It had to happen sooner or later. Macquarie Group, the house that debt built, has suffered its first major debt implosion with the $300 million Macquarie Fortress fund copping a margin call that triggered a fire sale which has destroyed much of the equity value.

When the highly geared Macquarie Fortress bond fund first confessed to problems on July 31, I wrote this supportive piece in Crikey and bought 780 of the $1 units at the supposedly knockdown price of 69c.

For a while, it looked like a great yield play. A distribution of $22.15 hit the account on December 21 – which is much bigger than the average payout on the 630 investments of $500 in the world’s biggest small portfolio.

Yesterday Macquarie Fortress closed at a miserable 11c after releasing this statement, the killer line being that the face value of the remaining bonds was $US420 million, debt was $US320 million but the market value of just $US372 million wouldn’t be realised in any further fire sale. Sounds like it might be insolvent.

Distributions have now been suspended as the recent fire-sale of bonds triggered a $US25.5 million book loss that put Macquarie Fortress on the critical list.

Margin calls are the ultimate ignominy in this credit crisis – just ask the Allco executives, former Centro CEO Andrew Scott, Tricom and some of the MFS directors.

Now the great Macquarie stable has joined the club. Given that Macquarie Fortress has not bought any subprime paper and has suffered no defaults on the bonds it owns, you’d have thought the broader Macquarie stable could have provided sufficient bridging finance to avert the margin call.

Even if APRA forbids such bailouts, the Macquarie network – or even a handful of the bankers in a personal capacity – could surely have rustled up some sort of rescue. Alas, Macquarie Fortress is being left to die – in stark contrast to Babcock & Brown’s 50c mop up bid for its underperforming bio-fuels fund.

The global credit crisis is manifesting itself in all sorts of remarkable ways. A much bigger example was AIG, the biggest US insurer, which plunged 11% overnight after auditor PwC warned of “material weakness in its internal control over financial reporting and oversight” relating to how it valued its credit default swap portfolio. This portfolio includes the dreaded CDOs.

It’s a shame PwC’s Australian arm wasn’t so vigilant on Centro.

Bond prices are plunging around the world and anyone forced into a fire sale is taking a huge haircut. The yields on offer from picking up some of this distressed debt will prove spectacular over time – but for the time being there is just a deluge of forced selling from the likes of Macquarie Fortress.

Go here for Saturday’s chat about Macquarie Bank with Geraldine Doogue on Radio National.

Peter Fray

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