lifeline needed

From the desk of ABN Amro Morgans Ltd:

"LIFELINE NEEDED

With no asset sales to date, BBI suggests it is unlikely to raise sufficient funds in time to meet its FY10 debt maturities. As such, BBI has engaged a potential
cornerstone. However, with the possibility that the preference securities could be converted, the recapitalisation may erode security holder value.

Asset sales process now unlikely to meet debt maturities
BBI has A$2.7bn of debt maturing in FY10 and FY11, including A$300m of corporate debt(due February 2010). With no asset sales to date, BBI suggests the sales process is difficult and may not realise sufficient proceeds to meet its FY10 debt maturities. A portion of BBI’s lenders (Holdco and Corporate) appears uninterested in refinancing. Previously, we thought BBI had to raise funds to pay down corporate debt. Now it appears BBI needs to pay down debt at the asset level as well. BBI has also flagged that asset sales, if they do occur, may be below book values.
Engagement of cornerstone investor may result in significant dilution. BBI is now exploring the possibility of a recapitalisation – having engaged a potential
cornerstone investor. Of significant concern, BBI has noted that BEPPAS and SPARCS may need to be converted before any equity recapitalisation – this may be highly dilutive and could erode security holder value. An interim agreement with the cornerstone also provides a three-month right of first refusal over the sale of certain assets, potentially thwarting the asset sale process. The process of finalising transaction terms and obtaining bank approvals is anticipated to take several weeks, with no assurance that an agreement will be reached.
Until balance sheet is cleaned up significant risks remain; too much uncertainty.
Given the uncertainty of the outcome it is hard to find a reason to own the stock, particularly as BBI is suggesting asset sales at a fair price look unlikely (and thus unlikely to produce any equity value for security holders). A full takeover bid seems remote given BBI’s complicated structure, high debt and overhang of SPARCS/BEPPAS. Given the hybrid conversion overhang, a recapitalisation rescue similar to TPI or AIO appears unlikely. If no asset sales or cash injection occur, then there is a risk that BBI will default on debt repayment. If a recapitalisation does occur with a conversion of SPARCS and BEPPAS (as BBI is suggesting), then dilution at the current price will erode much of the remaining security value.

We view the engagement of a potential cornerstone as further indication that BBI is struggling to meet future debt obligations. It would appear that a significant proportion of BBI’s lenders is not interested in re-financing BBI’s debt and want their capital returned (AND THIS NOW INCLUDES LENDERS AT THE ASSET LEVEL).

It would also appear that asset sale valuation(expectations) on DBCT and PD Ports are sufficiently different to consider a cornerstone, ie, vendor valuations of the assets are so low that the remaining equity would be insufficient to meet other debt obligations. This is a bit surprising as, less than two weeks ago at its FY result, BBI noted it was still working towards binding bids for DBCT and PD Ports. Also, the cornerstone will have a three-month right of first refusal over any bid for the assets, which could thwart the asset sale process.
The comment by BBI that BEPPAS and SPARCS will need to be converted before any equity recapitalisation is a concern as it will be highly dilutive and erode security holder value. When BBI presented to us last week, it highlighted that the internalisation of management structured with
BNB was designed so as not to trigger a change of control event that would lead to the conversion of BEPPAS and thus to dilution. This will effectively be undone if BEPPAS and SPARCS convert.
Given the uncertain outcome it is hard to find a reason to own the stock, particularly as BBI appears to be suggesting that asset sales at a fair price look unlikely (and thus unlikely to produce any equity value for security holders). There is a remote possibility of a takeover bid (from the cornerstone or otherwise), but this seems unlikely given BBI’s complicated structure, high debt
and overhang of SPARCS/BEPPAS. In the absence of any life line (asset sales or cash injection) BBI may default on its debt repayment, which may lead to the business going into administration."