UPDATE 1-Macquarie sets margin of A$600 mln hybrid at 3.5%

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SYDNEY, June 4 (Reuters) - Macquarie Group Ltd (MQG.AX),
Australia's top investment bank, said on Wednesday it has
raised A$600 million ($571 million) of Convertible Preference
Securities (CPS) and set the margin at 3.50 percent.

The margin was at the top of the revised 310-350 basis
points (bps) range.

"It was a fair price, not overly generous but acceptable,"
said one bond investor.

"The Tier 1 offer with a mandatory conversion is a deeply
subordinated bond and investors expect that to be reflected in
the pricing," he added.

The CPS are expected to be rated BBB by S&P and Baa1 by
Moody's, or two notches below Macquarie's senior debt.

The CPS consist of perpetual fixed rate, non-cumulative,
convertible preference securities paying unfranked
distributions.

They will mandatorily convert into ordinary shares of
Macquarie on June 30, 2013 with a 1.00 percent discount.

The issue was predominantly sold to retail investors who
took around 90 percent of the securities, with the balance
snapped up by institutional investors, a market source said.

The offer received bids from a total of 18 institutions,
including the broker networks, another source said.

The order book was oversubscribed at 350 basis points over
five-year swap and was covered at 340 basis points, a source
added.

Macquarie opted for the higher margin to offer scope for
tightening in the secondary market and also to reduce the
amount of scaling in allocations, the source said.

Still, 350 bps was not enough for some buyers.

"I can easily access similar securities with the same
ratings in the secondary market with an additional 100 to 200
basis points [over the CPS]," said one who declined to
participate because the price was too tight.

Another credit investor added the margin was too low for an
issuer such as Macquarie Group.

"Macquarie is not bullet proof. I am worried about the
banking sector," he said.

U.S. financials took a fresh hit on Tuesday after a report
that Lehman Brothers LEH.N may have to raise more capital
compounded recent worries the financial sector faces another
round of big losses from the credit crisis.

Some investors had expected the Macquarie issue to sell at
a higher margin than 350 bps, based on a similar Tier 1 issue
from Suncorp-Metway (SUN.AX) earlier this month.

Suncorp, Australia's sixth-largest bank, raised A$700
million of Tier 1 securities at 320 basis points. The Suncorp
offer was rated A- by S&P and A2 by Moody's, or two notches
higher than Macquarie's BBB rating by S&P and Baa1 by Moody's.

The Macquarie CPS is part of a relatively new type of Tier
1 capital, called non-innovative residual Tier 1, that offers a
cheaper form of capital compared with ordinary equity.

Banks are required to maintain a certain level of
ultra-liquid Tier 1 capital as a cushion to protect bank
deposits.

To qualify as non-innovative residual Tier 1 capital, the
securities must be perpetual and cannot include a coupon that
would step-up.

Macquarie is the third Australian institution to sell this
type of capital in recent months, following Suncorp and St.
George Bank SGB.AX.

Citigroup, Goldman Sachs JBWere, JPMorgan, Macquarie,
nabCapital, UBS and Westpac Institutional Bank were joint lead
managers and joint bookrunners.

ABN AMRO Morgans and ComSec joined as co-managers.

Key dates of the offer:

Closing of offer: July 3

Issue date: July 7

Normal trading start: July 10

First distribution pay: Dec. 31 2008

Mandatory conversion: June 30 2013
($1=A$1.05)
(Reporting by Cecile Lefort)