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Green fights for survival as Babcock investors panicFont Size: Decrease Increase Print Page: Print Katherine Jimenez | June 14, 2008
ABOUT two months ago Phil Green stepped in to help out his friend and business partner Lance Rosenberg. Now Mr Green is fighting for his corporate life as the company he helped build faces a crisis.

Mr Green's Babcock & Brown had a $40 million exposure to Mr Rosenberg's stock lending firm Tricom, which hit financial woes after receiving a $100 million margin call from ANZ bank. That forced Tricom to delay settlement of accounts with the ASX in late January. Not long after, it was looking for a merger partner.

Babcock recently agreed to pledge $7.5 million as part of a white knight consortium to recapitalise Tricom.

Now Mr Green is in the middle of his own crisis and it is unclear whether he will survive as chief executive.

Investors, led by short sellers, hit the panic button on Babcock this week, forcing the shares below the $2.5 billion market capitalisation threshold on Thursday and triggering a review event for its $2.8 billion senior corporate debt facility.

One banking source said: "something will definitely happen", suggesting that a private equity group might step in to provide liquidity and take a stake in the company. Or, he said, a predator might come in and negotiate with the banks. Another option might be to split up the business.

He said hedge funds believed this could be another Allco Finance Group situation. Allco was forced into a major restructure by its banks after a review of its senior corporate debt facility was triggered when its market value fell below $2 billion.

Mr Green "may have to step down like (Allco chief) David Coe did", the source said.

A fund manager said Babcock was relying on a business model of high leverage and turning over assets, "a la Centro or Allco".

"This credit crisis is slowly but surely finding them out ... it has shown the flaws in these business models. So whether they can turn themselves around from here or become another bank workout situation I think is not yet certain, but the probability is high that it is another bank workout.

"When you look at the other cases ... the CEO has not been the one to drive that workout."

It is understood informal talks are under way with some of the banks in Babcock's 25-bank syndicate.

The major local banks are believed to have exposures of between $120 million and $150 million. The Commonwealth Bank is said to have the biggest exposure, of about $170 million.

Mr Rosenberg and Mr Green are reportedly part of a group that owns a $23 million property in the NSW Hunter Valley.

Tricom has also been involved in a number of Babcock corporate activities such as the Babcock float in 2004 and B&B's takeover battle for Alinta. Most of Tricom's pipeline of corporate advisory work has come from B&B.

It is understood a few Babcock executives have margin loans.


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Visiting Saxo chief confident about deal for TricomFont Size: Decrease Increase Print Page: Print Glenda Korporaal | June 14, 2008
SAXO Bank founder Lars Christensen insists he has never met Babcock & Brown chief Phil Green.

But the Danish-born former derivatives trader, who is in the middle of another lightning trip to Australia to do due diligence on broker Tricom, is learning quickly about the complex interconnections in the business he is buying into.

Saxo, a rapidly growing Danish bank specialising in selling online trading platforms for foreign exchange and contracts for difference trading to brokers and banks, is coming to the aid of Green's friend, Tricom chief executive Lance Rosenberg. In an interview in Sydney yesterday, Christensen said things were still on track, halfway through a three-month due diligence period, to finalise a proposed deal that would see Saxo take a 35 per cent stake in Tricom alongside Green's Babcock & Brown and the ANZ Bank.

Tricom founder Rosenberg is set to retain 20 to 25 per cent of the firm with the Tricom staff set to hold the rest.

Green's Babcock & Brown, the ANZ and other unnamed investors in April put $30 million in Tricom to help stave off a repeat of the collapse of stock lender Opes Prime. Christensen said Saxo was invited to buy into Tricom after the collapse of plans to sell the company to Bell Financial in March.

Saxo, which has promised to come up with a $20 million cash injection as part of the deal, is still in complex negotiations with Babcock & Brown and the ANZ Bank to ensure it is ringfenced from the Tricom loan book and the shares that originally caused the problems for the broker when it failed to meet its settlement obligations in late January.

"Things are moving forward in the way we expected," Christensen said in an interview in Tricom's offices in Governor Phillip Tower over looking Sydney Harbour.

"Unless we see things that are not in line with what we expect, then we should be moving ahead (with the deal)," he said.

Christensen, who met with the ANZ Bank in Melbourne on Thursday, says the current process has involved many discussions with Babcock & Brown executives, but not Green himself. "I have spoken to other people from Babcock & Brown and been impressed with their professionalism," he said.

