The great credit crunch monster has struck again on two continents: pushing those desperate twins, Fannie Mae and Freddie Mac to the edge for the second time in six weeks in the US, and finally crunching financial engineer, Babcock and Brown in Australia, sending chairman, Jim Babcock into early retirement and CEO, Phil Green to the backbench.
We will look at the situation with the twin basket cases of US mortgage finance shortly, but yesterday’s announcement from the embattled investment bank and financial engineer marked the end of the first round.
BNB shares ended a big day down sharply, $1.23 to a new all time low of $2.22. The 35.6% fall on the day understandable given the news of the changes and the poor state of the company’s finances.
In contrast its troubled affiliate, Babcock and Brown Power, the source of much of its parent’s recent woes with big debts, write downs of $452 million and falling distributions, saw the price of its securities rise 2 cents to 18 cents at the close.
BNB shares have shed more than 90% in value so far this year as talk of problems, losses, instability and growing investor distrust have taken their toll.
CEO Phil Green has been replaced by Michael Larkin, the chief financial officer, while Jim Babcock, chairman and founder, is being replaced by Elizabeth Nosworthy.
She was chairman of Commander Communications which went belly up owing over $300 million a fortnight ago. She was deputy chairman of BNB, so she’s has as much responsibility for the problems as Mr Babcock and Mr Green.
B&B is to unveil the result of a strategic review in the near future (it still "has a way to go" was the timetable in yesterday’s documentation), which is expected to recommend that the company re-organise itself as an alternative asset manager and increase its focus on real estate and leasing as well as infrastructure investment.
That’s all a bit late, and all a bit like Allco Finance Group, which fell over earlier in the year and is now in deep negotiations with its banks.
Allco reports next week and losses of $1 billion and a bit more are expected from that disaster.
We will also hear from Centro Properties and Centro Retail in the next week and those two victims of the credit crunch monster will produce losses in the hundreds of millions of dollars.
BNB said net profit for the six months to June 30 fell 34% to $211.08 million, in line with its recent wide guidance of a fall of between 25% and 40%. The company repeated that it did not expect its full year profit to exceed last year’s figure.
Net profit attributable to the group was $175 million, down 30% from the $250.1 million in the first half of 2007, when times were good and credit easy.
The result included the impact of non-cash impairment charges of $386 million and realised trading losses of $55 million across its four divisions.
Net revenue for the half, excluding impairment charges and asset revaluations, was $764 million, up 31%.
"As previously advised, the group 2008 NPAT is not expected to be above the 2007 group NPAT of $643 million," it said and the actual result depends on market conditions, assets sales, the execution of its 2008 transaction pipeline and its progress on a restructuring and cost cutting program.
"The volatile global capital market conditions have made and continue to make business conditions uncertain and forecasting in the short term difficult," Mr Larkin said.
"The environment has created a number of challenges for the group, which we are actively working through at the current time to reach resolutions which endeavour to weigh the interests of all stakeholder groups."
B&B also said that as part of a strategic review of its business it planned to wind down its corporate and structured finance division.
"The corporate and structured finance division will gradually be wound down," Mr Larkin said.
"Other assets and businesses not within the key areas of focus will be kept under review and divested or wound down as appropriate to maximise shareholder value."
Its existing private equity funds – BBDIF and BBGP – will continue to be managed by the group and have access to its co-investment pipeline.
B&B Communities Group, B&B Capital Ltd and BBGI will continue to be managed by the group and will pursue strategies to maximise value for investors, said Mr Larkin.
"As a matter of prudence, no dividend will be paid until sufficient progress has been made on corporate debt reduction," it said.
And in a burst of confidence, the company says that dividends are expected to re-commence in calendar 2009.
In the US a far more dangerous game is being played with the shares of Fannie Mae and Freddie Mac.
Is it a coincidence that a week after the ban on naked short selling on Freddie Mac and Fannie Mae (and 17 other US banks and financial groups) the troubled quasi-US Government backed mortgage giants, that both are now back under pressure?
Probably not, but it’s convenient to blame the shorts for the emerging train wreck that is Fannie and Freddie.
Very soon, the US Government will be forced into some sort of bailout. It is coming, very quickly and the sharks in the credit markets sense that.
But has the Bush Administration, in its twilight days, the wit and the people to pull off what will be the most complicated refinancing deal the world will see in a long time?
Basically, it has to stop the terrible twins from defaulting on the debt, while allowing them to continue to fund the current meagre amount of mortgage refinancing that they are now carrying out.
The shareholders in both have lost their money; but the bond holders and others have a lot to do if they are to avoid collaterall damage.
It’s probably why US dollar short term int
