Australia's biggest investment bank, Macquarie, has become the latest local fund manager to confirm its potential exposure to the US subprime mortgage market. Two of its funds face losses of up to 25 per cent, or as much as $300 million.
Macquarie has made its name around the world for delivering big returns for investors.
That global reputation is a key selling point in Macquarie Fortress Investments (MFI), a retail arm managing high returns for small investors prepared to take a risk.
Some of that risk has been in the US mortgage market and last night, Macquarie told investors that two high-yield funds might be hurt by the widening crisis in subprime mortgage defaults.
In a statement to the Australian Stock Exchange last night, MFI director Peter Lucas said imbalances caused by a spillover from subprime defaults could mean losses of up to 25 per cent.
"While Fortress notes have no direct exposure to US subprime mortgages, the portfolio continues to be adversely impacted by price volatility in the US credit markets," a statement said.
Mr Lucas said while there was no reason to believe Macquarie would not be able to meet interest and principal payments, he was working to avoid a margin call when worried lenders call in their loans.
"As the market value of the portfolio has decreased further, it has become necessary for the investment manager to sell selected loans and apply the proceeds to reduce the leverage facility so that the loan-to-value ratio meets the applicable borrowing covenants," the statement said.
Macquarie's Fortress Investments joins two other Australian funds exposed to the US subprime crisis, Basis Capital and Absolute Capital, which have flagged potential losses over the past fortnight.
Wall Street losses
There was also more bad news at the subprime epicentre this morning.
The Dow Jones Industrial Average plunged more than 1 per cent in late trade after two home loan insurers said their billion-dollar stake in a subprime mortgage company might be worthless.
The late news caused a sell off in the banking sector, erasing earlier gains on Wall Street.
Still, market watchers like UBS senior economist Paul Donovan are continuing to focus on the fundamentals, such as a strong underlying US economy.
"It's essentially an issue of confidence - are investors willing to take risks or not?" he said.
But Mr Donovan says widening subprime mortgage defaults first need to be contained.
"If that spreads and we see lenders refusing credit elsewhere, it becomes more significant," he said.
Today's good news in the US was consumer confidence for June, which hit its highest level in almost six years.
But the next reading will be critical, and any sign that Americans are dramatically trimming household budgets on mortgage concerns could put a shadow across assurances that the world's biggest economy is in the best of health.
Showing posts with label US mortgage market. Show all posts
Showing posts with label US mortgage market. Show all posts
Saturday, August 04, 2007
Thursday, July 26, 2007
US subprime mortgage crisis spills over into 2nd Australian hedge fund
As defaults in risky US subprime mortgages grow the fallout is damaging the US mortgage market as a whole, and now its affecting Australian Investment funds.
A second Australian hedge fund has been hit by the escalating subprime mortgage crisis gripping the United States.
The boutique company Absolute Capital has suspended two funds worth around $200 million that are exposed to defaults in the risky mortgages, and admits it is worried about the state of the debt market in the US.
Absolute's suspension comes a week after another fund, Basis Capital, told investors their investments were in jeopardy.
The local developments comes amid renewed fears that the US mortgage crisis will spill over into other parts of the world's biggest economy.
Absolute Capital describes itself as a specialised structured credit fund manager, playing the usual tactical game of balancing high risk with high return.
It has two funds worth around $200 million that are exposed to the crumbling subprime mortgage market in the United States.
In a letter to investors last night, Absolute said its portfolio was diversified and it had not engaged in risky end of the market.
Managing director Deon Joubert said although the subprime exposure was less than 5 per cent, the funds had to be closed to protect investors.
"Absolute Capital believes a temporary closure of the funds is the best defensive measure to protect the longer-term interests of our investors and to ensure equity amongst all investors as we manage any withdrawal requests, given the current illiquid nature of the funds' investments," he said in a letter.
But Mr Joubert warns Absolute investors that any rush to withdraw their money could be even more problematic, given the number of bigger players already unwinding their positions.
"Given the reduced market liquidity Absolute Capital believes the funds are not placed to adequately satisfy or price withdrawal requests," the letter said.
Absolute says the funds' performance is down 4 to 6 per cent for July, and the processing of withdrawal requests could be delayed until late October.
Despite the subprime exposure, Mr Joubert remains optimistic.