"We have had a lot of exposure to them ... but I am not immediately familiar with the course of their current problems over the last few days."

But Christensen is in no doubt about the details of the deal agreed to in principle by Saxo in early May -- a deal which has helped to take the public pressure off Rosenberg and Tricom, the broker which handled the float of Babcock and Brown back in headier days in January 2005.

It is handing over its $20 million in cash in return for guarantees that Tricom will have a net balance sheet of $50 million which is free and clear from any stock lending business and any other questionable trades.

He says he doesn't expect that Babcock & Brown's current problems will affect this guarantee which is a critical part of the deal.

He is also very clear about another thing -- the Saxo deal will not include any exposure to any of Tricom's stock lending operations.

"The problem of stock lending is something which we have never been involved in," he said.

"For us, it is still a pretty critical component of the deal that ANZ and Babcock and Brown and the current shareholders completely ring-fence that and keep us out of that business.

"It is an area we have never dealt with and we don't want to be involved in."

If all goes well, Saxo could end up taking over 100 per cent of Tricom in a few years' time, buying out Babcock and Brown, the ANZ Bank and the other investors.

Christensen, who is still coming to terms with the demands of the long flight from Europe to Australia, having done three trips in the past two months, appears unfazed by reports of an Australian Securities Exchange investigation into Tricom.

He says Tricom still has an $8 million security deposit with the ASX which is part of conditions it imposed on the broker earlier this year after it failed to settle some trades in late January.

But he points out that the original security deposit was $14 million, with the ASX having since seen fit to hand back $6 million when things at Tricom settled down.

Christensen says he knows that there are still "some conversations going on" between Tricom and the ASX.

"I think there is a rational conversation going on without any massive sort of disagreement or whatever," he says.

"I don't know the detail of it other than that.

"But if the business is told to do things in a different way, of course we will comply and make sure that we operate exactly how the regulatory authorities and the other stakeholders here would like us to operate."

Once the deal is done, he will move fast to drop the Tricom name from the business because of the difficult memories of the past few months, labelling the new business with some form of the Saxo name -- possibly Saxo Capital Markets.

But he still wants Tricom chief Rosenberg, whom he has known for several years, and his key staff to stay on in the business.

"It's a very important part of any business to have dedicated and knowledgeable people," he says.

"Lance's skills are evident.

"He has also got a very loyal workforce that obviously like him very much and that are very loyal to him.

"A very important part of the deal was to retain Lance and other key people.'

Christensen, who went through some pressure of his own during the '90s in Denmark after he and his friend Kim Fournais founded Saxo predecessor Midas in a small office in Copenhagen, says he has found morale at Tricom to be "surprisingly high".

"It seems to bode well for the future," he says.

'If you can go through this kind of difficulty and still come out stronger on the other side -- I'm a firm believer that this is the kind of stuff which makes you stronger in the long run -- if you survive.'

It's advice which could provide some comfort for Rosenberg's mate Phil Green as he battles his own problems without the help of a white knight or a Great Dane.


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How the magic finally deserted the alchemists of bankingFont Size: Decrease Increase Print Page: Print Tim Boreham | June 14, 2008
ON a Friday evening in early October 2004, Babcock & Brown principals Phil Green and Jim Babcock quietly toasted their new fortunes -- $260 million to be precise -- after their investment house listed at a then record 50 per cent premium.

Babcock & Brown has always been dubbed a Macquarie Bank impersonator - and Phil Green seemed comfortable with that. Picture: Sam Mooy
The float, as it happened, was perfectly timed to catch the start of the three-year bull run. But by close of trade yesterday -- Friday the 13th, aptly -- any vestige of luck had deserted the financial alchemists. After a two-day battering which obliterated close to half of the stock's value, Babcock shares stood at $5.25, only just above their $5 listing price.

With the bull market now relegated to misty-eyed nostalgia, investors have clicked that a business model based on serial deal-making and debt cannot simply roll on unhindered during a credit squeeze.

While management denies debt covenants have been broken, and talks of a debt review instead, it's clear that the creditor banks will determine how -- and if -- Babcock remains a going concern.

It's an inauspicious milestone for Green, a former Arthur Andersen tax accountant who teamed with Jim Babcock to arrange a leveraged lease for a Qantas building in the early 1980s. Initially focused on real estate, the franchise -- a spawn of the lesser known US Babcock & Brown -- quickly subsumed infrastructure and energy assets and honed the esoteric art of aircraft leasing.

