It is hard not to admire the fiendish genius of Macquarie Bank.
Schools, roads and bridges in the USA are often funded by the municipal bond market. This is one of the world’s largest markets and, as its purpose is a noble one, to finance public works cheaply, “muni bonds”, as they are affectionately named, attract generous tax breaks from the Federal Government in Washington DC.
If however, one were to scroll for long enough through the interminable bond issues of local authorities from Tallahassee Florida to Wichita Kansas and beyond, one would eventually stumble upon, yes, you guessed it, a very unusual local government borrower, our very own Aussie bank, Macquarie. There it is in Houston, Texas, our Macquarie, nonchalantly helping itself to a tax break designed for the funding of children’s hospitals.
“A maestro of corporate welfare”
Well, to be precise, it’s not exactly “Macquarie” itself which is the bond issuer; rather it is a “special purpose vehicle” (SPV) associated with Macquarie called Texas Municipal Gas Acquisition and Supply Corp III (or TexGas III, for short). They don’t call these vehicles “special” for nothing.
You won’t find mention of it in the bank’s media release of November 2012 hailing the “exciting” muni bond transaction but this $US1.4 billion TexGas issue exploits the tax exemption from the US Federal Government which is meant for the construction of sewers, ports, correctional facilities and so forth by state and local government authorities.
This deal is the zenith of suave from Australia’s “best-of-breed” merchant bankers. Not only have they managed to raise cheap money on the US municipal bond market but also, somehow, jagged the tax exemption to boot. There, alongside the Texas Public Finance Authority, North Texas Tollway Authority, Texas Permanent School Fund and North Texas Municipal Water District, is our very own MacBank.
Macquarie is a maestro of corporate welfare. Wherever there is government, there is a banker trying to fleece it – but no other Antipodean usurer has been so proficient in the art.
When the bank, geared to the nostrils during the financial crisis, fell upon rough times and its share price veered towards oblivion, its bosses went cap-in-hand to Canberra to beg for special treatment. We can’t confirm it but once source claims there were tears.
So it was that, along with other Australian banks, it won a sovereign funding guarantee, a deposits guarantee and the protection of a short-trading ban.
Mere survival was not enough for these boys though. Knowing cheap taxpayer-backed funding meant they could make a killing lending it out again at higher rates, the bank raised $25 billion; not merely enough to survive but enough to deliver billions in profits over the next five years.
“If Congress heard a foreign bank was using the tax exemption they would not be happy”
There is another leg to the muni bond caper, gas sales. The US Federal Government, via its tax exemption, is effectively subsidising the purchase of gas from a Macquarie gas company.
The bank has a $US2 billion oil and gas business in the US. It doesn’t extract gas but it does market it, and the proceeds from the issue of these TexGas municipal bonds, have gone to finance the pre-payment of a 20-year supply of natural gas from Macquarie US Gas Supply LLC. The parent of this entity, Macquarie Group, is guarantor.
“It crosses the line,” one observer told michaelwest.com.au, referring to the line of tax decency, “If Congress heard a foreign bank was using the tax exemption they would not be happy”.
The source estimates the loss to the US Federal Government at around $US17 million a year, assuming a blended coupon on the muni bonds of 3 per cent. The yields on the bonds range from 0.75 per cent to 4.05 per cent.
With the tax break, investors on a 40 per cent top marginal tax rate will be prepared to buy the bonds at a substantially lower yield, and therefore a higher price, meaning cheaper funding for the bank.
Effectively, the way the deal is structured, Macquarie gets its $US1.4 billion upfront (prepayment of gas) on the cheap, with its dubious tax exemption, and has to pay it back over 20 years, not in money but in gas.
Macquarie was unable to furnish a spokesperson to defend the transaction, or to provide a prospectus or other documentation.