Macquarie Bank releases Explanatory Memorandum for restructure of Macquarie Group

14 September 2007

Macquarie Bank Limited (MBL) today lodged with the Australian Securities Exchange (ASX) the Explanatory Memorandum detailing the proposal for Macquarie Group Limited (MGL) to become a non-operating holding company (NOHC) and the ultimate parent company of the Macquarie Group. This follows MBL obtaining an Australian Federal Court order to convene meetings of shareholders and optionholders in October 2007 to consider the restructure of the Macquarie Group (Restructure).

MBL announced in July 2006 its intention to restructure the Macquarie Group into a NOHC owning separate banking and non-banking groups. The establishment of the NOHC is intended to support continued growth across the Group’s businesses, particularly internationally, whilst meeting the requirements of the Australian Prudential Regulation Authority (APRA).

The Explanatory Memorandum, which is due to be sent to MBL shareholders and optionholders late in September 2007, details the proposed Restructure of Macquarie and how it will provide greater flexibility for Macquarie to adapt to future business, market and regulatory developments.

The Restructure is proposed to be effected by schemes of arrangement to be considered by the Bank’s shareholders and optionholders at meetings on 25 October 2007.

Under the schemes of arrangement, shareholders and optionholders would exchange their shares and options in MBL for shares and options in the new MGL, which will be quoted on ASX under the code MQG.

Macquarie Bank Deputy Managing Director Richard Sheppard said the establishment of the NOHC structure would provide more strategic and operational flexibility than MBL’s current structure and is a common structure for global financial services groups.

"Much of the Macquarie Group’s growth in recent years has been generated by its international expansion and by diversification, particularly in activities that are not traditionally banking.

"The major driver for this Restructure is the continued growth in our businesses, especially internationally. Our objective is to allow Macquarie to continue to sustain the growth of non-banking businesses, which are not always readily accommodated by APRA’s banking rules.

"As previously advised, no major change to senior management or business strategy is contemplated as a result of the Restructure.

"Macquarie’s track record of success and growth has been driven by our business model, our culture, the team and our business approach. The establishment of the NOHC won’t change any of that," Mr Sheppard said.

How the Restructure will work
Under the proposed Restructure, the existing operating entities comprising the Macquarie Bank Group will be separated into a Banking Group (including MBL) and a Non-Banking Group.

Immediately after the proposed Restructure, and conditional upon implementation of the Restructure, MBL will undertake a capital reduction whereby the capital of MBL is reduced by $A3.0 billion with the capital deducted from the capital base of MBL transferred to MGL to capitalise the operations of the Non-Banking Group. The capital reduction does not involve a return of capital or other payment to investors and will have no impact on the total capital of the Macquarie Group.

Under the proposed Restructure:

• Each share and each option in MBL will be exchanged for one share and one option, respectively, in MGL
• The Banking Group will continue to be subject to the full range of APRA regulation as an authorised deposit-taking institution.
• MGL will be authorised as a NOHC and will be a regulated entity for APRA purposes.
• Macquarie’s strong emphasis on risk management would continue to apply throughout the Group.
• There will be no major change to group strategy or key management as a result of the Restructure.
• The Restructure is not expected to result in any material change to dividend policy, with the annual payout ratio expected to remain in the range of 50 to 60% of net earnings.

There will not be a taxable event for most shareholders and optionholders.

The Macquarie Group’s existing hybrid securities, the Macquarie Income Securities (MIS) and the Macquarie Income Preferred Securities will remain on issue. MBL will remain listed on ASX to support the continued quotation of the MIS.

One-off costs associated with the Restructure are not considered to be material nor are the additional ongoing costs. Details of costs associated with the Restructure are contained in the Explanatory Memorandum.

