Article from: The Australian HIDDEN beneath the complication and debt that has overwhelmed Babcock & Brown Infrastructure is an "Aladdin's Cave" of value for an investor with patience and deep pockets.
But anyone expecting this morning will bring the "abracadabra" moment that immediately opens the way to new riches is going to be disappointed.
BBI is expected to come out of 48 hours of trading halt today with confirmation that it is pursuing a recapitalisation through an equity raising rather than asset sales.
BBI is expected to confirm a broad framework for a recapitalisation that will likely involve investment both in the headstock and directly in some of the core operating assets.
It is speculated BBI could raise up to $500 million through a placement equivalent to 75 per cent of the headstock at a small discount to the prevailing market price -- and possibly more through the sale of direct interests in some core operation assets.
But today's statement is unlikely to deliver too much detail on the who, how, what and when of the progress towards introducing a new cornerstone investor to the only sustainable arm of the global folly that was Babcock & Brown.
The company is apparently keen to make it very clear to its flotilla of penurious shareholders that there is a lot of water yet between BBI and a secure, more prosperous future.
The one "W" question we can answer right away though is why someone would want to take a punt on BBI.
The crucial thing to understand about the BBI situation is that, while there is an awful lot of debt sitting within its corporate walls, the situation is not quite as complicated as it might appear at first.
Yes, BBI speaks for $9.9 billion of debt and about $3.5bn of it matures between now and July 2011. And that is before taking into account some $800m of hybrids, some $100m of which is due for re-set in November.
But the fact is that around $8bn of bank debt is secured by BBI's assets and it is being comfortably supported by the largely regulated revenue flows of those operations.
The immediate issue for BBI is that it has about $1.2bn of corporate debt which, while it is being serviced pretty comfortably from cashflows, is likely to be called by the banks as re-payment falls due between now and 2014.
At headstock level, there are three multi-currency facilities maturing between February 2010 and February 2011 which would, at current exchange rates, require about $750m to repay. In the past, BBI would either have extended the terms of that debt or traded one or more of its strong pool of infrastructure businesses to cover the repayment. But that game of soldiers died with the GFC.
BBI has been attempting to sell assets, including crown jewels such as the Dalrymple Bay coal port and its British ports business, without a whole lot of success for the past year or so.
What deals BBI has been able to complete have essentially been done at pricing metrics that have proved so self-defeating and value-deflating that the concept of a heavily discounted, control-changing equity issue now looks very positive indeed.
Over the past year or so, Australian corporates have raised $80bn in new equity which has promptly been delivered to banks in the form of debt repayment.
Time and time again we have seen the compounding impact the stabilisation of balance sheets has had on individual company share prices.
BBI is banking that it can repeat that virtuous cycle of recovery and the hedge funds are lining up to bet that it can. And here is how one of them is betting the BBI situation will pan out.
First, BBI finds a cornerstone investor prepared to stump up with maybe $500m at say 6c a share.
Then, given BBI continues to generate, post-capex, free cash at the current rate of $150m annually, it can quickly and easily start paying down the $750m of debt due over the next two years.
Given refinancing risk is mitigated as the balance sheet is fundamentally re-cast, investor sentiment would then shift and there will be a re-rating of the stock.
Now, if you use Asciano as a ready reckoner, then BBI might move reasonably quickly to maybe the 15c-a-share range, which means our cornerstone investor has made circa $700m-$800m.
The reason why some reckon this is all a bit of a no brainer from an investor's point of view is that the bulk of BBI's business is not even as cyclical as, say, Asciano and neither do they face the same structural risks as Asciano.
About 75 per cent of BBI's income flows from regulated assets where pricing reflects the cost of capital and locked-in rates of return.
When Asciano went to market it was overrun by demand and ended up doubling its raising to $2bn. The net result is that the share price has tripled and Asciano is suddenly back in the game.
The other thing to appreciate here is that BBI has prepared well for a white knight by internalising the management contract with Babcock & Brown at a cost of only $2m a year for four years.
While that represents a near 50 per cent increase on the fee flow from 2008, it is only 10 per cent of the flow from years past and country miles short of the terrifying $350m price paid by Macquarie Airports for the recovery of its right to manage itself from parent Macquarie Bank.
The management contract, mind you, remains a bit of a complication for the crew working on BBI's cornerstone investor option.
The issue there is BBI's $800m worth of hybrids. They can be converted on the sale of the B&B management contract and their conversion would plainly be seriously dilutive. Dilution is not something any new investor would contemplate lightly.
Given B&B is in the hands of an administrator and that the management contract is worth about $8m over 4 years, it would seem pretty likely that an early monetisation of the contract might be a serious option."
