Macquarie Pares Crisis Caution in Shorter Debt: Australia Credit

Macquarie Group Ltd., Australia’s biggest investment bank, has boosted its funding with short-term notes to the highest share since the crisis of 2008, increasing its exposure to any disruptions in money-markets.

The proportion that comes from wholesale paper with a tenor of 12 months or less almost doubled to 11 percent at the end of 2013 from 6 percent a year earlier, according to regulatory filings. That compares with as low as 3 percent in September 2010 when Macquarie cut reliance on such sources after global credit markets dried up in the wake of Lehman Brothers Holdings Inc.’s collapse, from about 27 percent in March 2008.

Stabilized global markets and a drop in borrowing costs have since prompted Macquarie to increase the proportion of cheaper, shorter-dated paper from the wholesale market. The average spread over Treasuries on its U.S. bonds has fallen 92 basis points since the end of 2012, while an index of similarly-rated financial companies has declined 49 basis points, according to Bank of America Merrill Lynch data.

“Their confidence in markets is increasing,” Brett Le Mesurier, a Sydney-based banking analyst at BBY Ltd., said by phone. “It is ideal to keep the short-term paper proportion low. While markets are unlikely to shut down now, it increases their exposure to market disruptions.”

The buffer between cash and liquid assets against short-term paper is at the narrowest since September 2008, according to filings by Macquarie.

Opportunity Spotting

The bank also outlines other debt maturing within the next 12 months, including structured notes and other bank loans, which fell to 9 percent of funding on Dec. 31 from 11 percent on March 31, according to a presentation on its website. The share of wholesale deposits shrank to 4 percent from 6 percent.

The category as a whole increased to 24 percent of funding at the end of last year from 23 percent in March. Australia’s three largest banks by market capitalization, Commonwealth Bank of Australia, Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd., draw 16 percent of their funding from short-term wholesale markets on average, regulatory filings show.

“We are not reliant on short-term funding for any of our businesses,” Macquarie chief financial officer Patrick Upfold said in a conference call Feb. 11. “It is really just seeing opportunities in the market and taking advantage of those opportunities. Overall where it is at the moment, it is probably right.”

Risk Management

The weighted average maturity of the bank’s term funding has been extended to 4.6 years as of Sept. 30 compared with 3.8 years as of March 2012, filings show.

Macquarie’s liquidity risk management framework shows that the group is able to meet all liquidity obligations in a range of market conditions, according to its 2013 annual report. This includes periods of stress defined as 12 months with no access to funding markets and only a limited impact on its business.

“The liquidity still looks fine, capital is OK, so we’re not too concerned with that at this point,” said Brendon Cooper, director of credit strategy at Westpac. “One number’s not going to concern us all that much. If we see a steady progression then that would obviously concern us more.”

A revival in investor appetite has boosted Macquarie’s market-facing businesses such as capital underwriting, cash and fixed-income trading, the bank said Feb. 11.

IPO Surge

Stock offerings are gaining momentum in Australia, Macquarie’s largest market. A total of A$9.8 billion ($8.8 billion) in equity was raised in the three months to Dec. 31, the most since the third quarter of 2009, according to data compiled by Bloomberg. Macquarie, which was the second-largest underwriter in the country in 2013 behind UBS AG, is seeing the biggest buildup in initial public offerings in six years, Hugh Falcon, its co-head of equity capital markets, said Jan. 20.

The Australian dollar bought 90.32 U.S. cents as of 12:46 p.m. in Sydney and has gained 1.3 percent this year.

The average yield premium over Treasuries for Macquarie bonds was 97 basis points yesterday, down from 189 at the end of 2012, according to a Bank of America gauge of single A-rated financial bonds in the U.S. market. By comparison the spread for the index, which includes banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., has fallen to 94 from 143 over the same period.

While Macquarie hasn’t sold unsecuritized notes publicly in its home market since 2012, it is the sixth-largest Australian-based issuer of bonds overseas, according to data compiled by Bloomberg. Only the country’s four major banks and BHP Billiton Ltd., the world’s biggest miner, have raised more money in offshore bond markets over the past decade.

Still Conservative

Macquarie sold 250 million pounds ($416 million) of December 2020 notes this month at 145 basis points more than gilts, and raised $500 million in January selling floating-rate notes at 100 basis points over the London interbank offered rate. The bank also priced A$1.4 billion of mortgage bonds this month, its largest issue since 2006.

The group’s return on equity was 8.7 percent in the six months ended Sept. 30 compared with 29.8 percent in the year to March 2005, filings show. The measure had fallen as low as 6.8 percent in 2012, as Macquarie boosted capital and liquid assets amid slowing market activity.

“Macquarie has eased back a notch in the most recent quarter,” Brian Johnson, a Sydney-based analyst at CLSA Ltd., said by phone. “Having said that, their balance sheet setting is still conservative and this carries an impost. They are willing to loosen it a little bit to lift returns.”

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