Australia's Macquarie Bank warned on Wednesday that retail investors in two debt funds face losses of up to 25 percent as fallout from the global credit crunch widened, knocking 10 percent off its shares.
Macquarie, known locally as the millionaire's factory for its big bonuses to staff, is the third Australian institution to flag possible losses as spooked investors have marked down the value of credit assets, with potential losses magnified by borrowings.
Analysts said other highly geared funds invested in potentially illiquid assets could face losses if the slide in valuations continues and lenders demand asset sales.
"Even the ones with less leverage are going to get to the stage where they are going to be forced sellers and it becomes a spiral," said Tony FitzGerald, co-head of Global Fixed Interest and Credit at fund manager Colonial First State.
The warning rattled investors in Asia, where the MSCI Asia-Pacific ex-Japan index tumbled more than 4 percent. Markets were already jittery after Wall Street's Bear Stearns halted redemptions in a third hedge fund specializing in risky credit and a U.S. mortgage firm said it might liquidate.
Macquarie said the two Fortress funds -- which invest in securitized loans and have no direct exposure to U.S. subprime mortgages -- could lose up to a quarter of their value, or more than A$300 million ($254 million).
"It's the indirect exposure that people are worried about. Obviously some of their funds have exposure to markets that are contaminated or suffering some contagion from the subprime market," said Eric Betts, equities strategist at Nomura Australia.
"It seems a bit of an overreaction ... (but) in this environment, people will sell first and ask questions later."
Macquarie shares fell 10.7 percent to A$73.70, their biggest one-day fall in five years, knocking about A$2.1 billion off the value of Australia's biggest investment bank. The stock is down about 23 percent from all-time highs above A$97 a share in May.
Trading volume in Macquarie shares was the highest in a single day since November 3, 1998.
The U.S. subprime mortgage crisis emerged as a slump in the U.S. housing market led to a rise in mortgage defaults, a wave of credit downgrades and a mass desertion of the market by buyers.
The problem has been compounded for funds that borrow heavily to leverage up returns, and there are concerns that the problems are spreading beyond subprime borrowers.
Macquarie's warning follows the suspension of withdrawals in recent weeks by two Australian hedge funds, Basis Capital and Absolute Capital, as managers try to avoid a firesale of assets.
Bear Stearns, recently embarrassed by the collapse of two hedge funds, said on Tuesday it had halted redemptions in a third fund after worried investors wanted to pull out their money.
Shares of American Home Mortgage Investment, meanwhile, plunged 90 percent after the lender said it could no longer fund home loans, while France's Oddo Asset Management closed three funds with about 1 billion euros in assets.
Analysts said it was likely more investors would be caught up as sentiment affected the pricing of assets in credit markets, where spreads of high-yield corporate bonds have more than doubled over U.S. Treasuries since early June.
"This is probably not the end of it. It's a flight to quality, to safety," said Kumar Palghat, managing director of Australian fixed income manager Kapstream Capital, who manages A$230 million in funds.
Asked if Macquarie would consider reimbursing retail investors who lost funds, a spokeswoman said: "Investors know they have no recourse to Macquarie."
Investor worries that funds operated by Babcock & Brown and Allco Equity Partners could also be caught up in the global credit crunch helped send their shares down by 11.3 percent and 5.4 percent, respectively.
Babcock & Brown later said it did not have significant exposure to the fallout from the U.S. subprime market, while a spokeswoman for Allco said the firm had no direct exposure.
Australian Treasurer Peter Costello said he did not believe the problems at the funds would reflect on Macquarie Bank.
"The parent in Australia is a well-capitalized, highly profitable bank," he told reporters ahead of an APEC Finance Ministers meeting in the northern state of Queensland.
The two Macquarie funds are the listed Macquarie Fortress Notes, with equity of about A$140 million, and an unlisted fund, with assets of about A$80 million. The two funds are geared at about 6.5 times, taking their total investment value to about A$1.3 billion.
Macquarie said the funds' investment manager had no major concerns about their overall credit quality, but had sold some investments to ensure the listed fund met borrowing covenants.
More sales were possible, and the manager was also in talks with some investors about a fresh investment to take advantage of "attractive buying opportunities in the senior loan market."
The listed notes fell 24 percent to A$0.57 on Wednesday. Investors in the unlisted fund have until September to seek redemptions, with a quarterly payout not due until October.
Globally, more than US$164 billion is invested in U.S. dollar high-yield bond funds, according to Lipper. Most of these funds are mutual funds sold to retail investors, which unlike the Macquarie funds, do not typically use leverage to boost returns.