babcocks brush with death

Babcock's brush with death
Alan Kohler


Phil Green and his team at Babcock and Brown knew on Friday that they had the majority support of its banking syndicate that they needed to avoid entering a four-month review period, but they didn’t have it in writing.

That took another two days of tense emails and phone calls between Green and the 25 banks involved, coordinated by the agent bank, Halifax Bank of Scotland. In the end they got “well over” the required two-thirds majority.

The price of removing the market capitalisation clause that almost brought the Babcock structure tumbling down was just 50 basis points on the $2.8 billion worth of debt taken out with the syndicate.

That’s just $10 million a year – an incredible bargain considering that the debt and equity markets have apparently entered a second leg downwards, and fear and loathing is stalking the screens once more.

It means Babcock and Brown survives. If today’s announcement had been that the banks had decided to trigger the review event and to not remove the market cap clause, the share price would have collapsed.

It would have represented a devastating vote of no confidence in the management, and indicted that the banks wanted to get their money out, which they could start doing in four months.

Margin calls would have been triggered immediately and bankers to all layers of the group would have wanted out. Administration, if not liquidation, would have been almost impossible to avoid.

As it is, the banks looked over the edge and pulled back. The result is a triumph for Green.

The fact that Phil Green agreed to the market clause in the first place, allowing the banks to trigger a review event if the Babcock market value fell below $2.5 billion or $7.51 a share, was an act of hubris on his part. He simply could not conceive the possibility that it would happen.

But it did, on June 12. From that Thursday, Babcock was hostage to the 25 banks. The following Monday evening there was a formal presentation to all 25 banks by Green and the team, as they tried to persuade them not to trigger the review.

The following 11 days were spent answering questions and trying to allay the banks’ concerns.

By Friday it was clear they had probably got across the line, but confirmation was needed in writing. That came over the weekend.

In the end, the self-interest of the banks involved and the need to put on a show of confidence in the management team won out – for two reasons:

1. Babcock’s value lies in its management contracts with its group funds. As we have reported, these last for 25 years and are virtually indestructible – except in the event of Babcock’s insolvency. If they triggered insolvency, they would be left with almost nothing.

2. The banks all know that the next lending boom is in global infrastructure; in fact it will be their salvation as the US housing market continues to collapse. There are very few global players with the skills to aggregate capital for infrastructure, and Babcock is one of them.

Phil Green and his team need to learn from this near-death experience and use it to understand the new world in which they operate. The signs so far are that they will.