Hybrid holders win the argument, and the risk INSIDER October 23, 2009
By Jamie Freed
Some of the holders of hybrid securities in Babcock and Brown Infrastructure have gained new ammunition in their quest for the proposed cornerstone investor, Brookfield Asset Management, to give them a return of more than 43c on the dollar.
After an exchange of letters between lawyers, BBI has admitted the EPS security over the former Alinta assets, the Australian Electricity Transmission & Distribution business (AET&D), definitely ranks above BBI's corporate debt holders. That is contrary to advice provided by BBI executives to investors and Insider over the last few weeks.
But it remains to be seen whether that confirmation offers much more than a pyrrhic victory for the EPS holders.
The EPS holders, with notes worth $779 million on face value, claim that, based on analyst valuations of the individual assets, between $93 million and $491 million could be available in the event that BBI fell into administration, after the AET&D debt, including $518 million of holding company debt due in January 2011, was repaid. That compares with the estimate of the independent expert, Grant Samuel, of $48 million to $148 million.
However, BBI makes the point that any sale could involve transactional costs of up to $100 million, including the repayment of $25 million of interest rate swap costs on the holding company debt, $40 million of stamp duty, receiver costs, and change of control provisions on the WA Gas Networks debt which could lead to a 200 basis point jump in the interest rate.
The most likely buyer for many of the assets would be DUET Group, in light of its pre-emptive rights over all but the Tasmanian gas pipeline.
Based on consensus analyst estimates for 2010, the ratio of DUET's enterprise value (debt plus equity) to earnings before interest, taxes, depreciation and amortisation is 9.7, while BBI's AET&D assets are 9.4 based only on the value of net debt to EBITDA, assuming there could be no equity remaining. DUET is unlikely to want to cut a deal that would dilute its earnings, so even if it paid 9.7 times for the BBI assets, the remaining equity value in those for EPS holders would be just $56 million.
So while the EPS holders do have security over the assets, even they would acknowledge that administration could be high risk, and that while maybe they could get a return of 70c in the dollar, it could just as easily be 20c.
In that context, it remains to be seen whether the threat of a no vote on the deal is enough for Brookfield to add a sweetener to get it across the line.
holding beppa
BBI Price at posting:
3.7¢ Sentiment: Hold Disclosure: Held
