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Rating Action:

Moody's affirms Macquarie Group's ratings with stable outlook, continues to monitor

18 Sep 2008
Moody's affirms Macquarie Group's ratings with stable outlook, continues to monitor

Approximately AUD100 million of debt affected

Sydney, September 18, 2008 -- Moody's Investors Service has affirmed, with a stable outlook, the A2 / Prime-1 issuer and debt ratings of Macquarie Group Limited and Macquarie International Finance. Macquarie Bank Limited's deposit and debt ratings were affirmed at A1 / Prime-1, while its outlook was revised to stable from positive.

"Macquarie Group's stable rating outlook reflects its very strong liquidity and capital positions, and its minimal exposure to troubled asset classes and counterparties. The Group's earnings could also decline significantly and remain within the expected range for its rating", said Patrick Winsbury, an analyst with Moody's in Sydney.

"However, Moody's continues to monitor market developments closely, in particular with regards to whether the potential for declines in market confidence could impact the Group's fundamental business operations. Even if this were to occur, Macquarie Group's strong financial position would cushion the immediate impact," Winsbury adds.

Moody's regards the Group's liquidity profile as strong. Liquid assets at end June 2008 were in excess of AUD20 billion, providing very substantial cover of the bank's short-term wholesale liabilities and affording the Group flexibility to ride out prolonged periods of wholesale funding market dislocations.

At end March 2008, the Group reported capital over 40% in excess of regulatory requirements.

Macquarie's earnings have historically demonstrated well above-average stability for the wholesale banking sector, as a result of a high degree of diversification by product and geography. A global slowdown in equity markets appears to have the potential to impact the greatest number of Macquarie's businesses. On a positive note however, the Group has a track record of successfully capturing opportunities during periods of market weakness.

The Group's specialist funds activities have a high profile, but contribute only around 20% of total earnings, and Moody's ratings have for many years incorporated the potential for a material decline in this business line's contribution.

Moody's notes that Macquarie's stock is currently subject to a high proportion of short positions and that the Australian Securities and Investments Commission is investigating alleged false rumours spread about listed companies, including Macquarie. The Group's stock price has fallen approximately 40% since early August.

A declining stock price might have only an indirect impact on Macquarie's rating. This could be transmitted in two ways:

(i) If the group needed to raise capital

The potential for the Group to need to raise capital is low. It has minimal reported exposures to troubled asset classes or counterparties that may require provisioning, and a large regulatory capital buffer.

The Group does retain stakes in listed Macquarie-managed funds and listed fund managers, which may require mark to market, but the total of these positions is no larger than the Group's excess regulatory capital. The funds themselves are invested in regulated assets with stable cashflows. Gearing is present at the individual asset level, but average gearing levels are not unusual for assets of this type and Macquarie does not have lending exposures to these assets.

(ii) If counterparty confidence were to be affected

Macquarie's business model does inevitably have a sensitivity to counterparty confidence, both in its specialist funds business and broader market activities. Reduced counterparty willingness to transact with the Group would reduce its flexibility and impact earnings, although its strong financial position would act as a buffer.

Macquarie Bank's rating outlook was revised to stable from positive, reflecting the reduced potential for upward rating movement as a result of turbulent financial market conditions.

The Bank's ratings had previously been assigned a positive outlook in November 2007, upon Macquarie's restructure under a new holding company Macquarie Group Limited -- primarily on the basis that as the bank's bridge facility to Macquarie Group Limited was repaid, the bank would become increasingly ring-fenced from the potentially more volatile business lines concentrated in Macquarie's non-banking operations.

Although the Group has steadily repaid the bridge facility as it has raised financing from the market, and could theoretically repay the facility outright from internal resources, heightened market dislocations as have been experienced in recent days may impact group funding opportunities and revenues at the bank. Hence while the bank's financial metrics are strong for its current rating level, the potential for a rating upgrade is curtailed, and the outlook is now stable.

Macquarie Group Limited is headquartered in Sydney, New South Wales, Australia. It reported assets of AUD167 billion (approximately USD133 billion) at 31 March 2008.

Sydney
Patrick Winsbury
Senior Vice President
Financial Institutions Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Hong Kong
Jerry Chien
Managing Director
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077

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