Huntley's Recommendation: Babcock & Brown Infrastructure...

Huntley's Recommendation: Babcock & Brown Infrastructure Group

Recommendation: Avoid

BBI is a stapled security over a trust containing transport and energy infrastructure assets, and the company which manages the trust. The group is highly geared, interest cover is marginal and free cashflow is tight. Distributions on the stapled securities and dividends on the preference shares have been suspended until further notice. BBI has begun selling part-interests in assets to reduce debt but there is uncertainty about the timing and adequacy of proceeds from future asset sales.

Event03-Mar-2009
BBI reported 1H09 NPAT of -$245.8m. Total operating revenue was $1.4bn, up 36%, and EBITDA increased 33% to $433.6m. There was no interim distribution.

Business Impact: The result was distorted by the mark-to-market of interest rate swaps and FX hedges, the first full-period contribution from acquisitions undertaken in FY08, and expansion projects. Volumes at PD Ports and Euroports could come off due to the world recession, with IEG’s UK residential gas and electricity connections business to be affected by the UK downturn. BBI has a staggering $9.8bn of debt and on December 31 EBITDA coverage of interest expense was 1.71x. BBI is selling off the farm to reduce gearing and interest expense. $300m of debt was repaid last week after the sale of 58% of Powerco NZ and 29.7% of Euroports. Discussions are underway about the sale of a further interest in Euroports and for stakes in WestNet Rail and PD Ports. BBI obviously has the support of its bankers. During and subsequent to the period it refinanced $870m of debt. On December 31 BBI met all its debt covenants and continues to do so today. The overall financial profile however is still aggressive and liquidity is tight. Gearing on December 31 was 403%! BBI’s plight is clear from its attempts to sell equity in the group’s premier crown jewel, the Dalrymple Bay Coal Terminal. Presumably it is doing so with great reluctance.

Forecast Impact: --

Recommendation Impact: All else being equal BBI should be gradually rerated by the market as it degears. There is a case for some kind of positive recommendation. The problem is external observers cannot know how long the deleveraging process will take and if there will be delays and disappointments. Asset sales at satisfactory prices will be difficult in the global recession and credit crisis. There is no certainty about the final asset portfolio and cashflows. We think it will be a long time before BBI regains a stable investment-grade credit rating. There is no point recommending the stock for income investors until this time draws close and distributions resume.