BNB and satellites have high quality assets financed by alot of debt. Central banks have been working very hard bringing down interest rates to "engineer" a soft landing for the global recession. The combination of, largely, regulated income streams for essential infrastructure and the lower cost of debt, long term, should be beneficial to BNB.
The short/medium term problem is that the risk premium (expressed as a margin over LIBOR or BBSW) has gone through the roof. This makes the debt burden (short/medium term) much more difficult to bear.
The short/medium term risk margin will not last forever. However, long term, the value of the BNB/satellite assets will be confirmed.
The banks have incidated they are of a mind to support BNB in the short/medium term. This confirms the LT value in BNB.
The price for this support will be paid by the ordinary equity holders:
- "on balance" infrastructure asset write downs
- losses on the sale of non-core business activities
However, the news here is NOT universally bad:
- there is the prosepect of selected asset values increasing
- some of the business operations, to be sold, could attract a premium
It is in the bank's interest to see that BNB is appropriately capitalised. No more, no less.
The analysis that is probably underway is to build a complete and rational picture of the value of the assets to be kept and to engage in a process to extract the most value from those being disposed.
The '08 annual report will give us the results of this analysis. The February '09 finanacial reconstructure proposal will, at the same time, offer a path forward.
At the present time, I believe BNB, BNBG.ASX and BNB010.NZX to all be signficantly undervalued. However, there are real and present risks that could be disasterous for the company.
For the investor, the decision comes down to risk.
- If you have zero tolerance for capital risk, and you hold ... TOO LATE ... your capital has been effectively wiped out. You might as well hold for the recovery.
- If you have a high tolerance for capital risk, and you don't hold ... some good opportunities exist in the subordinated debt instruments. Even the ordinaries could outperform the debt ... but only in the most wildly optimistic scenarios.
My personal view is that we will see a global recovery in "junk" debt. I am not sure if this will be a medium term rally, falling back with the recession biting, or if it will be the foundation of a LT reoovery. Time will tell.
Note: The above is pure speculation ... do your own research!! The risks in holding BNB/BNBG are very very high.
/disclosure: Hold BNBG, BNB010
BNB
babcock & brown limited
