banks boon

Babcock Loan May Be Boon for Banks, Not Shareholders

Dec. 4 (Bloomberg) -- Babcock & Brown Ltd. today received a A$150 million ($97 million) loan, giving the troubled Australian investment manager more time to sell assets and boosting its bankers¡¯ chances of recouping A$3.1 billion of debts.

Babcock¡¯s shares almost doubled as the loan kept alive its battle to avoid the fate of companies including Allco Finance Group Ltd., the Sydney-based manager of infrastructure funds that imploded last month. Babcock¡¯s shareholders may still lose out as the Sydney-based company suspended dividends and said it may recapitalize via a debt-for-equity swap as part of a plan to appease its 25 bankers and stave off bankruptcy.

¡°There¡¯s probably more in this deal for the banks than shareholders,¡± said Tim Morris, an analyst at Sydney-based investment advisory Wise-Owl.com, the only researcher to rate Babcock¡¯s shares a ¡°sell¡± at the start of the year. ¡°The banks¡¯ main motive is to keep it alive so they can raise more money from the asset sales when conditions improve. That may be better than seizing the assets and forcing a fire sale now.¡±

Babcock surged 88 percent to 47 Australian cents as of 2 p.m. in Sydney. The shares closed at 25 cents on Nov. 19, when they were suspended from trading amid speculation the company couldn¡¯t repay its debts as the global credit crisis raised funding costs and cut asset values.

Even after today¡¯s jump, Babcock is down 98 percent in 2008, the worst performer on the 1,695-member MSCI World Index.

Hard Sell

Babcock, which fed on cheap debt to buy property, ports and power stations, may struggle to sell assets amid the global credit crisis. Babcock & Brown Infrastructure Group, a fund managed by Babcock & Brown, said last month divestments are ¡°extremely difficult.¡±

The new loan is priced at the 30-day bank bill rate plus 6 percentage points per year, Babcock said in a statement. That equates to 10.6 percent at today¡¯s rates, compared with 8.99 percent for Commonwealth Bank of Australia¡¯s standard variable business loan.

The financial covenants for Babcock¡¯s two corporate loans have been suspended, and interest on the loans is payable on a ¡°pay as you can¡± basis, as part of the new agreement.

Babcock also resolved a dispute with one of its bankers, which seized a deposit last month, it said today, without providing more details. German lender Bayerische Hypo- und Vereinsbank AG seized an account with A$140 million on Nov. 19, according to the Australian Financial Review.

Cautious Outlook

¡°What we¡¯re seeing lenders doing is giving a stay of execution,¡± said Winston Sammut, who oversees the equivalent of about $49 million at Maxim Asset Management Ltd. in Sydney. ¡° ¡°All it really does is buy them time. The trade-off for the banks and lenders is that they get another fee. They also shore up their security.¡±

The new loan, which is due at the end of next year, will rank ahead of Babcock¡¯s existing corporate loans, adding another layer ranking above shareholders if the company should fail. Babcock suspended dividends, and said it¡¯s considering a debt- for-equity swap as it seeks to recapitalize its balance sheet and develop a plan to avert bankruptcy by Jan. 9.

¡°Banks may be looking to take whatever equity is remaining in the form of a debt-equity swap, so the long-term outlook is very cautious for shareholders,¡± Wise-Owl¡¯s Morris said. ¡°The banks, too, may be pouring a lot of money into a black hole. The underlying problems remain: deflation of asset prices.¡±

Morris was part of a team that recommended investors sell Babcock shares on Nov. 21, 2007, making Wise-Owl the most accurate of the eight analysts that cover the company, Bloomberg data show.

Australia¡¯s five biggest banks have A$700 million of loans at risk with Babcock, and overseas lenders, including Royal Bank of Scotland Plc, have almost A$2 billion on the line, according UBS AG estimates. Babcock had interest-bearing debt of A$9.6 billion as of Aug. 21, almost four times shareholders¡¯ equity.

¡°At worst it buys the company a bit of time,¡± said Paul Xiradis, who manages the equivalent of $11 billion as chief executive officer of Ausbil Dexia Ltd. in Sydney. ¡°At best it gives them at least some hope of working through their issues.¡±

To contact the reporter for this story: Stuart Kelly in Sydney [email protected]

Last Updated: December 3, 2008 22:06 EST