UPDATE: Macquarie Bank Plunges 10% On Credit Worries

HONG KONG (Dow Jones) -- Shares of Macquarie Bank Ltd plunged more than 10% in Sydney trading Wednesday, a day after the bank warned some of its high-yieldfunds could see sharp losses owing to the continuing fallout from the U.S.subprime mortgage market.

Analysts said the declines were fuelled by concerns the global widening inyield spreads could spell an end to the era of cheap financing and negativelyimpact Macquarie's business model.

"There's investor fear that what's been happening in the debt markets meansthe debt taps are going to be turned off and that could impact upon deal flowand ultimately fees generated," said Mike Younger, an equities analyst withCitigroup in Melbourne.

Macquarie, which has A$36.6 billion ( $31.13 billion) under management, earnsabout 40% of its income from packaging assets into specialty funds which it thensells to investors. It also charges annual management and advisory fees on thepackaged funds. About 60% of its income comes from traditional investmentbanking. It was Australia's leading mergers-and-acquisition advisor last yearafter advising on its own deals, which include the purchase of Duquesne LightHoldings, the French toll road operator APRR and Copenhagen Airport.

Macquarieshares fell 10.7% A$73.70 ( $62.47) in late Sydney trading, down $A8.80 from Tuesday's close. The declines eliminated A$2 billion in market value,according to reports.

In a statement to the Australian Stock Exchange late Tuesday Macquarie saidinvestors in two Fortress Investment Ltd. high-yield funds could face losses ofup to 25% in July. The funds, which had collected A$230 from investors, operatedat seven times leverage to create a fund of between A$1.2 billion and A$1.3billion, according to a Macquarie spokesman.

The funds could lose A$300 million, the Australian newspaper reported earlierWednesday.

Fortress said it has had to sell some of its holdings to reduce leverage sothat the loan to value ratio meets covenants on the borrowings it has.

The funds were hit by sharp losses after its underlying loan portfoliodeclined 4% between June 29 and July 30.

"The pricing changes that have come through the U.S. market has effectivelytaken 4% off the investment return of those particular funds, but becauseMacquarie has them geared at six to seven times, it has actually seen a 25%decline in the assets under management over the last month," Younger said.

Los-Angeles-based Four Corners LLC, which is two-thirds owned by MacquarieBank , manages the Fortress funds' portfolio. Macquarie said the funds do nothave any direct exposure to the U.S. sub-prime mortgage market, but problems inthe sector weighed on the prices of all credits.

Macquarie Fortress Notes, which are traded on the Australian Stock Exchange,plunged 24% to close at 18 Australian cents Wednesday.

A marketing brochure described the Macquarie Fortress Notes as investing inU.S. senior secured loans with a forecast yield of 10.1%.

"The portfolio continues to be adversely impacted by price volatility in theU.S. credit market," said Peter Lucas, director of Macquarie FortressInvestments, in the statement. "There have been no defaults in the portfolio andno reason to believe that the loans in the portfolio will not continue to paytheir periodic interest and repay the principal outstanding at par."

Lucas added the fund may have to make additional assets sales to reduceleverage. Macquarie does not have any direct exposure to the funds, a spokesmansaid.

Fortress is the third Australian fund manager to report distress relating tothe brewing turmoil in the U.S. sub-prime mortgage sector. Sydney-based fundmanagers Basis Capital and Absolute Capital have frozen investors money in sometroubled funds which had subprime investments.

(END) Dow Jones Newswires 08-01-07 0903ET Copyright (c) 2007 Dow Jones & Company, Inc.