death spiral?, page-25

Hi all,

my posting has reduced as I think alot of quality discussion has disappeared.

I respect all views, as my are mine and could be wrong. If you read both Dargie's and Melua's post they agree that asset sales are needed. They both agree a reduction of corporate debt is required but vary on the quantum and methodology. We should all be aware of the Sparc's issue which is current, as for Beppa conversion I believe 2012 is to far away to guess.

IMO markets act on finance theory, not accounting. Accounting is abritrary and subjective (it is also easily manipulated).

This is my oppinion and happy for people to disagree, but this is my we have a problem with the sp.

All along I said the problem is credit and its costs. Forget about interest rates, but the true cost being covenants and margin for bankruptcy premium (equity required).

Look at the half year financials and you will see the assets are all cash flow positive. This is the sign of good infastructure assets. In a perfect finance theory equation the optimum debt level is 100%, if your cash flow exeeds the cost of debt. The only problem is that this equation does not factor in bankruptcy risks and assumes credit lines are continually rolled over.

Here is your problem at present. The GFC means that the assumption that credit is rolled over is under threat and the bankruptcy cost has increased. I am happy with this assumption as evidenced by the decrease in organic capex that was debt funded, the sweep facility and the extra 200bps margin required by banks on the corporate facility.

Without trying to be too complex the CAPM pricing models generally mean you get a total return over the risk free rate (eg . government bond rate which has dropped),plus the cost of credit (normally interest rate, which has dropped, plus a market risk premium (which I believe has increased due to credit concerns). The big question is whether the equation will end up as increasing revenues, stable revenues or decreasing revenues once all things are added.

If you also throw in the increase in retained cash flows to fund organic capex, you end up with reducing free cash flows. Therefore corporate debt amounts may be harder to fund in the future if the conditions persist or worsen, therefore the risk increases at corporate level. This is why you get the 200bps interest rate increase and this will not be built into a regulated CAPM model as it is not at asset level.

All this is a result of the deflationary environment. In an inflationary environment you would expect returns to increase as the pricing model will ensure this (inflation reflects in increased interest rates and market risk).

What we require for BBI is an increase in inflation for the regulated assets. This means BBI will be getting in more dollars. Since alot of the debt is long-term hedged, you will be paying off fixed debt with inflated dollars, which means the debt is less in real terms and asset prices rise.

Therefore I still believe with all the stimulus floating around the world that inflation will return at some point. However, BBI require an good asset sale (at book and above) to ensure survuival until that point. Partnering at asset level will also reduce the need to fund capex from cash flows or debt (such as the EuroPorts deal).

Naturally, I hope the inflation is accompanied by increased economic activity. This should help the ports business, as stagflation could be nastier, but for a whole lot of other reasons.

So until we get inflationary credit flows back through the system, or more equity is injected (only reasonable way through asset sales at book and above) then BBI and Beppa price will stay depressed on credit conerns IMO.

My faith is that management will manage this cycle and get us through to the next inflationary cycle, which will go a long way to restoring sp.

All my thoughts and happy for anyone to disagree. Once again sorry about the length.

Cheers