Friday 22 March 2013

Multiplex SITES (ASX: MXUPA)

MXUPA are a hybrid security currently paying a floating rate of 8.2%. They are managed by Brookfield Asset Management which is the subject of a not-so-flattering review. 

1. General Observation of Accounting Practises

Bronte Capital posted a link to an article called The Paper World of Brookfield Asset Management. This was article was interesting for a number of reasons. First, as Bronte Capital note, two Australian listed investment banks Macquarie Group Ltd (ASX: MQG) and the now deceased Babcock & Brown similarly engaged in the practise of taking assets such as infrastructure, leveraging them up, grabbing hefty fees and presenting the remaining 'mutton dressed up as lamb' investments to the public. In my previous role I spent some time analysing the flagship 'satellite' Macquarie fund: the Macquarie Infrastructure Group. That vehicle has now been split into two different entities. I can't recall the exact time period I analysed, however it was in the order of at least eight years and on a cumulative basis it produced roughly zero cashflow. Fees paid to 'mothership' (MQG) helped empty the bank accounts of the various satellite investments. Yet, the accounts showed large profit gains thanks to asset revaluations which have been since questioned following the demis of mark-to-model* accounting.

Before we tut-tut the investment bankers for this practise, many (millions?) engage in a similar practise in Australia: it's called negative gearing investment property. You lose money on a yearly basis (rent minus costs) and get to claim the loss on your tax return. However your property is growing in value so your collective financial position is improving. People from overseas call people who do this nuts. In Australia we call them rich. Providing the right location etc has been selected, the strategy has worked for many, many years.

The above article explains in some detail the opaque nature of Brookfield Asset Management (BAM) itself, and while the execution is a little different and even more opaque, the result is similar: a transfer of wealth from the masses to a few. I'm always fascinated to see how businesses really work and as usual it's presumptuous to judge a book by its cover.

2. MXUPA

The second point is more practical: it involves MXUPA. Please let me connect the dots. Multiplex Group was bought out by Brookfield in 2007. Multiplex ran some managed funds, one of which is now called the Brookfield Australia Property (BAP) Trust. MXUPA sit on BAP's Balance Sheet as  equity. While classified as equity, MXUPA have a debt like structure: MXUPA have a face value of $100 and pay a coupon rate of 3.9% plus the six month bank bill rate. MXUPA currently trade at $85.60 and distributions are non-cumulative. The notes are perpetual.

The current yield on MXUPA is 8.2% p.a. 

Despite the misgivings of BAM itself, the MXUPA structure is actually pretty good, in my opinion. It could be argued that MXUPA are equity like risk for debt like return (= bad) however I think the opposite applies: equity like return for debt like risk (= good). I made a similar argument in a previous post (click here) on Healthscope Notes. Although I  do note MXUPA has run up in price of late and therefore the yield has lowered somewhat: my equity/debt argument is no longer as strong as it was. I do appreciate that MXUPA holders money is being used as leverage for the controlling equity holders benefit. MXUPA holders are getting paid a fat interest payment in return. In addition, the Responsible Entity, Brookfield Funds Management, provide a guarantee to MXUPA. I won't provide a detailed analysis of the recent financials, however they can be accessed from asx.com.au.

MXUPA is another decent income paying security, and as mentioned in a previous note also makes a good parking spot while waiting for other opportunities.


Kristian 

Disclosure: own MXUPA


*Mark-to-model as opposed to mark-to-market accounting allows for a revaluation of assets based on internal model assumptions rather than benchmarked against other market prices. I have not done any analysis on whether the mark-to-model accounting was abused, but it is safe to say the power of monetary incentive must have placed the assumptions used in the model under stress(!)

3 comments:

  1. THANK YOU. AT LEAST I KNOW A LITTLE ABOUT MXUPA-TOO RISKY LIKE BABCOCK & BROWN
    DAVID FARRELL

    ReplyDelete
  2. thanks, appreciate the analysis you do on your blog. helping me assist my retired parents with their investments

    ReplyDelete
  3. As a financial planner, I totally understand where
    you're coming from. I read your site fairly often and I enjoy your posts.
    I shared this on twitter and my followers enjoyed it too.
    Kepp up the good work!

    ReplyDelete