B&b Wins Market Trigger Reprieve

Sydney Morning Herald

Tuesday July 1, 2008

Danny John

A REVISED deal with its banks to cut its borrowing needs to $2.4 billion has secured Babcock & Brown's release from a market capitalisation hook that had threatened to add its name to the list of recent high-profile corporate debt casualties.

Faced with a situation which would have effectively put its future in the hands of its lenders - as Allco Finance and Centro Properties were - B&B yesterday managed to escape that fate by agreeing to repay $400 million of its existing debt facility from forthcoming asset sales.

The deal to reduce its recently renegotiated debt facility by nearly 15 per cent has assured its syndicate of 25 lenders that there is nothing fundamentally wrong with its asset and fund management business.

So far, two-thirds of the syndicate, which is owed about $2 billion, has signed up, allowing B&B to announce the new arrangements. The rest are likely to do so in the next few days.

In the meantime, there is nothing to stop B&B taking on the maximum $2.8 billion of debt it is allowed if it buys further assets that fit in with its business model.

But the investment group - which has seen its share price plunge from a record high of $34.63 a year ago to just $4.70 during the height of the current crisis - has committed to repaying part of what it currently owes, and then capping its debt requirements $400 million lower than at present.

In another sign of how expensive corporate debt has become since the explosion of the global credit crisis last year, B&B will also increase the cost of that debt by 50 basis points to 200 basis points - a full 2 percentage points above the cash rate.

While this will add a maximum of $10 million a year to the group's interest bill, B&B believes that is a small price to pay to rid itself of the market capitalisation trigger point which, in turn, could have led to a full-blown review of its debt facilities.

Negotiated in March, when B&B's share price was $15 and its market value nearly $5 billion, the deal effectively gave the banks the right to renegotiate the terms - with the implication of more onerous requirements - if the share price slid below $7.50.

While the company's stock had more than halved in value by that time, neither B&B's management nor the banks expected that level to be breached.

But three weeks ago a renewed bout of short-selling and the public acknowledgement of the trigger point saw the share price halve in the space of three days.

This left the group worth just $1.75 billion, compared with $11.5 billion exactly 12 months before.

Since then, the group has been in intense negotiations with its bankers. It indicated to the market it would shed assets, overhaul its business model and even consider bringing in an equity partner to restore investor confidence.

It has also reaffirmed a profit target at least $750 million this year, up 15 per cent on last year - although analysts now believe this is unlikely to be achieved, given B&B's need to offload assets into a sellers' market.

Yesterday's announcement helped push B&B's share price up nearly 18 per cent - or $1.14 - to $7.50, with the group again valued at $2.5 billion.

A relieved B&B chief executive Phil Green said the waiver of the review clause was not only important to stabilise the debt facility but also to bolster the group's market standing. "Does it change the global environment in which we're trading in? ... No," he said. "But it certainly underscores and improves our risk profile relative to counterparts."

© 2008 Sydney Morning Herald

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