actually, the buying could be MQG using some of $13 billion it borrowed with guarantee. See this article from SMH (penultimate para) and also DJ article from USA.
Don't know anything about WOTCA. Do you have a link to the PDS?
Brains behind new Macquarie model
Michael West
March 17, 2009
MACQUARIE GROUP has set up a crack lending unit under investment banking wunderkind Ben Brazil to spend a chunk of the $13 billion raised over the past three months from the sovereign guarantee.
The thirty-something Brazil - who spearheaded Macquarie's unsuccessful takeover bid for the London Stock Exchange in 2005 - has a mandate to lend the funds to corporations around the world at a higher rate than the cost of the government-guaranteed borrowings and "make the spread", or a profit, on the difference in the interest rates.
The young-gun banker, nicknamed "Brains" by Macquarie's chief executive, Nicholas Moore, has a team of around 30, split between Australia, the US and Europe, to look for special lending situations. Sources cited two avenues for lending: one, buying corporate debt at a discount, and two, looking for viable borrowers in the market for new loans.
At the moment, much of the funding is sitting in semi-government bonds earning 3 per cent compared to Macquarie's roughly 7 per cent cost of sovereign borrowing. If the bank were to buy debt at 80c in the dollar - and there was no default - then it would stand to make a grossed up return of 20 per cent over three years lending at 8 per cent.
Since the sovereign guarantee was introduced in December, Australia's banks have raised more than $62 billion - about half of their offshore funding needs for the year. The bulk was raised by the Big Four - Westpac, NAB, ANZ and the Commonwealth - and Macquarie.
The big trading banks fund about a third of their mortgages through overseas borrowings and the rush to use the Government guarantee reflects concerns that foreign markets could freeze during the financial crisis. Unlike the Big Four, Macquarie mostly sold out of, or closed down, its mortgage lending operations last year.
Macquarie's cost of funds under the guarantee has come down markedly since December with its first placement priced at 160 basis points over the swap rate and its most recent at 100 points over swap.
In its recent $3.1 billion issue, Westpac priced $1.59 billion of floating-rate notes at just 60 basis points over the Australian bank bill swap rate, and $1.48 billion of fixed-rate securities to yield 60 basis points over the mid-swap rate. Westpac has priced a $3.7 billion issue at 100 points over swap in December.
The "Macquarie model" has long referred to the group's satellite fund model, from which the flow of fees was furious during the bull market.
In reality, the bank started out in advisory, tax and mergers and acquisitions work - that was once its model - and the essential Macquarie model is anything where it can make money.
Given the present conditions, the best place to make a dollar is probably in distressed debt and credit market opportunities. If the elevation of Ben Brazil is any indication then Macquarie may shortly have a new model.
Mr Brazil is a confidant of James Packer. He left Macquarie to join the Packer hedge fund Ellerston, but has since rejoined the investment bank. He recently bought a property in The Crescent, Vaucluse, for $16.5 million.
DJ DEALWATCH: History Shows Converts A Better Bet For I-Bankers
By Kevin M. Nichols
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--It's going to take a lot more than the recent stock market
bounce to see investment bankers hit the road with secondary stock offerings on behalf of
their clients.
But they could find selling convertible bonds an easier proposition, with a strong
showing in the past for convertible issues when emerging from a bear market and investor
appetite in the right sector not hard to find.
In the last economic downturn, there were 197 such issues totaling $96.2 billion
offered in 2000, 284 issues totaling $154.4bn in 2001, and 201 issues totaling $67.3bn in
2002, according to Capital IQ.
Convertible bonds, which have features of both equity and debt, keep the cost of
capital for the issuer lower than straight debt, especially for high-yield issuers, or
equity.
They are particularly attractive when it's more expensive than usual to raise
straight debt, as is the case now. The handful of debt deals that have been done of late
have all been less risky and short tenured.
Rio Tinto PLC (RTP) recently unveiled a $7.2 billion convertible bond issue, for
existing holder Aluminum Corp. of China, or Chinalco, with a cost of 9% on the Australian
tranche and 9.5% on the U.K. tranche.
In another high-profile transaction, Dow Chemical Co. (DOW) issued $3 billion worth of
convertible preferred shares to Paulson & Co. and the Haas Family Trust to assist it
with its takeover of Rohm & Haas.
Lower Taxes, Investment Banking Fees
Investment bankers charge lower fees for marketing convertibles than for equity issues.
That's because convertibles require less due diligence time before being priced.
Issuing companies typically pay their investment banks around 7% of the total announced
value of the deal for capital raising via initial public offers. Fees on bond deals
including convertibles are typically as low as 4% of proceeds.
Because convertibles are treated as debt until they are converted into equity the
issuer enjoys tax advantages on the coupon paid, which aren't trivial. Rio, for
instance is saving nearly $250 million a year by paying coupon rather than distributing
the same amount as dividend.
Convertibles are smarter from a credit perspective as well. The coupons are usually
lower than interest on fixed debt.
But before convertibles can take off the volatility in markets has to normalize.
Liquidity in such instruments is provided by hedge funds which arbitrage by owning the
convertible and shorting the stock. The option market is also used to craft hedging
strategies. But high volatility leaves an investor constantly working on hedges which
makes owning a convertible expensive.
That partly explains the almost total dry-up in the convertible market in the last
couple of years. In the last 12 months there have been 113 convertible bonds issues,
totaling $38.1 billion.
Natural Fits
Natural resources and basic materials make attractive businesses for issuing
convertible bonds. The billions of infrastructure spending, led by China and the U.S.,
will translate into steady, incremental cash flows. A convertible bond today gives an
investor a call option on those future earnings.
That partly explains why Rio's general investors wanted a piece of its convertible
issue.
After all, the global mining sector is trading at a median 9.53 times forward earnings,
a multiyear low. Global Energy companies are trading at a median 7.26 times.
Convertibles, if rightly researched, can yield good results for investors too. The
Putnam Convertible Income Growth Trust, which invests at least 80% of its assets in
convertible securities, is up 0.17% in the year to date but is up 4.06% in the last three
months. The overall S&P 500 index is down 16.24% and 17.3% over the same respective
periods.
In the capital structure of a company a convertible will be subordinate to debt. But
the income, albeit lower than straight debt, when combined with the prospects of owning
an undervalued stock, ought to whet investor appetite.
Convertibles additionally are preferable to equity deals, which bear the highest risk
and lowest rank on capital, due to the limited impact on dilution of the underlying stock
and the ability of companies to synthetically issue equity at a premium to the current
stock price.
(Kevin M. Nichols is a columnist for Dow Jones Newswires. He has more than seven years
experience as an analyst and trader on Wall Street and was formerly an executive in the
proprietary trading unit at an investment bank. He can be reached at +1 (201) 938-2094 or
by email: [email protected])
MXG
multiplex group
