Bloomberg News

Macquarie Bond Risk Rises Faster Than Goldman: Australia Credit

November 07, 2011

Nov. 8 (Bloomberg) -- Macquarie Group Ltd. bond risk jumped to a two-year high, rising more than Goldman Sachs Group Inc., after Australia’s biggest investment bank cut its profit forecast and Moody’s Investors Service said it may lower the company’s debt rating.

The cost of insuring against a default on the bonds of Sydney-based Macquarie surged 256 basis points since June 30 to 574, while contracts on Goldman added 172 basis points to 307, according to data provider CMA. The gap between the two reached 298 on Oct. 27, the widest ever in CMA data going back to 2009.

Tumbling stock markets and weaker demand for services such as takeover advice forced Macquarie Chief Executive Officer Nicholas Moore last month to cut the bank’s full-year profit forecast. The lender’s A2 debt rating was placed on review Nov. 4 for possible downgrade by Moody’s Investors Service, which cited “protracted weakness in the financial markets.” Standard & Poor’s, which rates Macquarie one level lower at A-, is revising its criteria for analyzing all banks.

“The biggest concern with any investment bank is that they don’t have a recurring revenue stream, particularly as businesses slow down they’re not doing as much advisory, new issuance and those sort of things,” said Mark Mitchell, head of credit at Sydney-based Kapstream Capital, which manages A$3.7 billion.

The spread between credit-default swaps on Macquarie and the Markit iTraxx Australia index of corporate risk widened 32 basis points last week to 398, approaching the record 410 basis points touched Oct. 21, according to CMA, which is owned by CME Group Inc. and compiles prices in the privately negotiated market.

‘Possible Downgrade’

Moody’s said the A2 senior unsecured rating on Macquarie and its Prime-1 short-term rating will be reviewed “for possible downgrade.” The New York-based company assigned the current unsecured rating for Macquarie on Nov. 15, 2007, and placed it on negative outlook in October 2008, according to data compiled by Bloomberg.

S&P intends to publish this week its new criteria for rating banks including Macquarie and Australia’s so-called four- pillar lenders -- Commonwealth Bank of Australia, Westpac Banking Corp., National Australia Bank Ltd. and Australia & New Zealand Banking Group -- so named for laws that prevent the nation’s biggest banks from buying each other. S&P plans to begin applying its revised system late this month and finish by the middle of December, it said Nov. 2.

“Given the fact the S&P rating is lower and people are watching it to potentially move lower, I suspect the market will be a little more focused on that, as opposed to Moody’s action,” Mitchell said. “If you see a two-notch downgrade by Moody’s, that may give the market a pause.”

Job Cuts

Macquarie’s Moore joined Wall Street rivals including Goldman and UBS AG in reducing his workforce, announcing last month a 445 drop in headcount in the 12 months ended Sept. 30, the first decline in 2 1/2 years.

The bank closed part of its equity derivatives operations globally, cutting seven jobs in Hong Kong, two in New York and one in London, two people with knowledge of the matter told Bloomberg News on Nov. 3.

Increased turmoil in global markets, battered by doubts that European policy makers can resolve the region’s debt crisis, threaten to wrong-foot Moore’s bet to expand his business after the initial fallout from the collapse of Lehman Brothers Holdings Inc. in 2008 eased.

Having pioneered a business model of buying and pooling assets, listing them on an exchange and charging fees for managing them, Macquarie under Moore was positioned for a rebound in markets in the year that will end March 31, 2012.

U.S. Acquisition

Moore almost doubled his American workforce in 2009 and 2010, buying units such as Fox-Pitt Kelton Cochran Coronia Waller LLC to take the total payroll to 15,556 as of March 31. Since then, he’s cut that figure by 3 percent. The company was founded in 1969 with three employees.

Moody’s will “consider the challenges posed by Macquarie Group’s expansion, including risk management of an increasingly global and diverse business, as well as greater competition in many global capital markets business lines,” Moody’s Sydney- based senior vice president Patrick Winsbury said Nov. 4.

