A much-deserved kicking for Macquarie
February 2, 2010
Dear Mayne Report subscribers,
please click through and enjoy this special edition examining the $220 million debacle which is Macquarie Fortress. You'll think less of the Millionaire Factory after reading it as they join Allco, MFS, Basis Capital and the like on the credit crisis casualty list.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.
please click through and enjoy this special edition examining the $220 million debacle which is Macquarie Fortress. You'll think less of the Millionaire Factory after reading it as they join Allco, MFS, Basis Capital and the like on the credit crisis casualty list.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.
Special edition: how Macquarie Fortress blew up $220m
Dear Mayne Report subscribers,
Tricom and Allco are stealing the headlines at the moment, but there's another financial engineering house that should be getting an absolute media shellacking.
Macquarie Group bankers are meant to be the smartest guys in the room. Too smart for sub-prime investment, too smart to have short term debt exposures during this credit crisis. No, the marvels of Martin Place never get caught.
So when the Millionaire's Factory produced a listed product called Macquarie Fortress, with a name like that, how could you go wrong? Well, unfortunately, it has gone very wrong as notes that I bought for 69c on August 1 last night closed at 5.8c.
Macquarie Fortress is a highly geared investor in secured US loans. The notes that I own were part of a $141 million ASX-listed raising that was then used to borrow more than $800 million to invest in almost $1 billion of supposedly high quality US corporate loans. It's the same old story as investors were promised returns of 10.25% a year and financial planners were paid up-front and trailing commissions.
The first sign of trouble came on July 31 last year and the timeline is as follows:
July 20: completes $8 million buy back, so this Fortress must have plenty of cash.
July 31: warns of falling market value of loans and possible debt breaches.
August 1: I buy 780 units at 69c and defend them in Crikey as notes plunge 25% in one day.
August 2: Macquarie Bank shares recover but Fortress keeps falling - see Crikey.
August 6: Fortress releases reassuring statement. No worries mate, the owners of the 141 million notes listed on the ASX have sold $US133 million in loans for a loss of $US6 million but there are no margin calls on the remaining $US655 million in senior secured loans.
August 7: another supportive piece in Crikey after price recovers.
August 31: Annual report lodged with ASX but not sent to noteholders. The auditor, Mr Marrett from PwC, the same firm that audits most Macquarie vehicles, signs the accounts saying everything is fine.
September 11: despite earlier scares, Fortress announces 2.74c distribution to be paid on September 28, which will soak up $6.6 million in cash across the 240 million units in the three different vehicles.
December 21: another distribution of 2.84c is paid so $22.15 hits my account and another $6.8 million in cash leaves Fortress. I've now recovered 9% of the original $500 investment in just five months.
January 7-21: attempt to prop up sagging notes by spending $1.37 million in an on-market buyback.
January 30: voluntarily sold $US56 million in loans for a book loss of $US3.8 million after US bond prices weakened.
February 5: further weakness caused sale of additional $US85 million in loans for a book loss of $US8 million – no margin calls but warned future distributions in doubt.
February 7: cops first official margin call but doesn't disclose this until four days later.
February 11: sold $US164 million in loans for a book loss of $US25.5 million. Only $US420 million in loans left, debt $US320 million but the market value of the loans is only $US372 million and the manager warns that credit conditions are so tough, "a meaningful portion of the portfolio would not be able to be sold".
February 14: notes close at just 5.8c - 94.2% below the $1 issue price.
Totalling up the losses
To calculate the overall losses, it should be remembered that their are three different Fortress vehicles as follows:
ASX listed: 141.5 million notes issued at $1 from three separate raisings between May 2005 and April 2006. I'm in this one.
NZ listed: 28.7 million notes issued at $NZ1 in May 2005.
Unlisted: 70 million units issued in June 2004.
So, the marvels from Martin Place have blown 94.2% of the $141 raised from ASX-listed Fortress notes and more than $220 million when you include the unlisted and Kiwi alternatives.
You've got to ask yourself why on earth they continued with distributions and buybacks right through the credit crisis which really took off last August. All those criticisms from James Chanos, Ed Chancellor and Jim Cramer about unsustainable debt-funded distributions appear to be true in this case.
If you've got a 90% geared vehicle which has already been forced to sell assets, then surely it would be prudent to conserve cash and stop debt-funded distributions. Locking in a 40% haircut is far more prudent than suffering the ignominy of actually seeing a listed vehicle go broke. Perhaps the manager was keen to score those 0.9% in annual fees that were contingent on distributions being paid - - see page 18 of the original 2005 disclosure document. Interestingly, that prospectus was full of pictures of chess pieces as if to suggest Macquarie Fortress were the masters. Instead, we've lost every piece except for a couple of miserable pawns.
