bondholder buyout: speculation on businessspec, page-5

Banks move on Babcock & Brown noteholdersFont Size: Decrease Increase Print Page: Print Adele Ferguson | April 20, 2009
Article from: The Australian
A SYNDICATE of 25 banks is considering a move to buy out Babcock & Brown's 8000 subordinated noteholders owed about $600 million.

Any offer would pre-empt an August 17 meeting designed to discuss how much -- or how little -- noteholders could expect to recoup from the company's collapse.

The noteholders were offered just $600,000 by management in March, an offer that was overwhelmingly rejected and resulted in the appointment of voluntary administrators.

Analysts say the banks would have to offer a much sweeter deal to stave off any messy investigations into the company, including putting it into liquidation or challenging their rights to the debt if the company is solvent.

The administrators have four months to investigate the business affairs of the company, and according to one of the key administrators in charge, David Lombe at Deloitte, the investigation will include what caused the company to fail, an estimate of how much the noteholders might get back, and any deals or breaches that might work to get more money back for the noteholders.

A copy of minutes of the initial creditors meeting reveals that the administrators will also investigate the subordinated guarantee between Babcock & Brown and Babcock & Brown International Pty Ltd (BBIPL), which is the operating company that holds all the assets.

The subordinated guarantee prevents assets in BBIPL being made available to Babcock & Brown until all senior debt is paid to the senior secured creditors, the 25 banks.

If this veil can be pierced, it could enable the subordinated noteholders to get more money, albeit at the expense of the banks, say analysts.

Deloitte is well placed to understand the inner workings of the company as it was commissioned by Babcock & Brown in 2006 to do an internal audit of its compliance and corporate governance policies and structures.

A copy of that Deloitte report, obtained by The Australian, uncovered a series of adverse findings. The report concluded that Babcock had not maintained effective control procedures to ensure compliance with legal and AFSL requirements.

It was also concerned at the length of time the company took to address some important issues.

It stated that a conflict of interest policy that was tabled and approved at a compliance committee meeting in 2005 was still to be rolled out in 2006.

The report said: "Compliance at Babcock & Brown currently doesn't have a clear identity within the business process.

"Capital investment acquisitions made by Babcock currently require no compliance sign-off as part of the approval process."

Deloitte's new report, to be filed at the next creditors meeting on August 17, will recommend whether or not noteholders should put the company into liquidation or file a deed of company arrangement.

Analysts say if creditors vote to put the company into liquidation, it will give Deloitte additional powers to pursue section 588 transactions such as preferred transactions, related party transactions, whether the company was trading while insolvent, and any preferred transactions.

They would also be able to investigate whether the listing company is actually the operating company, and therefore consolidate all assets and liabilities.

One deal understood to be of particular interest to noteholders is the deal with a syndicate of 25 banks, which are owed $3.12 billion, to restructure the company.

Babcock & Brown International, the operating company of Babcock, is effectively ring-fenced from B&B's creditors, who include the company's noteholders.

Under a deal struck in February, the group's banking syndicate has total security over the assets that are to be sold to pay back $3.1 billion of loans. As one former executive at Babcock said: "In one fell swoop the restructure rendered the equity in the headstock worthless and tried to get the subordinated noteholders to take a fraction of their investment. It is a deal that needs proper examination to ensure there have been no breaches."

The deal struck with the banking syndicate requires the company to pay back just over $1billion of the debt by April 2011 through the sale of assets, and the remaining balance of $2.12 billion is repayable by 2018, but only to the extent of realisation of assets.

In return, the banks will receive a 20 per cent per annum restructuring fee on the loan.

If this is based on the entire $3.1 billion debt, the fee the banks could theoretically rip out is $10 billion.

If it is based on the second part of the loan, the fee could mount up to $6 billion. While Babcock & Brown might be in administration, the operating business is not, and it is this business that has been given the mandate by the banks to sell the assets to repay the debts.

The subordinated noteholders now have to sit back and watch while former senior managers are left to pick at the carcass and the surviving senior executives, many of whom oversaw the corporate governance of the company since listing in 2004, receive undisclosed retention bonuses simply for doing their job.

New Zealand-based Wayne Powell, who is representing 40 noteholders, told The Australian he was very disappointed by the whole affair.

"We are in the dark about what is going on. We are limited to the announcements to the ASX, and the creditors board is a Clayton's board," he said.

"It is all very unfortunate. The company was touted as a great business with strong cash flows, and now look at it. All we can do is wait for the creditors meeting to decide what to do."

Other creditors are feeling similarly frustrated. At the creditors meeting, one noteholder, Valerie Moran, said she had no confidence in the trustee.

"I've had no communication from them and the absence of communication -- lack of communication -- also explains some of what I thought were perhaps discrepancies in Babcock & Brown's communication. Where is the trustee keeping us informed?"

Meanwhile, the house of Babcock is being chopped up. The syndicate of banks, on advice from McGrathNicol, entered a conditional agreement on March 31 for a management buyout of Babcock & Brown Public Partnerships to Amber Infrastructure Group.

The price has not been disclosed.