Banks Back Babcock

The Age

Tuesday July 1, 2008

MATHEW MURPHY, INFRASTRUCTURE REPORTER

TROUBLED investment bank Babcock & Brown has been granted a reprieve from a market capitalisation-triggered review after it renegotiated its $2.8 billion debt facility with its lenders.

The 25 Australian and international banks have delivered a much-needed vote of confidence in B&B's business by agreeing to remove a review clause from its corporate facilities and waiving the right to demand a review of B&B. In return B&B has agreed to pay 50 basis points more on its interest payments and pre-pay about $400 million of its debt from asset sales.

Shares in Australia's second-largest investment bank soared $1.14, or 18%, to finish right on the now-removed $7.50-a-share trigger level whereby lenders were able to demand a review of B&B's operations.

Earlier this month, short-selling by hedge funds and concerns about B&B's separate investment funds took its shares to as low as $5.25, well below the $2.5 billion market capitalisation trigger level.

B&B chief executive Phil Green said the bank would look to appoint international investment banks to advise it on ways to capitalise on its primary infrastructure, real estate and transport businesses.

Mr Green said B&B would look to further reduce the company's gearing levels to allay investor concerns about its level of exposure within tight credit markets.

"The decision by the banks underscores the strength of our business and the banks' commitment to Babcock & Brown," he said.

"While we remain very confident about our long-term outlook, the focus of our business is not totally immune from current market conditions and in that regard we are taking some proactive approaches ... to make sure the business continues to generate quality earnings."

Under the renegotiated terms, B&B will pay a 200-point margin on the debt facility.

Michael Larkin, B&B's chief financial officer, said that could translate to about $10 million extra on a full-year, fully drawn basis. However, he said it was unlikely to cost B&B that much given the facility is not fully drawn. The interest rate could be reduced if Standard & Poor's reinstates it BBB credit rating.

Mr Green said B&B would continue to use the proceeds of asset sales to increase liquidity.

A letter has also been sent to B&B shareholders informing them of the banks' decision.

"This means the market can now have renewed confidence regarding Babcock & Brown's financing arrangements," Mr Green wrote.

Fat Prophets' head of Australasian research, Greg Canavan, said the banks had little choice but to waive their right to a review for fear of sending B&B into a further spiral.

"There is a lot of debt involved and the last thing the banks really want to do is force the issue or pressure the company into a fire sale of assets."

Mr Canavan said while the banks had given B&B some breathing space it was unlikely that it would reach levels seen this time last year when the stock traded as high as $34.63.

"I think it is damaged, although I think the investment banks will come up with some alternative structure that will allow it to continue in some modified form," he said. "I would be sceptical of Babcock & Brown's share price ever getting back anywhere near the levels that it was."

MALCOLM MAIDEN

This is huge victory for Phil Green: he is, like Bobby Ewing, back in the land of the living, and has the chance to relegate the market plunge that pushed Babcock to the brink to bad-dream status. BACK PAGE

BBC CALLS IN CAVALRY

? BusinessDay 2

OPINION

? Michael West comment

BACK PAGE

© 2008 The Age

Back to News Index | Back to Home