babcock crime and punishment

Does this mean noteholder would never get anything back??




When Babcock & Brown collapsed just over a year ago, not even the most hardened cynic could have predicted the magnitude of the losses that lay ahead.

Sure, the shares in the investment bank ? which had boasted a market capitalisation of close to $10 billion at the peak ? were probably worthless. But the 25 bankers who?d lent the mini-Macquarie around $3 billion thought they'd surely get back most of their money?

Completely wrong, as it turns out. In fact, one by one, most of Babcock?s bankers have taken the decision to sell their loans. And the buyers ? mostly hedge funds ? have been paying them a paltry 10-20 cents in the dollar to buy the banks debt.

That means the Babcock bankers ? including the big four Aussie banks along with a hoard of European banks ? have faced massive write-downs on their Babcock loans.

Commonwealth Bank, Westpac and ANZ Bank had each lent Babcock around $200 million, which means they faced horrendous write-offs of between $160 million and $180 million.

NAB had less involvement with Babcock. Its loan was just over $100 million, so it?s write-off was a more modest $80 to $90 million.

It says a lot about the phenomenal profitability of the big four banks that they?ve been able to shoulder these massive write-downs in their Babcock loans with barely a ruffle to their earnings.

But it says even more about the boom-time banking mentality that bankers were prepared to lend billions of dollars to an extremely complex and complicated group that they could not possibly have hoped to understand. Nor could they have realized the extent to which the massive leverage in the structure made the investment bank hugely vulnerable to a collapse in asset values.

Because that?s the real story in Babcock & Brown, it's the reason why a company that in late 2007 had a total enterprise value of almost $13 billion ? its market cap of $10 billion plus its borrowings of around $3 billion ? is now valued by the hedge funds at somewhere between $300 million and $600 million.

It?s not as though Babcock & Brown didn?t have some good quality assets. It had big stakes in its satellite funds, such as B&B Infrastructure (now renamed Prime Infrastructure), B&B Power (now Alinta Energy), and B&B Wind Partners (now Infigen Energy). But these funds also carried heavy debt loans, and when global credit markets seized up, and asset prices started falling, the share prices of these infrastructure funds started tanking. What?s more, the bankers to the various infrastructure funds were pretty quick to move in, and cut off flows of dividends and advisory fees back to Babcock.

Babcock also had a huge unlisted infrastructure funds business, including a $2.2 billion US infrastructure business, and a $3 billion wind farm business. It had also launched a listed UK PPP (public-private partnership) business ? now known as Amber Infrastructure ? that has about $3.3 billion in assets under management. In fact, the break up of Babcock has so far spawned more than a dozen separate businesses.

The trouble is that Babcock & Brown also had about $8 to $9 billion of debt secured against these assets. When asset values plunged in the wake of the financial crisis, the value of Babcock?s stake in the businesses was smashed.

Some close Babcock observers estimate that out of the $10 billion of market capitalization that Babcock enjoyed at its peak, roughly $1 billion represented the investment bank?s net assets. The remaining $9 billion represented good-will that is, investors? blind faith that Babcock boss, Phil Green and his team would be able to keep making money come what may. As it turns out, the Babcock bankers were also huge believers.

When Babcock & Brown gave up its battle for survival in March last year, the then chairman, Elizabeth Nosworthy, expressed sympathy for the investment bank?s shareholders and noteholders who had suffered a substantial loss. She might also have sounded a note of commiseration for the company?s bankers. But back then the bankers didn't have a clue about how badly they were about to be scalded.