Banks Circle The Piggybank With A Hammer, And There's Worse To Come

Sydney Morning Herald

Friday November 21, 2008

Elizabeth Knight

One of the sure signs a company is on the brink of being placed into administration is when the battle moves from being one between the company and its banks to a war between banks. The Babcock & Brown story has entered this phase.

The suggestion was coming from a variety of sources yesterday that B&B will be taken off life support next week and placed in the hands of administrators and receivers. The only thing standing in the way is a B&B deposit sitting in a German institution, HypoVereinsbank, which the company and the rest of the banking syndicate are attempting to retrieve.

The deposit is believed to be a little shy of $100 million, but it is cash - and as far as the asset pecking order goes, it's right at the top.

Ultimately, this will be sorted out in a court. Whether B&B has breached any of its banking covenants is a point of debate. But it probably doesn't matter because if it can't pay its interest, and the banks are not prepared to enter into a moratorium on interest payments, the company has no choice but to hand management over to administrators.

At this stage it becomes a race to see who gets in first - the directors, who are only too aware of their onerous legal responsibilities to cease trading if the company is insolvent, or the banks, who know they have finally come to an insurmountable obstacle.

The directors of ABC Learning Centres and Allco Finance Group moved rapidly to appoint administrators in the past few weeks when it became clear the companies were technically insolvent.

B&B is different in that it appears to be making attempts to put a good face on what is a fruitless struggle.

It told media this week that it was in talks with its bankers over covenants, but said it was not in breach of them. But the chief executive, Michael Larkin, said B&B would find it difficult to meet certain covenants in the near term given the deteriorating market conditions.

The company said that, to appease the banking syndicate, it would sack a large part of its workforce and sell everything but infrastructure assets.

But it is too late.

The trouble is that its investment bankers have been trying to sell assets for most of the year but no one wants, or is able, to buy them.

The banks hate putting these companies in receivership because, even if they have security, where the assets are not saleable they must be kept on banks' books or sold for a loss that is then crystallised in the banks' accounts.

It is also particularly bad public relations for the banks, and their own shareholders get nervous. And it certainly reflects poorly on their risk management procedures.

B&B and Allco are a clear case that the managed investment satellite models are fraught with trouble. Their structures are sufficiently complicated that analysts struggle to work out at what point they have no value.

The sharemarket suggests that B&B's equity is close to worthless. It would have weakened further in yesterday's soft market conditions except that its shares were in a trading halt until the fight with Hypo is sorted out.

But it is a fair bet that these shares will never trade again.

The trouble is that B&B is just the tip of the iceberg. It has many children - some of which are pretty large, with their own hefty debt commitments. Where B&B has lent money to its satellites, the loans will be called in and consequences will be felt.

If there are any of the children with cash left in the piggybank there will be many people fighting to get their hands on it. This sounds some distance from the orderly sale process that B&B announced a couple of days ago.

Local banks are estimated to be owed about $800 million by the B&B mothership and much more by the entire group.

Much of this will be secured, and if B&B and some satellites are placed into administration it will take many months to get an accurate feel for the rates of recovery.

Unravelling this mess will a nightmare for any group of administrators and receivers.

© 2008 Sydney Morning Herald

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