The percentage losses have been bigger with each forced sale. If outgoing Macquarie CEO Allan Moss was such a brilliant risk manager it is hard to see why the bank allowed such a geared vehicle to be launched in Macquarie's name in the first place. When that first credit scare happened in late July last year, surely it would have been prudent to sell more loans and create a far more comfortable buffer during the relative calm of October and November as equity markets peaked.
The vendor never wins in a fire-sale and that's what we've seen at Macquarie Fortress. It has been the worst perfomed investment in my 630-strong portfolio - and that's saying something.
Macquarie's appalling communications
I usually support Macquarie and was doing precisely that again with Geraldine Doogue on Radio National last Saturday and then an hour later with Helen Dalley on Sky Business News. Indeed, there was also this highly supportive video when Jim Cramer was launching his attacks.
So, have Macquarie been on the phone to apologise about Fortress. Nope, we haven't heard a peep. In this sort of situation, the investors should be receiving regular written updates, yet we didn't even get sent the annual report.
Today I did receive a glossy flyer from Macquarie's real estate division inviting me to a briefing that would make me "a better informed investor". They clearly want engagement because the marketing pitch was to win a $500 GPS system (from the lemon Lime taxi business perhaps?) by submitting a written question.
As far as Fortress is concerned, I remain completely uninformed. Why couldn't the bank use its vast networks and power to prevent this enormous destruction of wealth? Which banks were forcing all these fire sales? Where is the mop-up bid for Fortress to at least preserve a modicum of value? Why didn't the bank or some of its executives step in and buy some of the loans, if they were really so good and unlikely to default?
Talk to me. Send an email, give us a call. Explain yourselves. You don't smoke 90% in six months and sit mute. This hard-hitting story in Crikey two days didn't elicit a reaction so we'll keep trying. We'll let you know how long it takes them to get off their backsides and engage. There will be video expressing similar sentiments on the site by 1pm so check out the site this afternoon.
The harsh reality of this situation is that Macquarie Fortress has joined Centro, Basis Capital, MFS, Absolute Capital, Allco and RAMS as prominent victims of the global credit crunch. To be associated with that motley crew is the greatest embarrassment in Macquarie's proud history.
Finally, it would be good to know if any Macquarie executives are sharing the pain. New CEO Nicholas Moore lodged his enormous initial director's statement of interest this week. He's got exposure to even more Macquarie vehicles than me, but sadly, Macquarie Fortress isn't one of them.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.
Tricom and Allco are stealing the headlines at the moment, but there's another financial engineering house that should be getting an absolute media shellacking.
Macquarie Group bankers are meant to be the smartest guys in the room. Too smart for sub-prime investment, too smart to have short term debt exposures during this credit crisis. No, the marvels of Martin Place never get caught.
So when the Millionaire's Factory produced a listed product called Macquarie Fortress, with a name like that, how could you go wrong? Well, unfortunately, it has gone very wrong as notes that I bought for 69c on August 1 last night closed at 5.8c.
Macquarie Fortress is a highly geared investor in secured US loans. The notes that I own were part of a $141 million ASX-listed raising that was then used to borrow more than $800 million to invest in almost $1 billion of supposedly high quality US corporate loans. It's the same old story as investors were promised returns of 10.25% a year and financial planners were paid up-front and trailing commissions.
The first sign of trouble came on July 31 last year and the timeline is as follows:
July 20: completes $8 million buy back, so this Fortress must have plenty of cash.
July 31: warns of falling market value of loans and possible debt breaches.
August 1: I buy 780 units at 69c and defend them in Crikey as notes plunge 25% in one day.
August 2: Macquarie Bank shares recover but Fortress keeps falling - see Crikey.
August 6: Fortress releases reassuring statement. No worries mate, the owners of the 141 million notes listed on the ASX have sold $US133 million in loans for a loss of $US6 million but there are no margin calls on the remaining $US655 million in senior secured loans.
August 7: another supportive piece in Crikey after price recovers.
August 31: Annual report lodged with ASX but not sent to noteholders. The auditor, Mr Marrett from PwC, the same firm that audits most Macquarie vehicles, signs the accounts saying everything is fine.
September 11: despite earlier scares, Fortress announces 2.74c distribution to be paid on September 28, which will soak up $6.6 million in cash across the 240 million units in the three different vehicles.
December 21: another distribution of 2.84c is paid so $22.15 hits my account and another $6.8 million in cash leaves Fortress. I've now recovered 9% of the original $500 investment in just five months.
