Don’t punt on Babcock and Brown coming back.
It’s a huge unwieldy mess, much like Allco, MFS and Centro, but on a much larger, more global scale. Like these other failures, its reputation has been badly undermined by a lack of solid, trustworthy information from the parent and from some of its key listed investment satellites.
The public shareholding in the investment bank is small: the public’s interest is larger in satellites like the Power and Wind funds which are listed, or the Infrastructure business.
There are stories this morning that the company is seeking to do some sort of deal with the banks to limit the review of its business. The meeting with the banks is due to take place tomorrow.
The banking syndicate – led by Calyon of France – includes 25 banks such as ANZ, the Commonwealth Bank, Westpac, NAB, Suncorp Metway, Barclays, BNP Paribas, Citibank, UBS, Societe Generale and Bank of America.
Some of those, such as the CBA and ANZ have exposures to failures like Allco, Centro and MFS, or Opes Prime, so they will be nervy. But they will also know that its in their best interest for the bank to be able to continue trading, if possible.
The debt review was triggered when the investment group’s market capitalisation fell below a $2.5 billion threshold last week: BNP was worth $1.75 billion at Friday’s close of $5.25. It fell from $11.16 at the start of last week.
Brokers claim the banks could force the bank to sell $2 billion of European wind farm assets on its balance sheet, which were originally intended to be sold into one of the 10 listened investment satellites.That will at least generate profits if able to be done quickly.
B&B’s battle to survive was hit by Friday’s Standard & Poor’s downgrading of its credit rating on the B&B subsidiary that holds the $2.8 billion debt with the banks – Babcock & Brown International.
S&P cut the the ratings on B&B International from BBB Watch Negative A-3 to BB+ Watch Negative B, citing the "continued rapid slide" in the parent’s share price.
There are 10 investment satellites listed in Australia and a group of unlisted funds which the company was expanding to move away from the pressures of public exposure of being listed on the stock exchange.
But the myriad assets it has a stake in, or controls the management of around the world and moreover the estimated $80 billion in debt, makes it a tough situation to sort out quickly.
A hospital in Melbourne, a power cable in San Francisco in the US, trains in Europe, schools in NSW and wind farms in Europe, not to mention the phone company in Ireland, are some of the assets involved, plus billions in debt.
Management and staff own around 43% of the bank and a group of banks own another block of shares taken up as part of a refinancing deal earlier this year.
That makes it hard to impossible to refinance any part of the business through a rights issue or a management buyout. Placements are out of the question, even at a substantial discount because they wouldn’t raise enough money to satisfy the doubters. Not unless the management agrees to have its stake cut significantly.
The sale of a big stake to a ‘white knight’ would also see the management agreeing to take a big ‘haircut’.
There are unsecured notes quoted in the company and they closed at $40 on Friday for a loss of 60% on their face value and issue price of $100. But these notes have to be bid for at full face value in the event of a takeover. There could be around $150 million of these notes as well as unsecured notes on issue in New Zealand.
Short sellers have attacked the stock, but its sharp slide last week was more to do with the lack of solid information; the confusion of assets and investment vehicles here and around the world, and the surprise covenant in its banking agreement that said the banks could look at the company’s finances if market cap fell below $2.5 billion, which it did last week.
It was the market’s concerns about the company’s business model that set it up to be attacked, not the short sellers searching for another target.
Much of the pressure can be traced to its troubled power satellite, Babcock and Brown Power which has around $2.7-$3.4 billion of debt on around $516 million of market value.
There would not have been any of last week’s problems, especially Thursday and Friday, if there was market confidence in the company and its business model.
There obviously isn’t the same level of confidence in BNB that there still is in Macquarie Bank.
So BNB shares fell to a record low on Friday. The shares fell 32% and the market cap more than halved last week. The shares ended at $5.25, down $5.68, or almost 52%.
UBS cut its rating on BNB, as did Citigroup and Merrill Lynch.
UBS cited a "crisis of confidence” among investors in its downgrade.
Babcock and Brown Power is Australia’s biggest publicly traded power producer, but it’s been a shrinking one.
The securities fell 45.8% to 71c (down 60c). They touched a low of 54c during trading. Credit Suisse reckons it might have to sell some of its best assets quickly to generate enough liquidity to withstand the impact of the WA gas crisis.
BBP is the major gas distributor in WA and the Varanus Island explosion and subsequent drop in supply (of around one third) forced BBP to suspend trading in its shares to prepare a statement on the impact of the crisis on its finances.
It says the impact will be immaterial, but it seems the market disagrees as the company has to find hundreds of millions of dollars more in cash and new loans, on top of the $2.7 billion new loan facility which seems to be still intact.
BBP hopes to com
