banks in babcocks hands

Banks in Babcock's hands


The Spectators

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Gottliebsen: Banks in Babcock's hands
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While much of today's chatter will be over the solvency or otherwise of Babcock & Brown, perhaps a more important question is the terrible impact the Babcock crisis could have on our banks.

If the chief executives of Westpac, Commonwealth, NAB and ANZ are doing their job, this week they will have called for a 'total exposure' statement for Babcock & Brown. I'm not privy to any such statement, but my guess is that one or two of the CEOs will have been shocked because their bank had been happily treating various parts of the Babcock group as separate clients and not understanding that it was one group. Exposures may have risen beyond what would have been prudent for one borrower.

On my rough sums, the Babcock group owes banks and financiers in the vicinity of $50 billion. Never in Australia’s history have we had a group of this size in difficulty. Thankfully, the bulk of that amount is owed to overseas banks but our big four, led by the normally conservative Westpac, hopped in for their slice of parent debt. The odds are they have been lending big sums to some of the satellite operations and that the Babcock group will be among their biggest exposures. It is a serious matter for the Australian banking industry.

The stock market is saying that the listed satellites have only token equity. Those listed vehicles have debt of about $28 billion. The non-listed vehicles are just as large as the listed vehicles and take total debt beyond $50 billion. Babcock would claim that the stock market is wrong in the equity valuations and that the assets are generating sufficient cash to cover their loan requirements. But that won't stop bank CEOs with big exposures from feeling nervous.

The Babcock group may be solvent, but it is in crisis. All the various entities have been borrowing on a non-recourse basis, so there are few if any cross-guarantees. What every bank now has to do is look at whether the assets over which they have security have a realistic worth that is greater than the loans in the satellite.

In many cases they will be fine and the bank CEOs will gain great comfort. But in other cases they will find that the real value of the asset has fallen sharply. Babcock had a habit of paying top prices for assets and convincing bankers that it was all blue sky ahead. The great salespeople at Babcock will disappear and will be replaced by people who will count the real numbers and we will then find out what the position is.

Among the highly leveraged assets under management is about $7 billion in aircraft leases. Last night I flew on an interstate scheduled 737 flight that had just nine passengers, requiring us to sit in selected positions to spread the weight. It was yet another reminder that while the market for aircraft leases is currently strong, that industry has a very volatile history. I will never forget the joint TNT-News Corp aircraft leasing operation in the 1980s that gave big book profits to News Corp when they were badly needed by Rupert Murdoch. Later, the profits evaporated as the aircraft value cycle turned.

The world economy is slowing down and capital is short. Many asset purchase decisions made in the boom will look silly. The Babcock situation must now be looked at very carefully and we must all keep our fingers crossed that the stock market is wrong and there is real equity in the satellites – and that we are not on the brink of a set of serious banking losses.