Funds Fall Amidst Subprime Rout

Macquarie's Fortress Funds Fall Amid Subprime Rout (Update5)
By Stuart Kelly

Aug. 1 (Bloomberg) -- Macquarie Bank Ltd., Australia's largest securities firm, said investors in two of its high-yield funds may lose 25 percent of their money as a rout in the U.S. sub-prime market spreads.

Macquarie Fortress Investments Ltd., with $873 million of funds, was forced to sell assets to avoid breaching its loan agreements, the firm said in a statement. The company's notes slumped while shares in its parent headed for their biggest drop in 5 1/2 years.
``The contagion looks like it's spreading and some of the bigger names are now being dragged in,'' said Shane Oliver, who helps manage the equivalent of $83 billion at AMP Capital Investors in Sydney.

Funds are being caught in a downward spiral because banks are forcing borrowers to sell assets as the value of collateral declines. Bear Stearns Cos. halted redemptions from a third hedge fund yesterday while Sydney-based Absolute Capital Group Ltd. and Basis Capital Fund Management Ltd. are trying to avoid making sales at distressed prices.

``There have been no defaults in the portfolio and no reason to believe that the loans will not continue to pay their interest and repay principal,'' Macquarie Fortress director Peter Lucas said in the statement.

Asia Genesis Management, a hedge fund based in Singapore that manages about $450 million, today said it has increased cash holdings to 95 percent of its assets to avoid losses.

`More Cockroaches'
``There are still some more cockroaches to come out from under the fridge,'' Chris Viol, a credit specialist at Citigroup Inc. in Sydney, said in an interview. ``We are getting a lot of questions about the big picture and the amount of contagion to investment grade credit.''
Bear Stearns's Asset-Backed Securities Fund, with about $900 million invested in asset-backed securities, including mortgage bonds, suspended redemption after investors demanded their money back, spokesman Russell Sherman said.

Lisa Jamieson, a Sydney-based spokeswoman for Macquarie, wasn't immediately available to say whether Fortress will halt redemptions or comment on the bank's investments in credit markets.

Fortress notes, which trade on the Australian Stock Exchange, slumped 23 percent to 58 Australian cents at 3:15 p.m. in Sydney. The company aims to pay investors a 10.1 percent annual yield by investing in loans to companies with good records of repaying debt, according to a prospectus dated Feb. 3, 2006, for a third series of notes.

Leveraged Investments
Fortress uses leverage of 4.5 to 6.5 times and allows individual investors with as little as A$5,140 ($4,350) to spend to buy the notes.
Macquarie Bank's shares headed for their biggest fall since February 2002 with a 10 percent decline to A$74.61. They have slumped 19 percent over the past two weeks, wiping A$4.6 billion from the company's market value amid concern that global takeovers may decline and prices will fall in debt markets. Shares of Goldman Sachs Group Inc. and Bear Stearns dropped 14 percent and 15 percent in July.
The stock of other Australian investment-related companies fell. Babcock & Brown Ltd., the nation's second-biggest investment bank, slid 7.8 percent and Allco Finance Group Ltd., a Sydney-based manager of energy and property assets, fell 6.5 percent.

Christine Bowen, a spokeswoman for Allco, declined to say whether the company had any investments that may be affected by the U.S. credit markets. A spokeswoman for Babcock wasn't immediately available for comment.

Prices Fall
The average price of assets in the Fortress portfolios had fallen by 4 percent as at July 30, Lucas said in the statement. The value of the assets may decline a further 20 percent to 25 percent, he said. The funds had $873 million in assets on May 31.

Lucas said a ``continued deterioration in senior loan prices as we have seen in recent days'' could put Fortress in breach of lending requirements.

Investors in Fortress securities may lose A$300 million, the Australian newspaper reported earlier.

A decision on the payment of interest income for the three months ended Aug. 31 will be made nearer the payment date, and may depend on the level of loan sales, Lucas said.

Credit-default swaps based on $10 million of Macquarie Bank bonds rose $13,000 to $59,000 late yesterday, according to prices from National Australia Bank Ltd. That's up from $22,000 on July 10. Investors use the five-year contracts to speculate on credit quality. The costs, or spreads, increase as the perception of creditworthiness deteriorates.

Credit-default swaps, originally conceived to protect creditors against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to keep to its debt agreements.

``People are nervous because Macquarie looks and smells a lot like the companies that have been affected by this in the U.S.,'' said Hans Kunnen, who helps manage $117 billion at Colonial First State Global Asset Management in Sydney.