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Australian Toll Road Firm Continues Downward Spiral
Asset value of Macquarie toll roads drops $3.5 billion since June 2008.

The highly leveraged Australian toll road giant Macquarie Group continues to struggle as the global economy remains soft. On Wednesday, the firm's toll road subsidiary, Macquarie Infrastructure Group (MIG), lashed out at Indiana state House Speaker Pat Bauer (D-South Bend) for suggesting that the company has been "performing poorly internationally" and that the Indiana Toll Road might be sold off to another company as a result. MIG blasted Bauer in an unusual statement to Australian investors.

"In line with previous disclosures, MIG's sound financial position is well documented," the company's press release stated. "Of note, MIG currently has approximately A$900 million of cash on its balance sheet and no corporate level debt."

Bauer's statement followed the release of figures that showed the number of transactions on the Indiana Toll Road decreased 9.5 percent in Fiscal Year 2009 compared to the previous year while total traffic dropped 6.4 percent. Unless it sells its ownership interest in the road, Macquarie will collect tolls until the year 2081.

The situation is the same in other parts of the country where Macquarie runs the roads. Traffic dropped 5.1 percent on the Dulles Greenway in Virginia where Macquarie's ownership lasts until the year 2056. Traffic dropped only 1.9 percent on the Skyway in Chicago, Illinois where Macquarie will collect tolls until the year 2104

Fewer people driving on the tolls roads, however, does not mean any loss in revenue. To the contrary, thanks to toll hikes, Macquarie's US toll roads saw profit grow between 2.9 and 11.6 percent. This is so because the states that signed deals with the Australian company ensured that no matter how bad the economic conditions might be, Macquarie would enjoy an increase in the amount of tolls greater than the rate of inflation. In Chicago, for example, the toll will eventually rise to $21 to take a one-way trip that lasts less than eight miles.

Instead, it is Macquarie's complex and highly leveraged debt structure that has raised questions about long-term viability. In May 2007, New York hedge fund manager Jim Chanos was the first major analyst to suggest Macquarie's financial structure was unsound -- while the firm was at its peak. Chanos is most famous for being among the first to warn of Enron's fall. Now Chanos' predictions are coming true as MIG wrote down its asset value by 28 percent, from $7.1 billion to $5.1 billion. This comes on top of the 25 percent write down last year leaving MIG worth A$3.5 billion less than it was worth in June 2008.

"The anticipated portfolio valuation has been primarily affected by lower forecast traffic volumes, changes to asset discount rates, and the impact of movements in foreign exchange rates," MIG said in a June 30, 2009 release. "However a continuation of higher assumed financing costs, and changes to interest rates and inflation rates across the portfolio have also contributed to this reduction."

Because of the downturn, a number of Macquarie's top executives also saw their salaries slashed. Executive Director N.W. Moore's $14.8 million compensation was reduced to just $1.7 million. A.J. Downe had an $12 million salary cut to $4 million. G.C. Ward, N.R. Minogue and P.J. Maher saw their $3.3 million salaries plunge to $1.8, $1.5 and $1.3 million respectively.

The latter three also rely on derivatives in their own personal financial portfolio. They used the bank to loan themselves between $4.3 and $5.5 million for "zero cost collars," a complex transaction designed to ride out a down market while avoiding the payment of taxes from selling stocks. Non-executive Director D.S. Clark loaned himself $37 million.

The infrastructure division will report its annual profit on August 20.

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