The market believes that embattled investment bank, Babcock and Brown, is out of the woods for the time being after reaching a deal with its banks to remove two troublesome clauses from loan agreements that should relieve some of the pressure on the company’s share price.
Babcock and Brown (BNB) yesterday agreed to higher repayments to get the review of its $2.8 billion debt package by its lenders removed.
Bank of Scotland and a syndicate of 25 banks waived their right to review the debt after the Sydney-based company’s market cap fell below a $2.5 billion threshold this month.
Under the previous documentation the banks had the right to review the debt and BNB’s financial state if that happened for two months.
"Babcock & Brown has been advised by its banking syndicate that the market capitalisation review clause will be removed altogether from its corporate facilities.
The syndicate has also agreed to waive its right to a review of Babcock & Brown," the company told the ASX yesterday morning.
The shares jumped, and then eased a touch before rising at the close to end up 18% or $1.14 at $7.50.
From that reaction it’s clear the market believes the pressure is off and BNB won’t be a victim of the credit crunch like Allco Finance Group, Centro Properties Group, MFS, Capital Pacific, ABC Learning Centres and a slew of hedge funds, property groups and infrastructure trusts.
The bank’s move has a cost. BNB has agreed to a 0.50% increase in interest payments for the A$2.8 billion loan to a 2.0% margin over a basket of benchmarks including the Libor rates for the Australian, US and British currencies. That would put the rate close to 10% at the moment.
"The revised corporate facility provides for a reduction in pricing if Babcock & Brown’s previous S&P rating of BBB is reinstated in the future," BNB said.
Babcock says it will also repay $400 million once recent assets sales are done, such as the sale of $3 billion worth of European wind assets, including the Enersis business in Portugal.
"Additionally and in line with Babcock & Brown’s stated objective of deleveraging the balance sheet, the Company will prepay the corporate facilities by approximately $400 million from previously announced asset sales once these transactions are closed. The balance of proceeds from these asset sales will increase corporate liquidity."
"With the market capitalisation clause now successfully resolved, Mr Green said management will focus on:
- "Continued reduction of gearing levels through the Group’s normal asset recycling program;
- "Sale of non-core investments;
- "Directing balance sheet utilisation towards primary businesses and coinvestment and development activities within those businesses;
- "Further raising and investing committed unlisted institutional capital and third party capital for direct co-investment opportunities.
“Babcock & Brown and its listed funds have already initiated a number of actions aimed at closing or removing the gap between the underlying value of the funds’ assets and the current trading prices of the securities,” he said.
“Our primary businesses of infrastructure, real estate and transport operating leasing have strong, global market positions and demonstrated competitive advantages. We are examining additional ways to capitalise on these strengths for the benefit of both investors in Babcock & Brown and the various funds we manage,” Mr Green said.
"As part of these efforts, Mr Green confirmed that Babcock & Brown is looking to appoint international investment banks to provide external advice to the company."
“We expect to update the market on progress with this process over the next few months,” Mr Green said."
BNB’s CEO, Phil Green did a telephone briefing yesterday which left questions unanswered about earnings and the immediate outlook for the investment group.
Green conceded that the $750 million full-year profit forecast now hinges on conditions in global markets, which have worsened in the last three weeks.
He also indicated there would be write-downs in property and other assets which would hit BNB’s bottom line this year.
So not quite out of the woods, more a relieving of the market pressure.
Now BNB has to produce some asset sales, transparent revenue and earnings figures and a future strategy to accommodate the changing market sentiment towards its style of business.