This model of taking on balance sheet risk -- usually in association with co-investors -- was far from Babcock's pure origins as a deal adviser.

From the outset Babcock & Brown was dubbed "mini me" -- a Macquarie Bank (now Macquarie Group) impersonator -- and Babcock's management were comfortable with the comparison.

Certainly, both stocks -- which really can only be loosely described as investment banks -- share a common modus operandi. Assets are sourced, purchased, debt-funded and then either on-sold or plonked into a satellite fund from which management fees derive. The debt costs are typically hedged, or move in sync with returns from the asset.

Opinion varies on how "mini me" Babcock really is, in that Macquarie gleans considerable earnings from a spread of global activities such as equities, commodities trading and corporate advisory.

"The good thing about Macquarie is they have a huge chunk of business which is non funds management related, such as broking and wealth management," says Constellation Capital analyst Peter Vann.

Babcock & Brown is more closely aligned to the asset management game, drawing fees from $75 billion of investments ranging from the mundane (coal terminals) to the exotic (apartments in rust-belt German towns, in league with property trust GPT).

But the key difference is gearing. "Debt levels between Babcock and Macquarie are much higher and debt is deadly at the moment," says Austock senior client adviser Michael Heffernan. "It's just something you don't want to get into."

Direct debt comparisons are notoriously difficult because of the level of gearing in associated entities, but Babcock admits to about $50 billion of gearing across the greater empire. Suffice to say, Babcock's financial standing was sensitive enough to adversity for the stock to be trashed on the back of this week's seemingly peripheral problems at its Babcock & Brown Power satellite.

The fund last month revealed a $300 million funding black hole after banks refused fully to refinance its $3 billion facility. Fate then literally struck a further blow at WA's Varanus Island, with a gas explosion reducing supply to Alinta, the Babcock & Brown-owned retailer.

According to Bell Potter head of research Peter Quinton, Babcock & Brown Power's need to refinance $2.7 billion was well known. While the $300 million shortfall was a shock, it can be comfortably met through asset sales if necessary.

"The problem with investment banks is that they have as much to do with confidence as fundamentals," says Quinton. "If a client loses confidence in any type of bank it's serious and quite life-threatening."

Paradoxically, it appears to be business as usual at the coalface of Babcock & Brown, which expects to post a thumping calendar 2008 net profit of $750 million. Save for the power fund's $300 million black hole, little has fundamentally changed. Not that this dissuaded brokers from hastily revising their stance on the former market darling -- including Wilson HTM, which yesterday relegated the stock to a sell: "The company is in an unacceptable risk position from the viewpoint of generating value for shareholders."

UBS, which plumps for a neutral call, has adjusted its Babcock & Brown valuation from $25 a share (based on the sum of the parts) to $6.80. The latter is a 10 per cent discount on net tangible assets, which is about as conservative as one can get for an entity that's not in the caring hands of the insolvency profession.

There's many a pundit willing to vouch for Babcock's health, although not a lot were buying the stock yesterday. The survival swing factor is the quality of the Babcock empire's $75 billion of assets and how well they fare if the banks demand the "for sale" signs.

"The problem is that in the last couple of days the focus has been on debt rather than assets," says Austock's Heffernan. "If they're quality assets, what's all the fuss about?"

The beleaguered Babcock will discover just how amenable the market is when it finalises a planned sale of European wind-generation assets. UBS estimates that the sale, to be completed by July, would add a more than handy $300 million to Babcock's current-year net profit.

While further sales to reduce Babcock's 80 per cent debt-to-equity ratio are seen as the most likely remedy, Wilson HTM also raises the intriguing scenario of Macquarie acquiring Babcock at a rock-bottom $5 a share.

In the meantime, management isn't banking on asset sales. On the contrary, it has decided that the best defence is attack, yesterday unveiling its role in a consortium to buy Britain's Angel Trains for $7.5 billion -- partly debt-funded, of course.

According to Green, the deal demonstrates that his company retains the ability to originate, structure and close deals. And Quinton says: "They are illustrating that investors have got it wrong and that they can continue to do deals with the likes of AMP."

However, Constellation's Vann says there's a long way to go before confidence -- that magical intangible elixir -- can be restored.

