Macquarie Bank Considering Closing Macquarie Fortress Investments

One of Macquarie Bank’s (ASX: MQG) enterprises, Macquarie Fortress Investments, is on the verge of winding up its investment funds according to an article in today’s Australian. “Macquarie Fortress Investments is considering admitting defeat and winding up its investment funds after yesterday revealing that the value of its listed fund had plunged another 27 per cent in just three days. The Macquarie Bank-owned entity said that closing the funds, selling the assets and returning residual cash to investors was one of the options on the table after it was hit with its first margin call.”

There is a lot of liquidation going on in the financial world right now, as we mentioned yesterday. Creditors are forcing asset sales, and the sales are coming in at well below the values banks and financial institutions have carried them at.

Macquarie raised capital for the Fortress Notes project to invest in U.S. dollar-denominated corporate loans. Then the credit crunch hit. Now, forced to take losses, the assets left in the fund are barely larger than the debts. “The remaining portfolio comprises senior notes with a face value of US$420m and net debt outstanding of US$320m. The current market value of the portfolio is US$372m, though Macquarie said it may not be able to sell the holdings for that much.”

This is just one Macquarie fund, mind you. But we thought we’d take a look at the stock to see what the market thinks about Macquarie Bank, especially now that millionaire maker Alan Moss is leaving the outfit. Take a look.

Gee. Notice how the stock takes early in the second quarter 2005? This roughly coincides with the boom in U.S. subprime lending, fuelled by securitization, where mortgage lenders passed the dodgy loans on, via Wall Street banks, to unwitting or unconscious investors.

We’re not saying that Mac Bank boomed on the back of the subprime explosion. We are saying, however, the stock boomed at precisely the time the bull market in credit went supernova. Now it’s a bear market in credit. Where does that leave Macquarie Bank stock?

Well, it all comes down to earnings does it? Will the bank be able to generate investment banking profits? Will it generate fee income? Will it be able to trade profitable in an environment of rising rates and higher wholesale borrowing costs?

Don’t count on it.

We neglected to mention the other iron ore juniors in the Pilbara and the Mid-West that could be producers by the end of this year. In terms of volume, none of them compete with BHP Billiton (ASX: BHP) or Rio Tinto (ASX: RIO). But some of them already have agreements locked up with Chinese, Japanese, and Korean steel producers.

Not all of them are chasing the high-grade hematite ore in the Pilbara. Magnetite is a lower ore grade and has to be processed before it can be shipped. But rising prices for ore itself compensate for the higher production cost, making magnetite projects economics.

In any event, here are the likely producers in the next few years. Look for more details in the March issue of Diggers and Drillers:

  1. Fortescue Metals, estimated output of 45 million tonnes (mt) staring in May 2008
  2. Atlas Iron, estimated output of 4mt in October 2008
  3. Citic Pacific, estimated output of 27mt in early 2009
  4. Australasian Resources, estimated output of 12mt in 2010
  5. Aurox Resources, estimated output of 6mt in 2010
  6. Hancock Prospecting, TBA

By the way, yesterday was Thomas Edison’s birthday. We missed it! Happy Birthday Mr. Edison!

We’ve been reading up on Edison during our research on light emitting diodes. Edison received a patent for his “long-lasting incandescent lamp in 1878” and since then not much has changed in the world of white light. But Shuji Nakamura may have something to say about that. More on him tomorrow.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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