Commentary 12:40 PM, 18 Jun 2008 Alan Kohler Babcock's best bet
One good thing for Babcock & Brown is that the margin selling is probably finished, or close to it, which is why the price is now rising again.
Close to 80 million Babcock shares were traded between Thursday and Monday; that represents about half of the company’s free float, excluding the staff’s 43 per cent stake, Fidelity’s 7 per cent and Barclays’ 5 per cent.
Most of that turnover was selling in response to margin calls. Babcock has been a favourite of punters investing with borrowed money and last week’s price collapse triggered a huge wave of margin calls and margin selling in response to them, often by the lender taking possession.
The buying, as far as can be determined, has been divided between short covering hedge funds locking in terrific profits and high net worth (and therefore ungeared) investors who sold early and are coming back.
Many smart investors got out at around $25 through the second half of 2007 because it took a while for the credit crunch to really affect Babcock’s price. They’re people who like the model but could see problems coming, and they’re now inclined to take a punt at under $6.
But the question is whether those punters are going to bid the stock back to $7.50, so it escapes the bank’s market capitalisation debt review trigger.
They just might, which is probably the Babcock team’s best hope. If the punters now going long can keep the business out of the banks’ hands they might be big winners.
The clock ticking for the four-month review period can be reset back to zero if the share price goes above $7.51 for two days in a row. If it doesn’t, and Babcock reaches the end of the countdown having been below $7.51 for the whole time, the debts become repayable in 90 days.
If it stays above $7.51, the longs win. If it stays below that for four months, the shorts win. It’s the investment tussle of the millennium.
Babcock management had a big all-in meeting with their 24 banks yesterday and by all accounts the mood was positive, if not exactly joyous.
Nevertheless, having won – amazingly – a market cap trigger last year, the banks are not going to give up the power it gives them.
The idea that they won’t start the clock ticking on the four months is undoubtedly a fantasy; in fact it's probably already ticking.
BNB Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
