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Babcock on the brink
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Banks circle the piggybank with a hammer
AdvertisementDanny John
November 21, 2008

THE debt-stricken investment group Babcock & Brown was clinging to its corporate life last night as it sought to persuade one of its key bankers to release a substantial sum of the company's own money to which the lender has frozen access.

The dispute threatens to derail Babcock's latest attempt to persuade its banking syndicate that it should be given more time to pay back its $3.1 billion of debt and, in doing so, avert the growing possibility of insolvency.

But with all sides recognising the risks involved, the urgent talks between Babcock and the unnamed bank to try to resolve the crisis over the frozen deposit were going on against the backdrop of separate discussions involving the company and its banking syndicate about their respective legal positions.

Babcock refused to disclose the identity of the bank involved or the size of the sum of money at stake but said that the deposit was a "material amount".

The lender is said to have a long-standing relationship with Babcock, dating back many years. Sources indicated that a German bank, Bayerische Hypo-und Vereinsbank, could be the lender at the centre of the dispute.

HypoVereinsbank, as it is known, was an original major shareholder in Babcock and agreed to sell down part of its investment after the group was floated on the ASX in 2004.

News of the dispute emerged when Babcock yesterday morning unexpectedly asked the ASX to place its shares in a trading halt, just a day after it announced yet another critical shake-up of its business under which the troubled company will sack a further 850 of its 1450 staff and sell even more of its remaining assets to stay afloat.

Babcock asked for the suspension to stay in place until Monday morning in order to give it breathing space and avoid yet another calamitous fall in its share price.

The stock has more than halved in price over the past six days, dropping from 55c last Thursday to just 25c, where the shares are now temporarily frozen. But that is already 99 per cent below the stock's record high of $34.78 recorded just 18 months ago.

Investors were given little insight into the reasons behind yesterday's suspension. "The reason for the trading halt is that we are in dispute with a bank which holds a deposit of a material amount relating to the release of that deposit," Babcock said in its brief statement.

While observers cast doubt on the legality of the move by the bank involved, yesterday's events only served to complicate even further the relationship between Babcock and its bankers. It also cast doubt on the prospect of its latest survival plan delivering the necessary money to pay back half its outstanding debt by 2011.

Babcock's chief executive, Michael Larkin, warned on Wednesday when releasing details of the latest measures that there was "potential" for the company to breach at least one of its banking covenants in the near term.

The debt repayment plan is dependent on Babcock selling off its real estate and aviation leasing operations at a time when asset prices have plunged and buyers have retreated from the market because of a lack of funding. It also intends to slash its cost base by 50 per cent by 2010.

Babcock needs the support of its banks to get through the latest crisis, a process in which it engaged in a teleconference on Tuesday night with its 25-strong lending syndicate, aimed at securing their approval over the next week or so.