"We are expecting that markets will settle over the next few months, in which case investors in the funds may be able to benefit from these opportunities and improved market conditions," he said in the letter.
The suspension of Absolute follows a similar but higher-stakes story for Basis Capital, which has two funds worth more than $1 billion that are exposed.
Basis has hired the private equity group Blackstone to help defend a fire sale, and the global rating group Standard & Poors has been criticised for failing to detect the fund's fragility.
Distress in US
Meanwhile, Wall Street bounced back this morning after yesterday's heavy losses were fuelled by concerns that subprime defaults were spreading to more traditional mortgages.
But the signs of distress remain, with sales of existing homes falling for the fourth straight month, taking the US housing slump to its lowest level since 2002.
Real estate analyst Mike Larson agrees with yesterday's prediction from the major US mortgage lender Countrywide that subprime uncertainty means a recovery might not be seen until 2009.
"We've seen a real deterioration in the mortgage finance industry," he said.
"A lot more loans are going sour and a lot more lenders are cutting back on the types of loans they'll make.
"We'll probably see a continued weak market for the rest of this year and into next year with relatively weak sales and stagnant to falling home prices."
The mortgage instability in the US is being compounded in Australia by another collapse in the risky property sector.
South Australian private mortgage firm John West and Associates has been placed in voluntary administration with debts of almost $10 million.
Source: ABC
A second Australian hedge fund has been hit by the escalating subprime mortgage crisis gripping the United States.
The boutique company Absolute Capital has suspended two funds worth around $200 million that are exposed to defaults in the risky mortgages, and admits it is worried about the state of the debt market in the US.
Absolute's suspension comes a week after another fund, Basis Capital, told investors their investments were in jeopardy.
The local developments comes amid renewed fears that the US mortgage crisis will spill over into other parts of the world's biggest economy.
Absolute Capital describes itself as a specialised structured credit fund manager, playing the usual tactical game of balancing high risk with high return.
It has two funds worth around $200 million that are exposed to the crumbling subprime mortgage market in the United States.
In a letter to investors last night, Absolute said its portfolio was diversified and it had not engaged in risky end of the market.
Managing director Deon Joubert said although the subprime exposure was less than 5 per cent, the funds had to be closed to protect investors.
"Absolute Capital believes a temporary closure of the funds is the best defensive measure to protect the longer-term interests of our investors and to ensure equity amongst all investors as we manage any withdrawal requests, given the current illiquid nature of the funds' investments," he said in a letter.
But Mr Joubert warns Absolute investors that any rush to withdraw their money could be even more problematic, given the number of bigger players already unwinding their positions.
"Given the reduced market liquidity Absolute Capital believes the funds are not placed to adequately satisfy or price withdrawal requests," the letter said.
Absolute says the funds' performance is down 4 to 6 per cent for July, and the processing of withdrawal requests could be delayed until late October.
Despite the subprime exposure, Mr Joubert remains optimistic.
"We are expecting that markets will settle over the next few months, in which case investors in the funds may be able to benefit from these opportunities and improved market conditions," he said in the letter.
The suspension of Absolute follows a similar but higher-stakes story for Basis Capital, which has two funds worth more than $1 billion that are exposed.
Basis has hired the private equity group Blackstone to help defend a fire sale, and the global rating group Standard & Poors has been criticised for failing to detect the fund's fragility.
Distress in US
Meanwhile, Wall Street bounced back this morning after yesterday's heavy losses were fuelled by concerns that subprime defaults were spreading to more traditional mortgages.
But the signs of distress remain, with sales of existing homes falling for the fourth straight month, taking the US housing slump to its lowest level since 2002.
Real estate analyst Mike Larson agrees with yesterday's prediction from the major US mortgage lender Countrywide that subprime uncertainty means a recovery might not be seen until 2009.
"We've seen a real deterioration in the mortgage finance industry," he said.
"A lot more loans are going sour and a lot more lenders are cutting back on the types of loans they'll make.
"We'll probably see a continued weak market for the rest of this year and into next year with relatively weak sales and stagnant to falling home prices."
The mortgage instability in the US is being compounded in Australia by another collapse in the risky property sector.
South Australian private mortgage firm John West and Associates has been placed in voluntary administration with debts of almost $10 million.
Source: ABC
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