"If there are hedge funds shorting you can drive it up just as quickly as you can drive it down," he says. "But the line of least resistance is downwards." Austock's Heffernan is more blunt: "The fringe dwellers of the financial services sector are not where you should put your money at the moment."


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Burnt Babcock confronts fire saleFont Size: Decrease Increase Print Page: Print Michael Sainsbury | June 14, 2008
BABCOCK & Brown may be forced into a potentially massive fire sale of global infrastructure assets, analysts said yesterday, following a potentially fatal crisis of confidence in the Sydney-based investment house.

"We believe that Babcock could potentially sell off other parts of its wind development pipeline or its wind platform to generate additional revenue and repay debt," UBS analyst Jonathan Mott said yesterday.

"In addition, Babcock could look to dispose of other assets on its balance sheet to accelerate the repayment of its debt."

Babcock's major assets include Ireland's main telecoms group Eircom, a San Francisco electricity cable, a US gas pipeline, British ports, NSW schools and a raft of wind and conventional power generators.

Embattled Babcock chief executive Phil Green, whose personal wealth has been cut by more than $350 million in the last 12 months, spent the day fielding calls from worried global investors as well as major companies and governments who rely on the critical infrastructure assets owned by the Babcock group, including gas pipelines, power stations and ports.

Babcock, which has $50 billion or more of debt in its group of 20 listed and unlisted funds, is now technically at the mercy of its bankers and appears unlikely to be able to continue in its present form. "We have assumed that a senior debt review will be initiated, with materially destructive consequences for Babcock & Brown in terms of counterparty confidence, brand and future earnings trajectory," Credit Suisse analyst James Ellis said.

Shares in Babcock slumped a further $1.65 yesterday to close at $5.25, wiping more than $450 million off the value of the company which only 12 months ago had a share price of $34.63.

As the group's share price fell sharply for the third day in a row, some analysts raised the prospect of a management buyout as the group's net tangible assets are now greater than its market value.

"With BNB now trading below its net tangible assets we believe that it could be the target of corporate action", UBS's Mr Mott said.

"This would enable a purchaser to acquire the embedded value in much of its development pipeline as well as a high quality staff base.

"We believe that the possibility of a management buyout cannot be ruled out."

The company itself expects its share price collapse will slow down its business in the 2009 financial year and accelerate its move away from listed assets towards unlisted funds.

Babcock could also expect to see its fee income cut if competitors piled into the infrastructure game, Babcock's head of capital markets Trevor Loewensohn told The Weekend Australian.

He said that, with the loan review unresolved, he was not surprised by the continuing fall in the company's share price.

"The uncertainty that is plaguing the share price at the moment will only be cured now that we have gone through this market capitalisation point -- when we come back and say to the world what the banks are doing," Mr Loewensohn said.

A syndicate of 25 banks led by the Royal Bank of Scotland will hold meetings with Babcock next week to decide whether they will officially review the $2.8 billion loan, which was only signed off on April 14.

"Let us be clear about that. They have a basis on which they can call for a review. They certainly have no basis until they have that review if they want it, to take any prescriptive action until the end of the four-month period," Mr Loewensohn said.

If the review occurs, Babcock will have four months to lift its share price above $7.50 or face potential further action from the banks. "We are confident that the banks will have a look at our business case and confirm that what we are doing is what we said we are doing and what we have always been doing and what we intend to be doing, going forward," Mr Loewensohn said.

"Notwithstanding upside to our Babcock & Brown valuation, we see enormous uncertainty regarding BNB's future earnings trajectory (given effective transfer of control from equity holders to senior lenders)," Credit Suisse analyst James Ellis said.

Mr Loewensohn admitted that the company had overpaid for some assets but would not say which ones.

"We have been directionally moving our business towards unlisted capital markets for a while," Mr Loewensohn said.

"There is no question that we are going to need to continue to focus our business in our more profitable growth areas and to focus on those areas were we have a competitive advantage.

"We are going to need to de-gear a little bit and we are not alone in that respect.

"The whole world is going to have to do that."

But Babcock, with leverage of at least 60 per cent across the group and 52 per cent in the main company, was more highly geared than most.

Babcock & Brown Capital, the group's private equity vehicle, said the loan review did not affect the company or its debt positions in Ireland's main telecomms group eircom and Golden Pages.

"BCM has no cross-shareholding or loans with Babcock & Brown Ltd or any (of) its funds," BCM said.