It’s going to be a rough week for some of the country’s leading financial shares as a major, highly leveraged power and gas trust associated with the Babcock and Brown investment bank, struggles to convince investors it is not a basket case and it will be supported by its lenders.
Babcock & Brown Power Ltd (BBP) was the worst performer in the ASX 200 last week with the securities in the power group losing more than 40% in two days amid increasing concerns about its debt position and sloppy disclosure from its management which rattled already shaken investors.
The shares shed 20% on Friday after a larger fall on Thursday when the management completely botched an announcement about refinancing options which saw investors left uncertain about just how much debt was involved and when it needed to be financed by.
We saw three statements: the last two ‘clarifications’ or updates’ on the original statement about its refinancing on Thursday and the company’s securities still plunged.
There was a whiff of panic around BBP on Friday: the company was forced to call a briefing at short notice to clarify its debt position and the refunding of it as it and its manager staggered from one poorly worded statement to another.
And the confusion forced the manager, Babcock and Brown (BNB) to go public to back its offshoot.
Babcock & Brown indicated in the public statement that it would stand behind the fund as a "lender of last resort". BNB chief executive, Phil Green, was quoted in Saturday’s business media saying that he was confident there would be no need for such a move because the banks will fund it (BBP).
That’s a big call and BNB shareholders hope that that reassurance will not be needed. If it is then other groups in a similar position might be in trouble, as would the revamping of struggling businesses like Centro and Allco.
It was also a timely reminder to the wider market that despite the impression that the worst was over from the credit crunch, and the boom in resource stocks, the condition of market sentiment is fragile.
This will not be helped either by a sharp drop on Wall Street on Friday, led by big losses among financial shares, especially investment banks led by Lehman Bros, which suffered a significant loss of confidence last week.
Macquarie Bank lost 12% here after its veiled warning about the 2009 financial year’s outlook and BBP’s manager and sponsor, Babcock and Brown was also sold off sharply: the shares losing 18% in value to close at $12.72.
BBP finished the week down 41.5% at $1.18. That was a fall of 84 cents and came only two weeks after BBP made reassuring noises about its debt and financial needs. It’s now clear that was far from the correct situation.
So it’s no wonder there were a lot of big investors left aggrieved and looking for a culprit. They might be able to voice their displeasure at this Friday’s AGM of the parent company, Babcock and Brown in Sydney.
But first the group will have to weather a nervous week.
There is a sense of a repeat of the situation involving the Centro shopping centre group last December which revealed refinancing problems in a way that shocked the market and sparked the sell off in property, financial and other highly leveraged companies.
Even it does get that funding BBP won’t be out of the woods.
It has an additional $300 million in capital commitments to fund through asset sales or, even worse, an equity raising: something that will be highly dilutive of existing investors.
About half of the extra $300 million needs to be funded during the rest of this calendar year, and the rest during 2009.
BBP let the market know about the extra $300 million on Thursday, adding that it would bring its total financing commitments to $3.4 billion. But that was poorly explained and the company compounded the problem when it said there was $3.1 billion in debt to be refinanced, but didn’t fully explain the difference between that figure and the $3.4 billion.
That extra $300 million turned out to be really an extra $700 million.The banks are lending $2.7 billion in the refinancing, if it is done: total capital needs are $3.4 billion. That was clarified in Friday’s briefing and 10 page ‘update’, finally.
The admission came just two weeks after the fund told analysts it only needed to refinance $3.1 billion in debt; hence the sell off on Friday as investors realised that it might be better to sit this one out on the sidelines.
Of course for every seller there’s a buyer and those investors are taking a different view, but then so have a lot of investors in the likes of Allco Finance (which lost its Chief Financial Officer on Friday in a surprise) and Centro.
The upshot of all of this is another headache for Babcock & Brown. The investment bank has been pressured for much of this year as investors wondered about its health. Its close on Friday is only 82 cents above the year’s low of $11.90 but well under the year’s high of over $34.70.
If the banks won’t refinance all of BBP’s debt, BNB could be forced to fund between $360 million and $700 million more than it has anticipated when it revealed its own refinancing earlier this year.
Babcock and Brown Power itself will face a highly constrained future: it has been effectively forced to pledge the bulk of its power stations to its banks to raise $2.7 billion of expensive new debt.
The hastily arranged briefing was designed to stop the onmarket rout in BBP shares. BBP admitted it had badly handled the news of its latest debt refinancing efforts and confirmed it at $3.4 billion.
It didn’t really help. More noise, but it did force BNB to step in, which will probably provide a bit more
