Struggling investment bank, Babcock & Brown has received a $150 million of short-term funding from its syndicate of banks to allow it time to liquidate, instead of collapsing right now.
The deal will buy Babcock & Brown time while it hammers out a plan for an "orderly" sell-down of assets over the next two to three years. The $150 million facility will expire at the end of 2009.
The company is now all but in the hands of the banks and will be slowing broken up and sold off. It is in liquidation mode.
The $150 million loan can be regarded as a form of ‘debtor in possession’ finance common to companies in bankruptcy in the US.
There is however one difference: BNB has no future, its on a one way trip to the corporate knackery.
That seems to have escaped market punters who piled into the shares in early trading yesterday.
They jumped 128% at one stage to a high of 57c and traded up 100% to around 50c in late morning trade, before some second thinking kicked in over the afternoon. The shares ended up 56% at 39c.
It had already outlined a plan before the latest crisis broke last month and this agreement, released to the ASX yesterday has all but confirmed the once high flyer’s eventual demise.
As part of the agreement, the banks will gain more control over Babcock & Brown’s shrinking operations, including its plans to cut 850 jobs, and spin off non-core businesses.
Dividends to shareholders will be suspended while Babcock & Brown works with the banks towards a capital restructure, which could include offering banks equity stakes in exchange for some of its $3.1 billion in debt.
Interest owed on the stricken Babcock & Brown’s credit facilities will be converted to a "pay if you can” basis, giving it immediate cashflow relief.
”We appreciate the support of our banking syndicate who have moved quickly to provide measures to address some of the immediate funding requirements,” said Babcock & Brown’s chief executive Michael Larkin in the statement to the Australian Securities Exchange.
The company has been in a dispute with a bank over the release of a deposit, and has been in talks with its banking syndicate on a restructure of its banking arrangements.
The listed investment group has been in a tailspin after the global financial crisis created an existential challenge for its business model. Babcock & Brown had depended on rising asset values and inexpensive debt to keep up the pace of investments, which in turn generated fees.
As part of the deal Babcock & Brown has promised a revised business plan ”acceptable to its banking syndicate” no later than January 9.
The plan will lay out the repayment of the short term facility as well as offer a ‘road map’ for the group’s balance sheet. All financial covenants under Babcock & Brown’s two existing corporate facilities will be suspended.
The shares were suspended from trading on November 20 as BNB sought an agreement with its lenders after an unnamed bank, believed to be Germany’s Hypo Vereinsbank (HVB which is controlled by UniCredit of Italy), froze a deposit worth up to $140 million held on behalf of B&B against debt owing.
BNB says it has sorted things out with the bank involved, without naming it.
BNB shares hit a low of 25c before the suspension kicked in to allow it time to sort out the impasse.
The new $150 million facility will rank ahead of the existing corporate facilities. The facility will be available to be used to fund certain infrastructure asset development projects in North America and other planned cash outflows.
The interest rate on the facility is the 30 day bank bill swap rate plus a margin of 6% pa (ouch). That makes for a total interest rate of a nasty 10.70%.
"Under the terms of the new facility, interest on Babcock & Brown’s Australian and New Zealand subordinated notes will not be able to be paid until such time as the new facility is repaid. Interest on the Australian notes was last paid on 17 November 2008 and the next payment is not due until 15 May 2009.
"Interest on the New Zealand notes was last paid on 15 September 2008 and the next payment is not due until the 15 March 2009.
"Interest that is not paid on the notes will accrue from the scheduled payment date and itself will accrue further interest at the then applicable interest rate plus a margin of 2%."
"The agreement contemplates that by 28 February 2009, Babcock & Brown will propose a longer term capital restructure, which is expected to include a debt for equity swap, acceptable to its banking syndicate. The agreement provides for this to be implemented by 30 April 2009."
Meanwhile the slumping US economy and retail sector has seen Billabong International shares hammered yesterday after the company cut its earnings guidance for 2009.
The company trimmed its guidance for earnings per share growth from a 12% to 16% to a 6% to 10% rise (at least its still positive).
The shares of the world’s biggest publicly traded surfwear maker plunged 18%, or $1.80, yesterday to end at $8.20.
The reaction was odd given that the company’s earnings forecast remains positive because of an expected "strong" second half.
The company said that slowing demand in the US "has ac
