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.
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 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 odd 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. BNB has $2.8 billion in debt on its books.
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 complete the $2.7 billion debt refinancing this week, but needs to raise an estimated $635 million in debt to cover a loan and capital expenditure through to midway next year.
The manager and parent BNB says it will stand behind BBP on a short term basis, and that also spooks the market, which wonders where the investment bank will get that sort of money in the current market.
BNB may generate a couple of hundred million dollars of profits from the sale of European wind assets, but those are held in separate funds. It now seems that an associated hedge fund has loans with BNB that might cause worries.
On the ABC program, Inside Business yesterday, host Alan Kohler talked to a representative of corporate governance consultants, Riskmetrics.
This exchange highlights the problems in the Babcock and Brown empire:
ALAN KOHLER: Well do you think that the Babcock & Brown group will be able to pull out of this dive that it's in?
MARTIN LAWRENCE: The dive has been very sharp and very quick and to a certain extent, I mean they announced a Babcock & Brown consortium had acquired some assets in the UK, some rail assets. There's fees are going to come out of that. The problem is though that it's a business that's built on market confidence. On people giving them their money, on people trusting them to do deals. I think if they don't come out of it very quickly, it will be a very long hard slog back.
ALAN KOHLER: Well in fact, do you think they've lost credibility now?
MARTIN LAWRENCE: Well, the share price is fallen so quickly and the satellite funds have kind of gone down as well. I'm not sure if it's a question of credibility or if it's a question of just confidence. And there doesn't seem to be a lot of confidence towards the model at the moment.
ALAN KOHLER: Do you have a sense of how much of this is due to the activity of hedge funds?
MARTIN LAWRENCE: I think there's a lot of people who'd like to believe it was all just nasty hedge funds that are selling the stock short and manipulating the price. I don't think that that's what we're seeing here. I mean, maybe we saw it earlier in the market but most of the companies that have been sold short there have been good fundamental reasons to sell short. Babcock & Brown operates in the same kind of sphere, the financial sphere, that's been slaughtered. The shares in these companies around the world have been slaughtered. So there were compelling reasons if you were an investor to have some doubts. And as I said before, it's a model that has been built on easy access to capital. Capital's not easy to get at the moment and so it's an entirely rational decision as an investor to say, "I want out". So I think blaming hedge funds might be convenient but I don't think it's necessarily true or fair.
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