From The Australian:
Babcock bounces as bankers hold fire
Katherine Jimenez and Richard Gluyas | June 18, 2008
BABCOCK & Brown chief executive Phil Green appears to have kept the financial wolf from the door for the time being, with a presentation to bankers on Monday night believed to have been "reasonably well" received.
But it could be a week before Babcock's bankers decide whether to initiate a formal review of a $2.8 billion senior debt facility that the embattled group has with them.
The tense meeting also involved Babcock chief financial officer Michael Larkin and capital markets boss Trevor Loewensohn holding a phone hookup with bankers here and in Europe.
The trio's key message was that Babcock was now in the same position as it was less than two months ago when the banks completed due diligence and signed off on the corporate facility.
Sources said the banks were likely to take a week or two before deciding whether to call a formal review of the facility, which they are entitled to do after Babcock shares' market capitalisation fell late last week through the facility's $2.5 billion value trigger.
Early yesterday Mr Phil Green announced an accelerated strategic review of Babcock's listed funds.
Babcock is expected to start by selling wind-farm assets and some infrastructure assets.
Its satellite fund, Babcock and Brown Power, has already flagged for sale it was looking at selling selected non-core assets, with details expected shortly.
Those BBP asset sales could include a power generator in Australia.
This week's joint acquisition of British freight company Angel Trains is also a sign of the "third party" capital model Babcock may embark on in the future.
Babcock was the leader of the consortium but does not have to rely heavily on its own capital.
Babcock shares lost half their value last week in response to continuing concerns about its $46 billion in debt across its investment funds, as well as doubts about the longevity of its business model in the global liquidity crisis.
Online chatrooms have seen talk of shorting not only Babcock stock but also Macquarie stock, on the same basis of a supposedly flawed model.
Babcock shares bounced back yesterday, up 68c to $5.93. This followed the announcement by rival Allco Finance Group and its co-investors that they had sold their US wind-energy assets for a total of $US325 million.
An analyst attributed the bounce in Babcock stock to the price obtained by Allco, with Babcock likely to receive indicative offers this week for its European portfolio of wind assets. But one fund manager described Babcock's situation as "ugly" with its recovery up in the air.
"They've got to a point where the decision is in the hands of the bankers and I don't think that's ever a good position to be in because you've lost control of your destiny," he said.
With the private equity market dried up, and little cash available to service their debt, the company would likely turn to an asset sale, while the future of its satellites were also questioned.
"It depends what their valuations are like because they're all highly geared and it would only take a small reduction in the valuation of the assets to make them insolvent," the fund manager said.
Deutsche Bank told clients that Babcock could survive the negotiations with its bankers, with a reduction in gearing to be achieved by asset sales already planned.
"However, a shrinking balance sheet will reduce capacity for future deal flow, suggesting current earnings will not be maintained," it said.
Babcock had more than $3 billion in unspent equity in its unlisted, specialist funds, the analyst said. It also had a highly variable cost base, more than half of which was made up of staff bonus payments of $573 million last financial year.
"If at some future point the company's solvency is seriously jeopardised, we believe the bonus pool will be sacrificed, at least for one year," Mr Hill said.
"Clearly this outcome would not be good for staff retention and medium-term earnings prospects, but it provides material, short-term financial comfort."
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