babcock warns of insolvency

Babcock warns of insolvency
Eric Johnston
January 8, 2009

STRUGGLING infrastructure house Babcock & Brown has warned it will become technically insolvent as it prepares to make a series of huge asset write-downs as part of efforts to push through the sale of its aircraft leasing and property businesses to pay down debt.

The asset write-downs — which have yet to be be finalised but are expected to run into the billions of dollars — will result in the level of debt sitting inside the company far eclipsing the remaining value left in its infrastructure business.

But Babcock, which is being kept on life support by its banks, will avoid being placed into administration as it finalises the details of a debt-for-equity swap to secure a longer-term funding deal.

Babcock's 25-strong syndicate of international and domestic banks last year agreed to waive the key conditions tied to its $3.1 billion in debt.

The banks also provided a short-term funding lifeline of $150 million in return for further restructuring by the infrastructure house. Babcock will now put a final restructuring plan — involving further job losses — to the banks on Monday.

Analysts have described Babcock as essentially in "workout" mode as banks oversee an orderly sell-down of assets to recoup debt.

Still, bankers involved with Babcock have said the preference among the lending consortium's partners had been to keep the company out of the hands of administrators given the complexity of the businesses, which range from managing power stations to organising aircraft leasing.

Babcock's board met yesterday to begin the process of dismantling the empire built by former chief executive Phil Green over the past four years.

In earmarking a series of assets for sale, Babcock is forced by accounting rules to give them a current market valuation, rather than ascribing a longer-term value. But the drying-up of credit and the volatility of the sharemarket have caused a collapse in the value of assets such as property and infrastructure.

Babcock last night warned its asset impairment charges would put the company in "a substantial negative net asset position" for the year to December 31.

It said the impairment process was yet to be finalised and would be known closer to the release of its full-year results next month.

In its most recent set of accounts, Babcock's net assets stood at $2.51 billion, including corporate debt.

Several other companies have been forced to cut asset values in recent days.

They include construction giant Leighton Holdings, which warned that write-downs in its investments would punch a $170 million hole in its half-year accounts. Anglo-Australian investment house Guinness Peat Group said it was likely to make heavy write-downs across its holdings in a range of companies given the savage market downturn.

Among Babcock assets on the block are its aircraft leasing business and its property management operations.

Babcock is expected to make substantial write-downs in the value of its holdings in listed funds such as Babcock & Brown Power and Babcock & Brown Infrastructure.

Both satellite funds are trading at a fraction of their asset values as they also attempt to restructure debt.

http://business.theage.com.au/business/babcock-warns-of-insolvency-20090107-7c17.html