Babcock Gets $150m Lifeline

The Age

Friday December 5, 2008

ERIC JOHNSTON, FINANCIAL SERVICES EDITOR

BANKS are likely to emerge with a significant slice of Babcock & Brown as part of an emergency $150 million funding package aimed at heading off the collapse of the struggling infrastructure group.

Following a marathon round of talks with its 25-member banking consortium over the past fortnight, Babcock finally secured the rescue deal which will give it breathing room to push ahead with a program of asset sales to pay down a crippling multibillion-dollar debt facility. The new funding deal will be through additional loans due to be repaid by December next year.

The new loans, mostly funded by the big four Australian banks, will rank above the existing corporate facility and will be used mostly to fund wind-farm and other infrastructure developments in North America.

The financing will carry a substantially higher interest rate.

Babcock initially encountered resistance for the refunding deal from at least two European-based banks, although all members of the financing consortium eventually agreed to the deal.

At the same time, its banks have significantly watered down agreements on the existing $3.1billion in loans.

Part of this involves allowing the company to pay down loans as assets are sold down, while all other financial covenants on the facility have been suspended until the end of this year.

Critically, Babcock revealed that without the rescue deal it would have breached the terms of its lending agreement, largely due to hefty losses stemming from asset write-downs.

Babcock's banks have also agreed to convert some of the debt in the group into equity. While this threatens to dilute existing shareholders, the deal is likely to provide longer-term stability for the group.

Investors yesterday expressed relief at the funding deal. Babcock shares, which had been suspended for the duration of the talks, rocketed 56 per cent higher to close at 39 each. But they are a fraction of their record high of $34.63 last year.

Debt for equity is a tool expected to be more widely used by bankers, as the drying-up in credit and a slowing economy trigger more corporate collapses. The highest-profile debt-for-equity transaction in Australia was a decision by banks to take charge of collapsed base miner Pasminco in 2001 and to eventually relist the company as Zinifex Mining three years later in a $1billion initial public offer.

One banker involved in the transaction said the preference among the lending consortium had been to keep Babcock out of the hands of administrators given the complexity of the business, which ranges from managing power stations to organising aircraft leasing.

Babcock also risked losing value if it was forced into a fire sale of assets while global financial markets remained fractured, he said.

Babcock chief executive Michael Larkin said the agreement was the first step in the group's longer-term survival.

"We've got a resolution of our short-term issues," Mr Larkin said. "We've got a recognition from our banks that we've got a more appropriate long-term structure."

Under the agreement, Babcock will be required to submit a business plan to its banks by early next month to give them comfort on a repayment schedule for the $150 million lifeline.

This plan, which will need to be approved by banks, will determine the extent of the debt-for-equity swap.

Babcock's bankers have appointed restructuring experts McGrath Nicol and Partners to advise on the ongoing overhaul of the business.

This will give the banks greater control over the drastic slimming of Babcock's operations, including plans to cut another 850 jobs, sell off its once-core business of aviation leasing and speed up the repayment of its debt, which is due in 2011.

"For Babcock & Brown, the crossroads will be around what will be the right long-term capital structure that the banks will be prepared to accept," Mr Larkin said.

© 2008 The Age

Back to News Index | Back to Home