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Aug 21, 2009

Millionaire Factory turns corporate dud club

It takes a lot of talent to better the likes of Rodney Adler, Ray Williams and the other incompetents who gave Australia its biggest ever corporate loss, but this is exactly what Macquarie Bank has done.

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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.

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