The review also will “focus on the outlook for the group’s earnings against a backdrop of protracted weakness in the financial markets, and the extent that this trend may be secular as opposed to cyclical,” Winsbury said.

Lower Profit

Moore said Oct. 28 that he expects full-year profit to be lower than the previous year if markets and investor confidence don’t rebound in the six months to March 31, 2012. Net income in the six months to Sept. 30 fell to A$305 million from A$403 million a year earlier. Last fiscal year, the bank posted net income of A$956 million.

Trading income at the bank’s fixed income, currencies and commodities unit slumped 18 percent in the fiscal first half.

The bank’s annualized return on equity, a measure of how well it uses reinvested earnings to generate extra profit, fell to 5.7 percent from 10.2 percent six months earlier. That’s down from above 22 percent in the five years to 2008, filings show.

New York-based Goldman reported Oct. 18 its second quarterly loss in 12 years as the firm lost money on investments and revenue declined from trading, asset management and securities underwriting. The third-quarter loss of $393 million compared with a profit of $1.9 billion, a year earlier, the company said.

Spreads Widening

The extra yield investors demand to hold Macquarie Group’s A$1 billion of 6 percent bonds due January 2020 instead of similar-maturity Treasuries has increased 160 basis points this half to 469 yesterday, according to BNP Paribas SA prices.

The spread on Goldman Sachs’ $2 billion of 6 percent bonds due June 2020 climbed 156 basis points to 365 in the same period, Royal Bank of Scotland Group Plc prices show.

The yield premium for Australian financial bonds over the country’s government debt widened to 263 basis points on Nov. 4 from 173 at the end of the second quarter, while the gap for U.S. banks increased to 324 from 203, Bank of America Merrill Lynch indexes show.

If capital market “conditions remain protracted,” Macquarie face challenges maintaining its “traditionally strong capital coverage and moderate risk appetite -- which have always been a strong support for its ratings,” Winsbury said.

Europe Crisis

Concern Europe’s debt crisis would slow global growth was a key reason Australia’s central bank cut borrowing costs last week for the first time in 31 months. The Reserve Bank of Australia on Nov. 4 cut its forecasts for economic growth and inflation for the next two years as financial turmoil abroad makes businesses more reluctant to hire and consumers wary about spending.

The RBA said gross domestic product will grow 4 percent in the 12 months to June 30, 2012, down from its Aug. 5 estimate of 4.5 percent. Underlying inflation is predicted at 2.5 percent from a previous 3 percent, the central bank said.

The Australian dollar has weakened during the European crisis, trading at $1.0364 at 4 p.m. yesterday. The so-called Aussie, the world’s fifth-most traded currency, reached $1.1081 on July 27, the highest level since it was floated in 1983.

The yield on Australia’s benchmark 10-year government bond tumbled 23 basis points, or 0.23 percentage point, last week to 4.31 percent, the largest drop since Aug. 5. The rate on the securities declined three basis points to 4.285 percent, or 223 basis points more than similar-maturity Treasuries.

Share Buyback

Shares of Macquarie have fallen 38 percent this year, outpacing the 10 percent decline for Australia’s benchmark S&P/ASX 200 index.

Macquarie said last month that group capital was A$12.4 billion on Sept. 30, A$3.5 billion above minimum requirements, and announced plans to buy back as much as 10 percent of its shares.

The buyback is equivalent to A$803 million at yesterday’s price, according to Bloomberg data. The last time the bank returned capital to shareholders was via a special dividend in 2005, Chief Financial Officer Greg Ward told reporters last month.

“Their earnings tend to be very highly correlated to what happens with GDP,” said Kapstream’s Mitchell. “These guys are very savvy, they’re aware of that and that’s why they maintain an exceptional liquidity position.”

--With assistance from Sarah McDonald in Sydney. Editors: Malcolm Scott, Garfield Reynolds

To contact the reporter on this story: Jacob Greber in Sydney at

To contact the editor responsible for this story: Chitra Somayaji at

Toyota's Hydrogen Man
blog comments powered by Disqus