Australia’s home-grown investment bank has total assets of A$32.5 billion (as at 30 September 2002) and last year recorded a pre-tax profit of A$355 million. It employs 4,800 people in more than 20 countries and operates under six broad groups: investment banking, equity markets, treasury and commodities, banking and property, funds management and financial services.
A prolific debt issuer, the bank has $4.5 billion worth of offshore paper currently outstanding. FinanceAsia interviewed the man in charge of funding the bank’s activities, executive director Craig Shapiro, and ask him about his borrowing strategy.
What are your borrowing plans for the rest of 2003?
We are an asset driven bank so raising funds is important but because we aren’t a retail bank we don’t have pools of deposits floating around. We tend to source an asset and then decide how we are going to fund it. This characteristic makes it hard for us to predict what our funding requirements are going to be over a period of time. There are about A$1 billion of offshore medium term notes expiring this year but we are not sure yet whether we will refinance these.
So you may retire these programmes?
Probably not. Historically we have refinanced our maturing debt, but what I am trying to say is that we don’t set clear funding targets at the beginning of each year like other financial institutions. We fund on an “as and when” basis.
You also securitize a lot of your assets, how does this impact your fund raisings?
Our securitization vehicle called PUMA acts as a mortgage warehouse on the balance sheet. And because we a relatively small bank the relative impact of any deal that PUMA issues is a lot greater for us than it would be for a major commercial bank. As a funding tool it is very effective and the activities of this vehicle can change the direction of our funding strategy based on the success of its issuance.
Macquarie also acquires companies, how do you fund these acquisitions?
Our acquisition strategy is a bit like our asset strategy, it is ad hoc and we don’t tend to hold the assets on the balance sheet for long. We usually offload them into a special investment vehicle within a short period of time, so any funding requirements tend to be short term. Last year we bought the broadcast business of NTL and warehoused that asset on the balance sheet before channelling it into a communications fund. But it was only on the balance sheet for six months.
So how do you prepare for these situations?
You can only prepare up to a certain point. The key is to stay in constant communication with the different divisions of the bank so that we know what their funding needs might be based on deals that are in the pipeline.
How does the liability side of your balance sheet read at the moment?
We have core assets and trading assets; the first sub-set are longer-term commitments and the second set are those that can be liquidated quickly. Our liabilities match these two types of assets. At the moment the offshore/onshore liability mix for our core assets is 60/40, so a lot of our money comes from overseas. Our balance sheet has grown so much since our acquisition of BT three years ago that we now need to look offshore for funding.
Does that suggest there is not enough capacity in the Australia market?
Yes. Most of Australia’s big banks are getting their funding offshore now.
What about the currency mix of your liabilities?
We issue some Aussie dollars overseas but most of our offshore activity is in foreign currencies. The breakdown at the moment is 30% in US dollars, 30% in euro, 30% in sterling and the rest is a mixture of yen and Hong Kong dollars. Again we don’t have specific currency targets. We like to have a good mix of currencies and investor bases, but price is important and sometimes when the pricing is good in a particular currency, the balance is tipped. If we start to see that we are a bit overweight in one particular segment or currency we try to balance it up a bit.
Do you swap your raisings back into Aussie dollars?
Most of our assets are in Australian dollars or US dollars so we swap a lot of it back and the rest is hedged; we don’t have any open currency positions. This practice tends to dictate the pricing we get on our funding – it is swap driven. Investors usually look at our US dollar levels or our Australian dollar levels to determine what they will pay for our sterling issuance. Sometimes the swap can be working in our favour, and sometimes not.
What sort of instruments do you issue?
We issue euro commercial paper, medium term notes and domestic bonds. Offshore this is all handled through our Debt Issuance Programme and we have one set of documents for all deals. It gives us a great amount of flexibility to issue when we want to and we can respond quickly to most market opportunities. Though it doesn’t let us issue into the US because of the stringent regulations. We could probably get the necessary authority but it is an expensive way to go. If we want to issue into the US we usually go the private placement route.
And what is your maturity profile?
Our distribution profile is similar to other banks. A lot of one-year borrowings, a few in the three-year category and then it tapers off. Five years is the longest we have issued.
What is the cap on your Debt Issuance Programme?
We have just had board approval to take this from a limit of $5 billion to $10 billion so that we can fund more growth in the balance sheet.
What has been your most recent deal?
In January we issued a 20 billion yen floating rate note in Europe to primarily European fund managers. Then we did a local subordinated debt deal in February. It was a A$225 million mix of fixed and floating with a 10-year maturity and a five-year call. There was some offshore interest in this as well.
So you also get some offshore investors participating in onshore deals?
We do and this is despite some old withholding tax rules which made it difficult for foreign investor to buy locally issued paper. Up until recently domestic issuers couldn’t tap the offshore market with their local deals because of an associates test on withholding tax. Oddly enough this was never a problem for us because we only have one associate fund manager and this fund manager is not a custodian of third party assets, so it was easy for us to instruct them not to buy our paper. Last year we did two senior bond issues locally and about a third of each of these was placed in Asia. But in general there has been confusion over the rules surrounding foreign investment in local deals. The fact that the rules have now been changed should free up the market a bit.
Where are your spreads at the moment?
They are doing fine compared to our peers. Though there is no denying that the end of last year was very tough. We were lucky because we didn’t have to issue in this period. This year the markets have started off well and there is strong bid pricing on the table. The recent yen FRN was priced at Libor plus 25 basis points and was a competitive deal.
Who do you use as a pricing benchmark?
Other single-A rated banks. Locally there is St George and SunCorp Metway which is a rung below. I must admit it is hard to compare ourselves to other bank issuers in Australia because we are very different. St George is predominantly a retail bank and we have such a diverse range of businesses. The diversity of our income has been one of our strengths and we spend a lot of time explaining our business to the ratings agencies so that they understand the dynamics of Macquarie.
How secure is your single-A rating?
Our rating was reaffirmed last year while there were a lot of other investment banks being downgraded. So for a while there we were achieving better pricing than our peers. This has come in now.
Do manage your own deals or do you hire underwriters?
Locally we handle our own deals because we have the distribution network. In Europe we use underwriters to help us out. We have a dealer panel that we deal with regularly. Though the success of our offshore borrowing strategy is probably owed to our 24-hour funding desk operating here in Sydney. We have people rotating days and nights so that if a funding opportunity comes up in London or the US they can respond to it quickly. This is why we have been able to tap a diverse number of funding sources from overseas markets.