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Babcock Shareholders Wiped Out as Banks Force Sales (Update1)
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By Malcolm Scott

Feb. 6 (Bloomberg) -- Babcock & Brown Ltd. will be forced by creditors to sell all its assets to repay debt, wiping out shareholders after its strategy of buying ports and property on credit imploded as the global financial crisis deepened.

Chief Executive Officer Michael Larkin will lead the sale process and hand the proceeds to banks over the next two to three years, Sydney-based Babcock said in a statement today. The listed company, which had a peak market value of $7.8 billion, may be placed in administration and removed from the exchange, it said.

“There was too much greed and arrogance and not enough transparency,” said Tim Morris, an analyst at Sydney-based investment advisory Wise-Owl.com, the only researcher to rate Babcock’s shares a “sell” at the start of 2008. “The core of the problem was when they started repackaging assets and the only people making money was themselves. When you start burning people, it’s only a matter of time before the fire catches up with you.”

Babcock, an owner of property, ports and power stations around the world, becomes the biggest Australian casualty of the global credit crisis, topping a list that includes Allco Finance Group Ltd. and Centro Properties Group. Like Centro, Babcock averted liquidation because falling asset prices and scarce buyers makes this an unattractive option for creditors.

Australia’s five biggest banks have almost A$870 million of loans at risk with Babcock, while overseas lenders including Royal Bank of Scotland Plc have almost A$2 billion on the line, according to estimates by UBS AG. Babcock had interest-bearing debt of A$9.6 billion when it last published accounts in August.

Debt Restructure

Babcock’s holdings “across all asset classes” will be sold, with all proceeds over the amount needed to continue operating the business used to reduce debt, the company said. Creditors have agreed to a restructure of existing debt facilities, with all interest payments and approximately A$2.12 billion of principal repayments to be on a “Pay If You Can” basis.

The owner of wind farms and properties will recommence a redundancy plan announced in November, when it said it would cut headcount by almost two-thirds to 600 by 2010.

“When you pay too much for assets and you’re debt funded, you only need a very small change in circumstances to make it unviable,” said Roger Montgomery, who manages A$200 million at Clime Asset Management and avoided Babcock’s shares. “Too much debt brings forward the inevitable.”

Choking on Debt

Creditors of Centro Properties in December decided against appointing administrators after the world’s fifth-largest shopping-center owner failed to refinance A$5.1 billion of debt accumulated as it acquired 650 U.S. malls. Instead, the banks said they would take a stake of as much as 90.1 percent to pay off some of the loans.

Babcock shares, down 99 percent in 2008, have been suspended since Jan. 7 at the company’s request and last traded at 32.5 cents. The shares peaked at A$34.78 in June 2007, when the company had a market value of about A$12 billion. There will be “no value” for equity holders and “negligible or no value” for note holders after its survival plan, Babcock said in a statement on Jan. 23.

Founded in 1977 by Jim Babcock, the company sold shares at A$5 apiece in an initial public sale in October 2004. The stock surged as Babcock, copying a business model pioneered by Macquarie Group Ltd., reaped fees from managing its 11 listed investment funds amid a five-year stock market boom. That unraveled as the global credit crisis pushed up debt costs and cut asset prices.

High Leverage

“The business model was all about turnover of assets during a time of cheap credit, and quite a high amount of leverage,” said Brett Le Mesurier, an analyst at Wilson HTM in Sydney. “The stock prospered in good times, but Babcock found out the good times don’t always last.”

Jim Babcock stepped down as chairman in August and Phil Green quit as chief executive officer after the company posted a 24 percent drop in half-year profit. New CEO Larkin then embarked on a program of selling assets, firing workers and loosening ties to affiliate investment funds in an attempt to appease creditors.

To contact the reporter for this story: Malcolm Scott in Sydney [email protected]

Last Updated: February 6, 2009 02:42 EST