babcock crime and punishment, page-4

Alan Kohler :Business Spectator:18 May 2010

Babcock's lending lesson

In Europe, the banks have learned that its always best to lend to the core and not the periphery, but in Australias biggest corporate collapse Babcock & Brown the lesson has been the opposite.

Virtually all of the $3.6 billion lent to the two core companies in the Babcock & Brown group has been lost, while nearly all of the $44 billion or so lent to the periphery looks like being recovered.

Actually, most of the bankers to the main operating business, Babcock & Brown International Pty Ltd (BBIPL), have now sold their debts to hedge funds for between 10 and 20 cents in the dollar. There were 25 banks 22 sold. The return to creditors from that company looks like being about 10 cents in the dollar, so the hedge funds have lost their bet.

The top company, Babcock & Brown Ltd (BBL), had $600 million in subordinated notes supporting its only asset of 100 per cent of BBIPL. That has been completely lost, because all equity in BBIPL was wiped out immediately.

There were two types of loans to the Babcock & Brown periphery: non-recourse debt to specific BBIPL deals, mostly wind farms and other infrastructure deals still held by the core company, and corporate debt and non-recourse funding into the 15 satellite funds within the B&B orbit.

While pretty much all of the equity in these funds has been wiped out or severely diluted, most of the loans will be recovered.

There was a total of about $7 billion in corporate debt held by these funds, which looks like returning 90 cents in the dollar, and $30 billion in non-recourse debt on specific deals, which looks like recovering 100 cents.

The non-recourse BBIPL debt at the 'core' is estimated to be worth 95 cents in the dollar because the assets against which the loans were written are all still operating in new corporate entities.

All that remains now is to find out whether those who created this over-geared house of cards will be held to account.

The Australian Securities and Investments Commission has been poring over evidence for nearly 18 months, but no charges have been laid or civil actions launched.

A public examination of directors by the liquidators of the top company, David Lombe and Simon Cathro of Deloitte, has been delayed, and is now scheduled to go ahead on July 5.

In a report last September, Deloitte said the directors may have traded while insolvent and may have breached their directors duties. They said B&B became insolvent on or about November 29, 2008, which was more than three months before voluntary administrators were appointed.

So far there have been no charges laid or civil actions launched against directors or executives for this. Michael Larkin remained behind to clear up the mess as managing director of BBIPL effectively working for the hedge funds that bought the bank debt and the others have all gone on to new careers.