Terry McCrann of the Herald Sun referred to Allco Finance Group (ASX:AFG) as “Mini-Mac” the other day. What he meant was that the company has similarities to Macquarie Group (ASX:MQG). If we were Macquarie Group, we’d be downright insulted.
How are the two similar? Well they’re both leveraged with debt. They both did well when leveraged stocks were doing well. Leveraged stocks aren’t doing that well now.
But you know… maybe Terry’s right. If Allco can fumble 92% of its value in a bit under ten months… imagine what Macquarie can do. Imagine, if only for imagination’s sake, what would happen if Macquarie suddenly couldn’t pay off its credit. According to its balance sheet from the last full-year report… creditors have claims on around 95% of the company’s assets. That wouldn’t leave much for the humble, toiling shareholder.
And man… he’s been toiling lately.
It’d take a lightning strike to knock out Macquarie. It’s unlikely. Our point is simply that that are more train-wrecks ready to happen in the financial sector. The tracks are crooked, and remain well-greased with slick, slippery debt. But the passengers in the train sometimes don’t see this. They can’t see much if the driver doesn’t tell them it’s coming.
For example, Allco recently revealed its falling share price had triggered a recourse loan. This means one of Allco’s creditors included a safety clause in its loan. The clause said if Allco’s value fell below AU$2 billion, the creditor could recall its AU$900 million within three months. Never mind AU$2 billion… Allco’s value is getting close to zero. That loan is now forfeit.
Who could’ve known? Not shareholders. They weren’t notified. So now you have to be extra careful about what your companies’ directors aren’t telling you. How ridiculous is that? You couldn’t possibly be careful about something you’re not even aware of. Excessive debt only adds to that uncertainty. We suggest avoiding it.
Markets and Money