3:49 PM, 17 Nov 2008 Stephen Bartholomeusz GPT's collateral damage TOP News Lion Nathan launches $7.66bn takeover for Coca-Cola Amatil to create drinks giant 5:57 PM St George boss resigns as court clears Westpac merger 5:51 PM OneSteel flags production cuts on weaker demand 5:43 PM Turnbull says parliament must approve bank guarantee 3:19 PM Aust stocks end down 2.5% 4:17 PM
The Spectators Bartholomeusz: Lion Nathan's unwelcome advance Gottliebsen: Non-bank growth? It's child's play Leveraged to the fall Gottliebsen: Spending what we don't have Killer presentation
The joint venture between Babcock & Brown and GPT has been under increasing pressure as the credit crisis has deepened, to the point where the market has ascribed no value at all to the more than $2 billion of equity within it. It looks as though the market might have got it right.
Today Babcock announced that a special purpose vehicle within the joint venture that holds US loan assets had received a "notice of acceleration" under a debt facility provided by the troubled Wachovia Bank after the vehicle decided not to provide additional collateral the bank had requested.
The parties are still talking but Babcock said that, in the absence of an agreement, the joint venture could suffer losses as the loan assets were liquidated by Wachovia, which lent the special purpose vehicle $US112 million.
As with the borrowings for the entire joint venture, the Wachovia loan is non-recourse to Babcock and GPT, which means the most they have at risk is their ordinary equity and any retained earnings within the vehicle. Babcock said this amounted to $US82 million, or about 4 per cent of the ordinary and preferred equity the partners have invested in the joint venture.
The losses, if they materialise, would be shared equally between the partners, although the equity isn’t. GPT has $1.9 billion locked up in the partnership, about $1.6 billion of it preferred. Babcock had about $169 million of ordinary equity in the lop-sided joint venture.
GPT has already prepared the market for the worst. In the documentation for its recent $1.6 billion capital raising its scenario analysis included the possibility that the joint venture was "exited" for zero value. The partners had planned to wind the venture up progressively, with GPT getting its preferred capital back progressively as the underlying assets in the joint venture were sold.
The joint venture is leveraged, with $4.7 billion of debt against $6.7 billion of assets, or a loan-to-valuation ratio (LVR) of just over 70 per cent. The loans have LVR and other covenants which, if breached and not remedied, would give the banks the ability to force the sale of the underlying assets.
In the current environment, where banks are anxious and property values are falling, particularly in the US and Europe, a leveraged property joint venture is extremely vulnerable. Neither GPT nor Babcock would have the capacity, let alone the appetite, to throw good money after bad if the joint venture’s covenants were breached.
The prospect that Wachovia might force a liquidation of one the joint venture’s vehicles might, therefore, be just a preview of what’s to come.
For GPT security holders, of course, the deeply-discounted capital raising and the non-recourse nature of the joint venture’s borrowings mean that a collapse of the joint venture wouldn’t jeopardise its own survival.
The price of survival might have been steep but GPT has insulated itself from the fallout of a collapse of the controversial joint venture. The real loss, given that no one attributes value to GPT’s equity in the joint venture, would be of some unlikely upside if the structure could be held together until conditions were more stable.
GPT Price at posting:
88.6¢ Sentiment: None Disclosure: Held
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