January 7-21: attempt to prop up sagging notes by spending $1.37 million in an on-market buyback.
January 30: voluntarily sold $US56 million in loans for a book loss of $US3.8 million after US bond prices weakened.
February 5: further weakness caused sale of additional $US85 million in loans for a book loss of $US8 million – no margin calls but warned future distributions in doubt.
February 7: cops first official margin call but doesn't disclose this until four days later.
February 11: sold $US164 million in loans for a book loss of $US25.5 million. Only $US420 million in loans left, debt $US320 million but the market value of the loans is only $US372 million and the manager warns that credit conditions are so tough, "a meaningful portion of the portfolio would not be able to be sold".
February 14: notes close at just 5.8c - 94.2% below the $1 issue price.
Totalling up the losses
To calculate the overall losses, it should be remembered that their are three different Fortress vehicles as follows:
ASX listed: 141.5 million notes issued at $1 from three separate raisings between May 2005 and April 2006. I'm in this one.
NZ listed: 28.7 million notes issued at $NZ1 in May 2005.
Unlisted: 70 million units issued in June 2004.
So, the marvels from Martin Place have blown 94.2% of the $141 raised from ASX-listed Fortress notes and more than $220 million when you include the unlisted and Kiwi alternatives.
You've got to ask yourself why on earth they continued with distributions and buybacks right through the credit crisis which really took off last August. All those criticisms from James Chanos, Ed Chancellor and Jim Cramer about unsustainable debt-funded distributions appear to be true in this case.
If you've got a 90% geared vehicle which has already been forced to sell assets, then surely it would be prudent to conserve cash and stop debt-funded distributions. Locking in a 40% haircut is far more prudent than suffering the ignominy of actually seeing a listed vehicle go broke. Perhaps the manager was keen to score those 0.9% in annual fees that were contingent on distributions being paid - - see page 18 of the original 2005 disclosure document. Interestingly, that prospectus was full of pictures of chess pieces as if to suggest Macquarie Fortress were the masters. Instead, we've lost every piece except for a couple of miserable pawns.
The percentage losses have been bigger with each forced sale. If outgoing Macquarie CEO Allan Moss was such a brilliant risk manager it is hard to see why the bank allowed such a geared vehicle to be launched in Macquarie's name in the first place. When that first credit scare happened in late July last year, surely it would have been prudent to sell more loans and create a far more comfortable buffer during the relative calm of October and November as equity markets peaked.
The vendor never wins in a fire-sale and that's what we've seen at Macquarie Fortress. It has been the worst perfomed investment in my 630-strong portfolio - and that's saying something.
Macquarie's appalling communications
I usually support Macquarie and was doing precisely that again with Geraldine Doogue on Radio National last Saturday and then an hour later with Helen Dalley on Sky Business News. Indeed, there was also this highly supportive video when Jim Cramer was launching his attacks.
So, have Macquarie been on the phone to apologise about Fortress. Nope, we haven't heard a peep. In this sort of situation, the investors should be receiving regular written updates, yet we didn't even get sent the annual report.
Today I did receive a glossy flyer from Macquarie's real estate division inviting me to a briefing that would make me "a better informed investor". They clearly want engagement because the marketing pitch was to win a $500 GPS system (from the lemon Lime taxi business perhaps?) by submitting a written question.
As far as Fortress is concerned, I remain completely uninformed. Why couldn't the bank use its vast networks and power to prevent this enormous destruction of wealth? Which banks were forcing all these fire sales? Where is the mop-up bid for Fortress to at least preserve a modicum of value? Why didn't the bank or some of its executives step in and buy some of the loans, if they were really so good and unlikely to default?
Talk to me. Send an email, give us a call. Explain yourselves. You don't smoke 90% in six months and sit mute. This hard-hitting story in Crikey two days didn't elicit a reaction so we'll keep trying. We'll let you know how long it takes them to get off their backsides and engage. There will be video expressing similar sentiments on the site by 1pm so check out the site this afternoon.
The harsh reality of this situation is that Macquarie Fortress has joined Centro, Basis Capital, MFS, Absolute Capital, Allco and RAMS as prominent victims of the global credit crunch. To be associated with that motley crew is the greatest embarrassment in Macquarie's proud history.
Finally, it would be good to know if any Macquarie executives are sharing the pain. New CEO Nicholas Moore lodged his enormous initial director's statement of interest this week. He's got exposure to even more Macquarie vehicles than me, but sadly, Macquarie Fortress isn't one of them.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.