Babcock & Brown claims subsidiary unaffected COMMENT: Bryan...

Babcock & Brown claims subsidiary unaffected


COMMENT: Bryan Frith | March 24, 2009
Article from: The Australian

BABCOCK & Brown has been very vocal that its descent into administration won't have any material impact on its operating subsidiary B&B International and that it will remain solvent and continue to trade. But does that claim stand up to scrutiny?

B&B was placed in administration on March 13 after the company's noteholders voted to reject a proposed restructure, which would effectively be a workout for B&B's secured creditors who are owed more than $3.35 billion.

Under that proposal, B&B would have sought to sell down assets over the next two to three years to enable repayments to the banks of just over $1 billion by April 2011. The remaining $2.12 billion would be payable by mid-2018, more than nine years after the restructure was begun, and the amount repaid would depend upon how much was realised via the asset sales.

B&B believed there would no value left for B&B equity holders and no, or negligible, value for the noteholders. In November 2005 B&B raised $416 million through a prospectus offering issued in Australia and a further $NZ225 million through a prospectus offering in NZ.

The noteholders' approval was required to prevent B&B falling into administration. But they were offered only 10c in the $100, or 0.1c for each dollar of face value, provided they gave up their existing rights, and agreed to the possibility of some repayments over an indefinite and extended time period, and then only after the secured bank debt had been repaid in full (an unlikely occurrence).

The Australian noteholders never got to vote on the proposal. The NZ noteholders voted first and they rejected it, upon which B&B was placed in administration. The rejection means that noteholders preserve their existing rights.

The administrators, David Lombe and Simon Cathro of Deloitte Touche Tohmatsu will hold the first creditors' meeting tomorrow to vote on appointing a committee of creditors.

It's a safe bet that one of the first tasks confronting the administrators is to determine exactly what the rights of the noteholders are and whether they have any leverage that could entitle them to repayment ahead of the secured creditors, or at least to rank equally with those creditors.

If that is not the case, then it's arguable that the directors of B&B International need to think long and hard as to whether they should put the operating subsidiary into administration on the grounds that they have no reason to believe the company is able to pay its debts, as and when they fall due. Directors, of course, can be held liable for any debts incurred by a company that trades after it becomes insolvent.

It all hinges on a guarantee given by B&B International of all amounts due and payable on the B&B notes. The notes are unsecured and are subordinated to the claims of the secured creditors, and no amounts are payable under the guarantee until the secured creditors have been repaid in full. The senior corporate debt facilities do not currently permit any payments under the guarantee.

B&B asserts that while any amounts are owing to the bankers nothing is payable to the noteholders under the subordinated guarantee and that the inability of B&B International to pay B&B to meet either interest or principal on the amounts does not prejudice the solvency of B&B International because its obligation to pay funds to B&B is "deferred" until its corporate debt has been fully repaid.

B&B also asserts that the appointment of the administrators to B&B does not of itself prevent B&B International from continuing to operate, and that would be so if a liquidator was appointed.

Moreover, B&B claims that because of the subordination arrangements neither an administrator or liquidator of B&B nor the noteholders or the trustee for the noteholders would be entitled to seek appointment of a liquidator to B&B International so long as any monies remained owing to the operating subsidiary's senior lenders.

If that is correct then guarantee is, and always has been, virtually worthless. The guarantee was highlighted in the prospectus, (UBS was the lead manager and bookrunner) with the front cover naming B&B as the issuer and B&B International as the guarantor. However, it's true the prospectus pointed out that the guarantee was subordinated to the claims of the secured creditor and that no amount would become payable under the guarantee until the senior debt was repaid in full.

Under the terms of the issue, the noteholders can request exchange "or repayment" of all of their notes by providing an "exit notice" to B&B after the occurrence of a "trigger event".

A trigger event is defined as any of the following -- B&B resolves in meeting to wind up, a provisional liquidator is appointed, a court orders a wind up, an administrator is appointed, B&B executes a deed of company arrangement, a receiver and manager is appointed, interest remains unpaid for more than 20 business days and a "delisting event" occurs.

Two trigger events have occurred: administrators have been appointed and a delisting event occurred on February 9 after B&B's shares had been suspended from trade for more than 20 consecutive business days.

It's known that some noteholders have issued B&B with exit notices demanding repayment, which become due and payable around May 13. An event of default will occur if B&B fails to repay those notes within 20 business days of it becoming due and payable.

Those noteholders want to know if they or the trustee for the noteholders, Trust Co Fiduciary Services, can call on the B&B International guarantee. The trustee says no amount is payable under the guarantee until the senior creditors are repaid in full.

Moreover, the trustee is party to a subordination deed under which it cannot make demand for repayment under the guarantee, or sue or take any other action to recover amounts owing with the consent of the security trustee for the senior creditors.

Moreover, the trustee cannot seek to wind up B&B International except in accordance with the instructions of the security trustee for the senior lenders.

If that is so it must be wondered why the trustee agreed to become a party to the subordination deed, as it's difficult to see how those terms could be in the interest of the noteholders.

The issue was made when B&B was flying high and looking for funds to aggressively leverage its growth. But the trigger events under which noteholders could require repayment all related to the possibility that the company would come to grief -- as has happened.

It's arguable that in such circumstances the priority of the noteholders to repayment is accelerated -- otherwise what was the purpose of including trigger events which enabled noteholders to require repayment?

Whether or not that is the case, it's arguable the administrators should be putting B&B International on notice that they intend to call on the guarantee.

That may cause the directors of B&B International to focus on the issue of solvency. It may be that no amounts are payable on the notes while ever the secured creditors are owed money, but it's arguable that the debts to the noteholders are due, with payments only deferred. If and when they become due it's difficult to see how the directors could have any expectation that those debts can be repaid.

Admittedly repayment of any amount may be deferred for many years, and the directors may be prepared to chance their arm. But they would be the ones at risk.

If B&B International were to go into administration, the banks would no doubt appoint receivers -- which would mean that the amount they could expect to receive would probably be considerably less than if they can run their own orderly wind down.

The prospect of such an outcome might provide some leverage for the B&B administrators to improve the prospects of the noteholders.