The Babcock and Brown financial engineering empire continues to stagger towards an uncertain future with its power offshoot yesterday revealing write-downs of more than $450 million on its assets, a move that sent the shares in both groups to new record lows.
Babcock and Brown’s share price sank to a new all time low of $3.91 yesterday morning, but recovered to close 6 cents up at $4.51, as the investment bank asserted that the results it will release on Thursday would include the impact of the BBP write-down.
Babcock and Brown Power (BBP), which revealed the write-downs in a statement to the ASX yesterday morning, saw the price of its securities plunge to just 20.5 cents. That was down more than 50%; they then recovered a touch, and then fell, closing at 25 cents, down 41% or 17.5 cents on the day.
There was market talk around yesterday that BNB CEO, Phil green, would be announcing later in the week that he was stepping aside, but there was no comment from the company.
While the write-down hit the power arm, concerns about the impact of that loss on the forthcoming interim financial results on Thursday were behind the renewed bout of selling in the parent this morning.
The power fund, which is managed by Babcock & Brown, also confirmed its 2007-08 guidance of achieving earnings before interest, tax, depreciation and amortisation of between $330 million and $340 million.
But that did not include the $452 million in charges on the value of its Altina power assets and the loss of $42 million on the sale of the Tamar power project in Tasmania to the state government.
The news of the earnings guidance is statement was forced out of the company by an ASX query about the big price fall late last week of 34.5%.
BBP said it would take a $410 million impairment charge associated with the Western Australian power utility Alinta, acquired by B&B and associated funds last year. It also said hat it had extended a $120 million debt facility to March 31, 2009.
It is the second bout of weakness in BBP securities since May-June when it announced it would have to consider selling assets to plug a $300 million funding shortfall.
So it started disposing assets: the Uranquinty and Ecogen businesses were sold at book value, but the Tamar sale was well below book and will inflict a nasty wound in BBP’s balance sheet at a time when it doesn’t need to bleed.
The power company boasted that the sale of Tamar, Uranquinty and Ecogen had cut its debt by $770 million, but debt will still total a very large $3.7 billion, with an average interest rate of 8.8%
After saying in June that it would cut its 2008 second half distribution, the company changed that today to merely say that its distribution policy remained "under review”, given that various debt facilities required repayment before distribution payments could be made.
That’s telling security holders not to expect very much, if anything, by way of a distribution this half.
And the company said today that that more asset sales may also be undertaken and that it had hired UBS as a strategic adviser.
In a separate statement to the ASX, Babcock & Brown confirmed that the interim result guidance given in its release on 11 August 2008 included the potential impact of Babcock & Brown’s equity accounted share of the impairment charges announced by Babcock & Brown Power (ASX: BBP).
"Babcock & Brown equity accounts its investments in all its managed funds. Those funds are subject to independent audit processes. The interim result guidance range given last week reflected the anticipated impairment review outcome for all managed funds.
"The review of Babcock & Brown’s half year financial statements by its auditors has been carried out in the ordinary course and is in its final stages. Babcock & Brown expects, as scheduled, to announce its results on Thursday, 21 August 2008.
"In June 2008, the Babcock & Brown Board engaged KPMG to undertake an independent review of its impairment assessment process. The outcome of that review was approved by the audit and risk management committee on 8 August 2008. The Company’s auditors Ernst & Young have been fully engaged in and supportive of the review.
"All financial covenants under Babcock & Brown’s corporate debt facility remain well covered and the facility does not stipulate a requirement for any asset sales. The facility is a three year evergreen facility which currently extends to April 2011. Undrawn capacity and unrestricted cash at 30 June 2008 was in excess of $800 million and as at Friday 15 August 2008 was in excess of $750 million.
"The majority of the write downs included in the interim result are non cash items.
"Operating cashflow for the half year to 30 June 2008 is expected to be approximately 60% above the result for the previous corresponding period.
"As disclosed in the BBP announcement, following the sale of Tamar, Babcock & Brown’s exposure to BBP will be approximately $380 million which includes pre-existing facilities on development projects acquired by BBP from Babcock & Brown and is still under construction. Babcock & Brown as manager of BBP is working with the Board and its advisers UBS on assessing the optimal long term capital structure for BBP including an appropriate reduction in BBP’s gearing.
Phil Green, CEO of Babcock & Brown said, “The need for a range in the guidance we gave on 11 August 2008 primarily reflected the timing of the independent audit processes of our equity accounted funds and took account of the potential impact of the announcement today by BBP.
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