B&B in freefall as woes mount June 12, 2008 - 3:19PM
Babcock & Brown shares are getting smashed on speculation of hedge funds shorting the stock into oblivion - into the hands of its bankers, that is.
A Babcock spokeswoman has confirmed that if Babcock shares fall to $7.50 at their close that would trigger a $2.5 billion market capitalisation review clause with its syndicate of banks.
The upshot would be a total collapse in market confidence as Babcock would be in a similar basket to Allco and Centro - in the hands of its bankers. The banks would then have four months to do their review.
The spokeswoman was confident the banks are not going to call the review. "There were comments this morning from our banks. They are not necessarily going to call it.''
The spokeswoman also said that besides the 333.3 million shares on issue now there are another 50 million held in Babcock & Brown International Proprietary Limited (BBIPL), which represents another 13% of issued capital.
She confirmed that these shares could be converted into ordinary equity and be included in the trigger point calculation for the banks - as could some 33 million zero-priced options and other pre-IPO options priced at $5 at the float.
With the BBIPL stock the price of the review event would come down to around $6.58 per share.
The stock was down more than 19% at $7.68 in late afternoon trading.
There are two problems with this story. One, there is no "borrow'' in Babcock stock right now, no shares on loan for shorts. It's all tied up. Most of the selling is coming from giant quant fund Barclays Global Investors, which sells on volatility. BGI sold down below 5% earlier this week and is likely to be in the market again today.
The problem is buyers are vanishing in the panic and Babcock is yet to emerge to clarify the debate over the "market review" clauses.
The second story is that Babcock & Brown's founders in the US hold about 17% of the company in a convertible note, which means that could convert to equity in the event of the group hitting its $7.50 trigger point.
Most of the selling, then, is coming from existing shareholders. There is a likelihood that hedge funds will "cover'' today - or buy back their short positions if they are already short - or simply buy the stock for a bounce.
There is also some ugly speculation doing the rounds that this morning's sell-off has been exasperated by the triggering of margin calls.
Longer term of course, the picture is more cloudy. It is clear the business model is broken and the market has little faith that management can replicate its track record of earnings growth by knocking out deal after deal and snipping big fees. Rather, management is preoccupied with surviving, plugging holes everywhere in the group's constellation of satellites.
No plugging is more vigorous that in Babcock & Brown Power today. The stock has been caned 42.5 cents to 88 cents since it came out of a trading halt mid-morning.
While BBP's banking syndicate has agreed to the $2.7 billion refinancing, there remains another $300 million to $400 million to be found, from somewhere, for working capital requirements. And that somewhere looks like it could well be the parent.
The fact that BBP has been hit with worries about gas supply thanks to the explosion at Apache's Veranus plant in WA does not help things. But it is ratings agency Fitch that has also whipped up concern among banks and institutions. While Fitch has assigned a BBB rating on the $2.7 billion secured facility - a notch above junk status - the devil is in the rater's detail.
According to a release for institutional clients, the Fitch ratings news is not delivering an investment-grade rating of BBB minus.
The release says BBPF is what the Babcock system calls an asset level entity. It has a contractual close of a secured facility of $2.7billion.
Fitch gave the facility an investment grade rating of BBB minus. But the release says equity investors should also pay attention to the Fitch ''Issuer Default Rating'' for BBPF, which is a non-investment grade rating of BB+.
This downgrade in the Issuer Default Rating from Fitch does not provide a lot of comfort to institutions who are tossing up whether to back BBP for a recovery. A lot of the stock in a recent issue went to hedge funds and they are selling today.
Fitch goes on to explain that in the BBPF case, the security of the loan will give it higher recovery given default - hence the secured facility rating is notched above the IDR. Fitch says that since equity holders rank behind debt in the recovery process given default, from an equity perspective, it thinks the BB+ rating is more meaningful.
Longer term of course, the picture is more cloudy. It is clear the business model is broken and the market has little faith that management can replicate its track record of earnings growth by knocking out deal after deal and snipping big fees. Rather, management is preoccupied with surviving, plugging holes everywhere in the group's constellation of satellites.
No plugging is more vigorous that in Babcock & Brown Power today. The stock has been caned 42.5 cents to 88 cents since it came out of a trading halt mid-morning.
While BBP's banking syndicate has agreed to the $2.7 billion refinancing, there remains another $300 million to $400 million to be found, from somewhere, for working capital requirements. And that somewhere looks like it could well be the parent.
The fact that BBP has been hit with worries about gas supply thanks to the explosion at Apache's Veranus plant in WA does not help things. But it is ratings agency Fitch that has also whipped up concern among banks and institutions. While Fitch has assigned a BBB rating on the $2.7 billion secured facility - a notch above junk status - the devil is in the rater's detail.
According to a release for institutional clients, the Fitch ratings news is not delivering an investment-grade rating of BBB minus.
The release says BBPF is what the Babcock system calls an asset level entity. It has a contractual close of a secured facility of $2.7billion.
Fitch gave the facility an investment grade rating of BBB minus. But the release says equity investors should also pay attention to the Fitch ''Issuer Default Rating'' for BBPF, which is a non-investment grade rating of BB+.
This downgrade in the Issuer Default Rating from Fitch does not provide a lot of comfort to institutions who are tossing up whether to back BBP for a recovery. A lot of the stock in a recent issue went to hedge funds and they are selling today.
Fitch goes on to explain that in the BBPF case, the security of the loan will give it higher recovery given default - hence the secured facility rating is notched above the IDR. Fitch says that since equity holders rank behind debt in the recovery process given default, from an equity perspective, it thinks the BB+ rating is more meaningful.