Under Australian tax law in order for shareholders to be entitled to franking credits, they must satisfy the ’45 day rule’ in relation to their new holding of MGL shares. This rule generally requires shareholders to hold their MGL shares ‘at risk’ for at least 45 days in a qualifying period (unless they qualify for an exemption). In order to provide a greater opportunity for shareholders to satisfy this rule in respect of their MGL shares prior to the payment of Macquarie’s 2007/8 interim dividend, if the Restructure proceeds, the interim dividend to investors will be paid by MGL rather than MBL and will be paid on 30 January 2008 (with a record date of 9 January 2008), rather than in mid-December 2007.

Debt refinancing strategy
Under the Restructure, MGL will be required to finance the initial transfer of the non-banking assets and businesses from MBL to the Non-Banking Group. The initial financing of MGL will be achieved through a combination of external credit facilities and funding from MBL (including the capital reduction). Following the Restructure and on an ongoing basis, MGL will fund the growth of the Non-Banking Group, while MBL will continue to be funded along similar lines to its existing practices.

Macquarie has established a Restructure financing plan to meet the initial and expected ongoing funding requirements of the overall group.

As previously advised, Macquarie has received binding commitments from a group of major international and Australian financial institutions to underwrite a multi-currency, syndicated senior unsecured credit facility for MGL of $A8 billion.

MBL will provide a $A10 billion two year committed senior bridge facility to MGL to provide transitional funding while MGL’s capital markets issuance programme is being established. This bridge facility will be refinanced via issuance in all significant global capital markets.

There will be no increase in the net debt of the Macquarie Group as a result of the Restructure.

Impact on credit rating
Provisional ratings have been received for the NOHC from Standard & Poor’s (A-), Moody’s (A2) and Fitch (A). The ratings for Macquarie Bank Limited following the Restructure are expected to remain unchanged for S&P(A) and Fitch(A+). Moody’s has advised that Macquarie Bank Limited is expected to be rated A1 with a positive ratings outlook following the Restructure. Definitive ratings will be applied upon establishment of the restructured Macquarie Group.

Independent Expert’s Report
The Explanatory Memorandum includes a report by Independent Expert, KPMG, which assessed the Restructure proposal. KPMG has concluded that the proposed transaction is in the best interests of shareholders and in the best interests of optionholders.

KPMG has further concluded that the associated capital reduction is fair and reasonable from the perspective of MBL’s shareholders as a whole and would not materially prejudice MBL’s ability to pay its creditors.

Board Recommendation
The Board of Macquarie Bank has concluded that the proposed transaction is in the best interests of shareholders and optionholders and unanimously recommends that shareholders vote in favour of each resolution at the meetings.

In addition to the approval of shareholders and optionholders, the Restructure proposal remains subject to the approval of the Federal Treasurer. Formal approval has been received from the APRA for Macquarie Group Limited to be authorised as a NOHC. All necessary private tax rulings and draft class rulings have been received.

Indicative Timetable
Latest time for lodgement of proxies 6.00pm, 23 October 2007
Shareholder & Optionholder Meetings commencing at 3.00pm,25 October 2007
Second Court Hearing 29 October 2007
Last day for trading MBL Shares 2 November 2007
Commencement of trading MGL Shares 5 November 2007
(on a deferred settlement basis)
Restructure Record Date 12 November 2007
Implementation Date 13 November 2007

Information on the Restructure is available at www.macquarie.com.au/restructure. Macquarie shareholders and optionholders with inquiries can contact the Macquarie Restructure Information Line on the following numbers:

Australia - 1300 554 096
New Zealand – 0800 442 099
United States – 866 499 0754
United Kingdom – 0800 694 0471
Other countries – 61-3 9415 4000

Contacts:

Richard Nelson
Investor Relations
Macquarie Bank
Tel: (612) 8232 5008
Email: richard.nelson@macquarie.com

Paula Hannaford
Public Relations
Macquarie Bank
Tel: (61 2) 8232 4102
Mobile: (+61 4) 1394 0180
Email: paula.hannaford@macquarie.com