Investment firm Babcock and Brown is still standing at the end...

Investment firm Babcock and Brown is still standing at the end of a tumultuous week which saw its first half profits falling 24 per cent, a company restructuring, and Phil Green vacating the chief executive's chair for Mike Larkin, the former chief financial officer.

ALAN KOHLER, PRESENTER: Investment firm Babcock and Brown is still standing at the end of a tumultuous week which saw its first half profits falling 24 per cent, a company restructuring, and Phil Green vacating the chief executive's chair for Mike Larkin, the former chief financial officer.

To find out if the changes go far enough, I spoke to Wilson HTM Banking Analyst, Brett Le Mesurier

(to Brett Le Mesurier) Well Brett, do you think Babcock and Brown will survive?

BRETT LE MESURIER, BANKING ANALYST, WILSON HTM BANKING: I hope it will survive. I think here's a good chance it will, under the way the accounting treatment is at the moment, given that assets don't need to be market to market, that helps the situation.

ALAN KOHLER: So what do you think they have to do in order to make sure they do survive?

BRETT LE MESURIER: Well survival will depend on an orderly and profitable asset sale program, but of course that's going to be quite tricky at the moment, because asset values have fallen materially. We don't have a lot of detail about what their specific assets look like, but if they're anything like the general type of real estate infrastructure assets, it will be quite tricky.

ALAN KOHLER: What do you think the total debt of the group is?

BRETT LE MESURIER: Well just the B&B headstock is around $9 billion to $10 billion at the moment but of course when you bring in the satellites, you have a larger number. And survival of B&B at least in the first instance is really about the debt at the head stock. Most of the debt of course is limited recourse to the assets itself, and therefore not recourse to B&B. It's only the unsecured corporate facility which has recourse to B&B.

ALAN KOHLER: Yes, but do you think the banks are looking at it as one group in terms of their exposure or individual exposures?

BRETT LE MESURIER: They would be looking at it on two levels, they would be looking at specifically the issues with B&B and then secondarily their group exposures as they would have debt outstanding to the satellites. But I would imagine their first issue would be the unsecured portion on B&B because that is effectively structurally subordinated.

ALAN KOHLER: Just looking at Babcock and Brown itself, they've said that they need to sell or will sell $2 million worth of assets. Will that be enough?

BRETT LE MESURIER: Well they actually need over time to sell more than $2 billion. I think they basically need to sell half the assets, they need to shrink the business by about half, roughly, to get to the sort of gearing level which the amount of equity that they currently have can support, the right amount of gearing for assets.

ALAN KOHLER: So what sort of asset sale program would be reducing it by half?

BRETT LE MESURIER: Oh about $6 million, $7 billion dollars.

ALAN KOHLER: That's a tall order.

BRETT LE MESURIER: Yes - and the question is, over what period of time do you need to do that? - probably over the next 2 or 3 years. So they would need to be doing I would think at least $2 billion per annum in asset sales. That would be the minimum.

ALAN KOHLER: What do you think of the announcements they made this week in the management and board changes?

BRETT LE MESURIER: Well I think it was an improvement. I think it was important Michael Larkin be given a chance to put more order into the place. It seemed to be more discipline needed to be required and they did talk about greater focus. But I'm not quite sure what the greater focus meant because they are still focusing on operating leasing, infrastructure and real estate. The only business that they're cutting is corporate and structured finance, and there is very few assets involved in that part of the business as a proportion of the whole anyway.

ALAN KOHLER: Do you think history will record Babcock and Brown as just another overextended group of asset dealers in the tradition of the entrepreneurs of the 1980s?

BRETT LE MESURIER: That's how it's being looked at at the moment, I'm sure. It benefited from the very substantial decline we've had in credit spreads, up until a year ago, and as the stock went up as a result of it, it has collapsed as credit spreads have widened faster than they contracted in the first place. It is very substantially a product of the market and they didn't give themselves much wriggle room at all.

ALAN KOHLER: Thanks for joining us, Brett.

BRETT LE MESURIER: My pleasure, Alan.