The vultures are gathering around Babcock and Brown, our second biggest, but rapidly shrinking investment bank.
Babcock and Brown shares plunged 27.5% yesterday to a new three year low of just $6.90, meaning that the billions of dollars of share placements over the past couple of years are delivering the takers of those shares huge losses.
BNB blames ‘short sellers’ for the price weakness, but something is going on: solid, well capitalised and well thought of companies do not suffer such sharp price swings. Macquarie Bank is under pressure, but it has not suffered the same sort of devastating price attack that BNB has.
Macquarie Bank shares fell 5.6%, or just over $3 to $50.90, well above the year low of around $42.
There are now fears that the BNB share price plunge will trigger a review of agreements on its $2.8 billion of debt.
The company confirmed yesterday that creditors have the right to demand early repayment of debt should Babcock’s market capitalisation remain below $2.5 billion for longer than four months. That’s going to happen after the company’s market cap fell to $2.3 billion at the close yesterday.
BNB didn’t help when it revealed that it’s negotiating with its lenders to ease that condition.
Babcock shares have fallen by more than 73% this year, more than any Wall Street securities firm.
The company has been lumped in with the likes of MFS, Allco Equity and Centro.
Bloomberg reported that Babcock and Brown was saying that the review would cover "$2.8 billion of loans maturing in 2011, Babcock spokeswoman Erica Borgelt said in a phone interview. She added that short sellers are targeting the company. Short sellers sell shares they borrow on expectations prices will fall and they can buy them back at a profit."
"We believe the stock is being shorted, but we don’t know by whom," Borgelt said. "Our business is carrying on as normal. We are none the wiser,” she told Bloomberg.
Babcock & Brown Power fell a record 36% at one stage amid investor concern about the effect of disruptions to supplies following the Apache gas pipeline explosion 10 days ago.
The stapled securities have slumped 70% this year as it works to complete refinancing $2.7 billion of project finance debt. The basic shape of the new debt deal was agreed to last week, but not completed before the suspension and earnings update yesterday.
Driving the sell down in BNB was the collapse in the share price of Babcock & Brown Power which resumed trading yesterday after being suspended for two days while management worked out the impact of the WA gas crisis on its distribution business in that state.
BBP said the Varanus Island gas explosion was not expected to have a material effect on its earnings in fiscal 2008 and fiscal 2009. But seeing there was no mention of a bank review of the $2.7 billion facility, agreed to last week, in the Tuesday announcement, but it then popped up in yesterday’s release, the market got nervy.
And with no mention about progress in finding $360 million in extra debt, or another $300 million for capital spending, investors shied away from the securities, or sold them off.
BBP was left with a market cap of $650 million at the close Thursday, and debt of 6 times that, at least, which is very high leverage by the current conservative standards for the market.
Anything with Babcock in the name is getting sold down as short sellers, a loss of confidence and fear of contagion undermines share prices.
Even the group’s own $2.6 billion hedge fund, Everest Babcock & Brown tumbled 6% to a record low of 45c in morning trade and stayed there for the rest of the day.
Staff of the parent company, BNB still own 43% of the company, so they can’t quickly recapitalise the business, if need be.
And a number of institutions who took shares in fund raisings last year and earlier this year are underwater on their investments.
The Babcock and Brown unsecured notes closed down 20% at $55.80. That’s an interesting reaction; the loss is 44 cents in the dollar and a good indicator of just how far the high flyer has fallen. These notes rank ahead of the shares, so the loss should be smaller than the fall in the shares.
But when the market is pricing in an almost one in two chance of BNB falling over, then it could be time to seek high ground.
