From BusinessSpectator: Bartholomeusz: Babcock's vanishing...

From BusinessSpectator:
Bartholomeusz: Babcock's vanishing point

Just in case the market missed it the first time, Babcock & Brown has reminded us that even if its discussions with its bankers result in an agreement on a new business plan and balance sheet restructuring, there will be no value left for equity holders and negligible, if any, value left for subordinated note holders.

Babcock provided its "update" ostensibly because there is still some "grey market" trading in its securities in Europe, particularly in Germany, even though official trading in them has been suspended.

It doesn’t want anyone to be under any illusions about the outcome of the negotiations with the banks, even if that outcome technically keeps the group alive.

Given that the group is so adamant that, even with a successful negotiation with the banks, there will be no equity value left, it would appear reasonable to ask why the remaining directors and executives are still there.

Confronted with a near-identical situation, the directors of Allco Finance finally gave up when the balance between their personal liability and the faint hope of salvaging something for shareholders tilted against continuing. They called in the administrators.

When they originally disclosed that the equity value in the group – previously recorded at $2.8 billion – had been wiped out by impairment charges that will be made against the December half earnings, Babcock directors referred to the reclassification of "non-core" assets on the balance sheet as assets held for re-sale.

Having to mark the value of assets to market in the current environment, where there is virtually no functioning market for assets of any scale, would be an exercise flooded with red ink. Babcock’s auditors, Ernst & Young, its bankers, and even the directors themselves, would inevitably take a very conservative view of value in the group’s circumstances.

One can understand why the banks, owed almost $4 billion, would like to keep the group’s structure intact. Babcock is an exceptionally complex group, operating globally, and the banks need its people and their experience and contacts to manage the assets and, more particularly, to maintain some semblance of deals flow if they are to avoid very heavy losses.

For the directors and the executives, there would be little point in continuing if all they were doing is what an administrator would do and working purely for the interests of the banks. The fact that Michael Larkin and his board and the core of his senior team are still there suggests they think there might be some prospect, even if it is a remote one, of extricating something from the mess.

If they want to keep Babcock alive, albeit on life support, the banks are going to have to agree to a massive debt-for-equity swap to reduce the debt-servicing burden on the group.

That, as occurred within Centro, would provide Babcock with some leverage to hold onto a tiny slice of the action for their equity holders. Centro securityholders were left with just under 10 per cent of any upside from their group’s deal with the banks.

The best case for the Babcock team is if they can carve out a sliver of the action for their shareholders and noteholders, while corralling the banks into a "take-and-hold" outcome that allows assets to be sold in an orderly fashion over time.

At today’s valuations there clearly is no value for equity holders. If Babcock can be kept on life support for two or three years, however, there is some prospect that values might firm. After the restructuring, assuming the deal with the banks is done, what might look like an out-of-the-money option today might eventually have a sliver of positive value.

If they didn’t believe something, however small, could be salvaged from the wreckage, it would be safer and less traumatic for the Babcock team to give up and, like Allco, call in the corporate undertakers. Presumably that’s the theory those trading its securities unofficially in Europe are working on. If they are wrong, of course, they can’t say they weren’t warned.