Sydney, 20 March 2016
AFR Weekend, published 19-20 March, claims Macquarie to be “one of the world’s biggest junk bond investors”. This is untrue.
This claim is based on the premise that debt held in Macquarie’s Corporate and Asset Finance (CAF) lending book is predominantly junk bonds. This is also untrue.
The US non investment grade bond market (junk) is approximately $US1.2 trillion. The bonds issued are generally unsecured or have second ranking security and few covenants. The investors are institutions, mutual funds and ETFs (for example, Barclay’s High Yield Bond fund - ticker “JNK”).
CAF lending has been running successfully as a standalone business unit for seven years and is well known to the market. Its lending book is predominantly a diversified portfolio of senior secured loans that have numerous covenants and are secured against high quality assets. As disclosed, 90% of these loans are to non investment grade borrowers providing the grounds for the AFR to claim they are "junk". Such a classification is misleading as most bank lending, which includes residential mortgages, SME businesses lending, commercial property loans and most corporate loans is to sub investment grade borrowers. The security and covenants provided by the borrower on these types of loans determine whether the loan is prudent.
The CAF lending book is approximately $10 billion (at December 2015), representing less than 5% of Macquarie’s total assets. It largely comprises loans that have either been originated or purchased at a discount, are intended to be held to maturity, and are accounted for on this basis. As detailed in the presentation on CAF which Macquarie made to the market on 4 February 2016, the business has performed well with very few credit losses and good returns on shareholder equity. More than two thirds of the loans made by CAF lending since 2009 have been successfully lent and repaid.
Almost all loans recorded in this portfolio’s regulatory filings as “non performing” were purchased at an appropriate discount which reflected their profile.
The AFR’s excitable front-page is at odds with the corresponding column’s description of the business: “CAF's impairments record suggests risk management has been excellent to date: annual losses have been just 0.2 per cent of its high yield portfolio since 2009.”
The AFR has also recycled the claim that Macquarie built this business based on the government guarantee introduced in 2008 in response to the global financial crisis. This is false. In Australia more than 200 financial institutions were covered by the government guarantee. Contrary to the claims in the article, the Macquarie balance sheet and overall loan book did not increase over the relevant period. The growth in the CAF’s lending book at the time was due to dislocation in global lending markets rather than the government guarantee.
Macquarie notes that notwithstanding the commentary attributed to UBS in the articles, its 25 February 2016 broker report contains a “buy” recommendation for Macquarie.
The response provided to the AFR prior to publication was:
“The main driver of Macquarie’s past 90-day loans reported in the December 2015 Pillar 3 Report is the acquisition of defaulted debt at a discount. The Group’s Operational Briefing presentation on 4 February 2016 detailed the CAF lending portfolio and provides details of its composition since inception. At 30 September 2015, CAF’s lending portfolio was $11 billion which represented five per cent of Macquarie's total assets and less than 10 per cent of Macquarie's total loans, trading assets and equity investments. Further, in relation to CAF’s lending portfolio:
The senior debt includes both investment grade and non-investment grade. Most of the secured borrowers are non-investment grade and most of the unsecured borrowers are investment grade.”
Macquarie directed the AFR to the comprehensive 4 February 2016 presentation on its Corporate and Asset Finance lending business which can be viewed here.