buy into their future schemes, when you would think that no investor or bank would ever touch them again with a 40 foot pole.

  • 3
    peterjimmy
    Posted Friday, 21 August 2009 at 2:24 pm | Permalink

    I know that there’s plenty of scope to criticise Macquarie but any comparison with HIH is just mischievous. We’re still going through a “Global Financial Crisis”, which has wiped out the likes of Lehman Brothers, and Macquarie and it’s satellites have been hit harder than most. Sure, asset values have fallen and it’s way of setting up these funds might now be outdated but they’re not crooks who riped off poor shareholders and policy holders as Adler and Williams did.
    Glenn Dyer makes more sense when he’s writing about Kyle and Jackie O.

  • 4
    Rena Zurawel
    Posted Friday, 21 August 2009 at 3:36 pm | Permalink

    State Bank SA, HIH, and now Macquarie - all those lovely bank ‘products’ contributed to the world crisis. Shall we ever learn?
    In the world of strict licensing, monitoring, registration and compliance system - how come that no such rules apply do the banks and their ‘products’?.
    Perhaps it is not about crooks and gangsters. So where is the culprit? Is there a chance to avoid disasters in the future? Or is it a dead -end-capitalism?
    Peter, can you explain why Macquarie bosses had such hefty salaries? (14mln a year). Was it ‘performance-based’?

  • 5
    peterjimmy
    Posted Friday, 21 August 2009 at 3:56 pm | Permalink

    Rena, the issue of executive salaries is really just a big furphy for politicians to beat their chests and shareholders to let off a bit of steam. Of course the Macquarie MD isn’t worth $14 million pa but the reason he and many others get such exorbitant amounts is simply because someone agreed to pay it to them.
    The fault lies with the Boards that agreed to these packages, not the people who gratefully accept the money. On the other hand, the Boards are advised by consultants on what it’ll cost to get the high quality people they want so, sadly, in the end it’s this nasty free market of ours at work.

  • 6
    Sean
    Posted Saturday, 22 August 2009 at 10:15 am | Permalink

    PeterJimmy, I think you’ve totally missed the prime causes of the GFC and the problems associated with MQG’s habit of overpaying for assets and overleveraging businesses, creating short-term windfall profits and payoffs with longterm unsustainability, and of the ability to charge massive and arbitrary ‘service fees’ and ‘success fees’ for setting up dodgy loans and M&As. It’s called excessive risk-taking, speculation, gambling, greed and ‘wood for the trees’ syndrome. What you don’t seem to understand is that the $14M executive remuneration has to come from somewhere, the ‘service fees’ have to come from somewhere — ultimately being the pockets of people paying road tolls and using other services like airport parking. There’s lots of sweeping under the carpet of the inconvenient truth going on here. This is no different in essence from the blind ambition and hubris that lead to the collapse of Centro, ABC Childcare Centres, and the rest, which would probably be better comparison points than HIH. You can’t blame the GFC for causing the problem when in fact the unsustainable borrowing activity worked hand in glove with the mythical credit being raised in the international finance markets just prior to a major correction which is still unfolding and has quite a way to go. To be honest, you would be better having the govt own and manage the roads and airports themselves, with selective outsourcing of functions to service provision entities rather than selling these assets off to a speculative private sector lock, stock and barrel. But NSW and Federal Labor and the Macquarie Bank are more or less synonymous these days, it would seem…

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