criterions view

Babcock & Brown (BNB) $5.25

STILL on highly geared and over-engineered entities, the investment house yesterday decried "incorrect and misleading commentary" about its debt as management entered formal chats with its bankers -- the equivalent of going to the headmaster for six of the best.

While designed to be reassuring, the firm's utterances reek of semantics more than anything. Investors agreed: after an initial anaemic up-tick, Babcock stock closed unchanged.

Management assured anyone still listening that last week's stock market trashing did not trigger a breach of debt covenant or "specific action" by the bankers.

The banks have the right to review their position in relation to the $2.8 billion of corporate debt, but can only act if Babcock's market cap remains below the $2.5 billion trigger point at the end of a four-month review period.

Whatever the case, there's not going to be a sharp cataclysmic response on the part of the bankers, who need more debt provisioning on their books like Zimbabwe needs Robert Mugabe.

Indeed, bankers would not have been obliged to pull the pin even if formal debt covenants had been breached.

Management has also talked up the quality of its greenfield development assets -- mainly in wind, solar and gas-fired energy -- as well as the imminent sale of its European wind assets.

"We will move as quickly as possible to restore investor confidence in a decisive yet orderly manner," Babcock chief Phil Green says.

But it's hard to be orderly and decisive when the creditors are calling the shots and when the malevolent hedge funds and shorters -- insert pantomime jeers -- smell blood.

Babcock & Brown is a fascinating investment conundrum. The $75 billion of total debt is a good reason to shy away from the Babcock empire.

On the other hand, the only thing that's changed is the $300 million funding black hole in the Babcock & Brown Power offshoot. Babcock the mothership expects to make $750 million this year.

But of course the company has to survive first. Some argue the Babcockers simply must be allowed to bat on, given the horrendous ramifications of failure for the wider market.

Before last week, most brokers had Babcock as a buy. Most have retreated to a neutral call, with Wilson HTM declaring the stock a sell on account of its "unacceptable risk position".

Criterion had Babcock & Brown as a speculative buy at $16.04 on May 15 and maintains that call, but not after more soul searching than the Dalai Lama.

We'll also maintain Macquarie Group (MQG, $48.65) -- which is more diversified and resilient -- as a speculative buy.

Macgroup's move to privatise its Macquarie Capital Alliance offshoot below net asset backing is a sign of things to come.

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The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not own shares in the companies mentioned.