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Babcock &Brown backer refuses further aid
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Scott Murdoch | November 21, 2008

Article from: The Australian
BABCOCK & Brown appears close to collapse after a deal to set fresh debt covenants stalled.


Babcock & Brown offices in Sydney. Picture: Alan Pryke

Germany's HypoVereinsbank has refused to inject emergency cash into the troubled group.

The deadlock threatens the survival of the diversified financial engineering group, which was forced to rush its shares into a trading halt yesterday.

The move by HypoVereinsbank to stop access to a substantial deposit is believed to have angered the international financing syndicate of 25 banks, which are keen for a deal to proceed to realise the value of Babcock's asset portfolio.

"We are not expecting good things to come out of this," a banking boss said yesterday.

HypoVereinsbank, a long-time backer of Babcock & Brown, held a 20 per cent stake in the investment group when it was floated in 2004.

The initial investment was made in 2000 when the German bank pumped $164 million into the fledgling business.

However, the German bank has struck its own troubles and Hypo Real Estate, a lending arm associated with the bank, was forced to receive E50 billion ($97.45 billion) recently as part of the German Government's bailout.

The major four Australian banks, which hold about $660 million worth of exposure to Babcock, are thought to have taken a back seat to the international banks, which are driving the key negotiations.

A late night meeting in Sydney on Wednesday night failed to strike a deal and the future of Babcock now appears grim. The Babcock stock will remain off the market until Monday unless a fresh deal is struck in the meantime.

"The reason for the trading halt is that we are in a dispute with a bank which holds a deposit of a material amount relating to the release of that deposit," the company told the ASX.

Chairman Elizabeth Nosworthy refused to elaborate on whether a fresh debt deal was likely, despite the future of her company now hanging in the balance.

Babcock & Brown will be the largest Australian victim of the global financial crisis if it is to capitulate, with the structure and size of the business much larger than Allco.

"I'm not in a position, I'm not going to confirm anything," Ms Nosworthy said last night.

The broader Babcock group holds about $50 billion worth of debt, but the contentious covenants surround $3.1 billion, which the company warned it was unlikely to be able to meet.

The move by HypoVereinsbank to withhold the funding follows its disastrous venture into Australian infrastructure investment through BrisConnections.

Vereinsbank, plus a Hypo Real Estate subsidiary, Depfa Bank, were two of the major financiers of the stricken Brisbane airport link project. The senior debt of Babcock is already rated junk status, which means potential investors will avoid the commercial paper.

Analysts at Citi said Babcock's troubles were similar to those of Allco, which warned before its collapse that its debt covenants would prove troublesome.

"The group now finds itself in a similar position to Allco earlier this year, which had also approached its banking syndicate to restructure its corporate debt facility," Citi said.

Merrill Lynch removed its rating on Babcock, saying the future of the group remained "in the hands" of the 25-bank syndicate, which could decide there was no viable option for the future.

The majority of the Australian financing from the retail banks is secured, while it is uncertain whether the international financiers took security over their loans.

Analyst Kieren Chidgey said Babcock's survival plan was risky, as it depended on selling $7.5 billion worth of assets in a weak market.

"Further material writedowns now appear unavoidable and could lead to a breach of debt covenants as early as December," Mr Chidgey said.

"Going forward, BNB will focus solely on the asset development and funds management in infrastructure. "While a logical move in our view is approval of this plan, BNB's fate rests in the hands of the 25 banks in its corporate debt syndicate."

Mr Chidgey said it could unfold that second-half writedowns would be greater than the $440 million in the first half, which would knock down profit before tax and breach debt covenants.