Macquarie caught in Babcock fall-out

August 28, 2008

Danny John and Jacob Saulwick - The Sydney Morning Herald

THE financial giant Macquarie Group suffered a huge market sell-off yesterday as fallout from the collapse of investor confidence in Babcock & Brown drove its share price down to levels not seen since late 2004.

Macquarie's day mirrored other downfalls this year, its shares plummeting nearly 10 per cent - or $4.44 - to $41.61, prompting a "please explain" from the Australian Securities Exchange.

The ASX query raised concerns about a sustained decline in Macquarie's share price. Over the past two weeks it has fallen 24 per cent, from $54.10 on August 13. That is part of an even bigger erosion in the group's value, which hit almost $100 a share in May last year.

Macquarie was then worth $27.6 billion. Yesterday its market capitalisation was $11.6 billion after a day of sustained selling thought to have involved hedge funds and institutional investors concerned about its debt-driven business model.

Last week's fall from grace of Babcock & Brown, whose debt troubles prompted the dumping of its financing structure and the departure of its chief executive, Phil Green, has focused renewed attention on Macquarie, the first and most successful asset and fund management operator.

Despite its stronger financial base and a much-wider range of businesses, Macquarie was caught in the crossfire of US investment banks crippled by the credit crisis and its shares were sold off. Yesterday's fall was more sharply focused on Macquarie itself, and wiped away the final gains from the bull market.

One of the triggers was a broker's report from the investment bank UBS, which cut its "buy" recommendation on the stock to "hold" and reduced its target price from $60 to $48 on concerns about the company's ability to withstand another year of the credit crunch.

UBS also questioned the strength of the balance sheet. Macquarie claims to have excess capital of $3 billion but the broker estimates the real buffer could be $150 million to $500 million.

Macquarie refused to comment about the fall in its share price, but told the ASX in a formal response it could offer no explanation for what had happened over the past fortnight.

In a statement to the Herald, Macquarie reiterated recent market announcements of its solid earnings results, the diversity of its wide operations and that its specialised funds management operations make up only 20 per cent of its income.

Market traders indicated that Macquarie had been relatively insulated from the turmoil surrounding more debt-laden investment funds because of the focus on B&B.

"There has been a lot of questions, especially from the US, as to why Macquarie had been holding up recently after what has happened to Babcock & Brown [and] that sooner or later the negative sentiment was going to flow through to them," Goldman Sachs JBWere said last night. But concerns about Macquarie's funding problems had been "well and truly overplayed", it said, and it was in the enviable position of not having to raise extra finance.

"Quite a bit of it is people catching up with what has gone on at Babcock," the managing director at Cannae Capital Partners, Hugh Giddy, said.

The areas where Macquarie derived most of its revenue had begun to slow significantly, prompting questions about where the group could generate value, he said.

"The markets they operate in have really slowed up. The only thing that is really open for business at the moment is rights issues and placements, with companies needing to acquire capital."