There are plenty of examples of the cupidity involved in the Macquarie Group/Bank model of investor fee clipping.
Sydney Airport stands out, as does Macquarie Bank itself, Macquarie Media, Macquarie Leisure and Macquarie Communications. All have revealed the faults of paper profits, huge debts taken on by borrowing to pay distributions, and huge and continuing management fees paid to the greedy at Macquarie Group, regardless of performance.
Now the model is dead, and casualties are being counted: Macquarie Communications has gone, shuffled off to one-time Canadian mates of the parent company. Macquarie Media is struggling with a bitter downturn in the bush TV market, Macquarie Leisure has cut itself free of its parent and Macquarie Airports (whose big asset is Sydney Airport) is looking for the easy way out before confronting reality.
But none of the Macquarie satellites have come to typify the egregious destruction of value than Macquarie Infrastructure Group (MIG) which should be known as the Macquarie Infrastructure Destruction Group.
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Too much debt, too little income, but too many paper profits booked in the boom to justify the additional borrowings taken on to pay distributions and do more deals. It had a paper balance sheet backed by a bit of this toll road, and a bit of that: all now are unsalable, except at crippling losses.
MIG clipped another $2 billion from the value of its toll roads in the June quarter, taking the amount cut in the year to June to a massive $5.1 billion, or more than 50% since June 2007 when asset values were a heady $10.33 billion.
MIG said yesterday that according to its preliminary calculations, the group’s portfolio was valued at about $5.1 billion as at June 30, with net asset backing (NAB) estimated at about $2.54 per stapled security. That NAB figure is a fall of 33% in a year. And what about the peak value: $4.59 at December 30, 2007? That’s a fall of 66%. No wonder some wags in the market reckon Macquarie Infrastructure’s market code of MIG should be replaced with MUG; as in the poor punters who own the shares.
The units closed up 2.5 cents yesterday at $1.425. Nowadays it seems nothing can surprise the market when it comes to reporting results from Macquarie Group affiliates. Some analysts (who have a lot to answer for in not being more sceptical of the flawed model) now say the valuation gap between the market and the NAB figure is encouraging.
For Macquarie management it no doubt gives them room for further asset valuation cuts as MIG’s toll roads struggle to make a living.
”The anticipated portfolio valuation has been primarily affected by lower forecast traffic volumes, changes to asset discount rates, and the impact of movements in foreign exchange rates,” MIG said in a statement on yesterday.
”However, a continuation of higher assumed financing costs and changes to interest rates and inflation rates across the portfolio have also contributed to this reduction.”
Not one mention of the management and boardroom incompetence that took MIG to this position or the high prices paid for assets financed by excessive borrowings. These were built upon to pay distributions and gear up the balance sheet again. Strange how it’s the over borrowed, heavily geared companies run by asset shufflers that are feeling the pain from the credit crunch and recession most, isn’t it?
MIG, which operates toll roads in Australia, US, Canada and Europe, will release its 2009 results on August 20. A lot of red ink can be expected, especially after the first half loss of $1.269 billion, much of which represented asset impairment charges.
MIG has already heavily written down the value of its four US toll roads and the group’s other investments in the French APRR, Toronto 407 and the UK M6 toll roads could see valuations slashed.
MIG’s board is dominated by Macquarie — Mark Johnson, a former senior bank executive, is chairman.
The results announcement next month will be interesting, not only for the size of the loss and other examples of value destruction, but also the size of the fees clipped by Macquarie Group. The best figure for those will be zero: billion of dollars in devaluations and a unit price that has more than halved from a 52 week high of $2.92. Ah, those were the days.
Macquarie Group should be returning some of the fees it has clipped from MIG back to the company for under performance.