If BBI don't sell anything and convert SPARCS, what then?
BBI is unique. Stable, low risk and growing trading businesses. High debts. High growing interest income for its banks, no distributions to equity holders or sub-debtors.
Some people have rightly pointed out that liquidation is painful. The 2600 page judgement of the WA Supreme Court in the Bell liquidation of 1990, is a good example of the lessons to be learnt.
Allens Arthur Robinson on their website make some salient points on that case (at http://www.aar.com.au/pubs/insol/foinsolnov08.htm):
"The case recognises that the solvency test in Australia starts with a cash flow test but finds that that is not the end of the question. The balance sheet test is also relevant and insolvency is ultimately to be judged by a full consideration of the company's entire financial position based on 'commercial reality'. In particular, the judge said directors cannot 'rely on some faint hope that help is at hand and all will be well. The word "reality" in the phrase "commercial reality" has a bite.'
The judgment also gives some useful guidance on the ability of a company to take into account the sale of assets in considering its present solvency, emphasising two things in particular:
if a company owed a debt which it believed it could meet by the sale of an asset, it would need to form the view that that asset could be sold for the required value before the debt fell due for payment; and
if a major income-generating asset is to be sold to meet liabilities, the company must take into account the fact that that sale would deprive it of future income which might otherwise be derived from that asset and so 'rob the company of the ability to meet other liabilities due later but nonetheless in the foreseeable future.'"
The directors of BBI would be alert to the Bell decision given the BBI situation.
From the banks perspective, administration involves: increased uncertainty about getting their money, administrators and lawyers getting paid first, administrators mismanagement, loss of key staff, a flood of litigation and possibly litigation as to their right to jack interest rates up in the manner they have. It will invite every creditor to stake their claim and the ATO will not just sit there upon administration. In the Bell case, the guarantees procured by the banks from directors were held to be void in circumstances of near-insolvency.
I think the banks have thought about liquidation, sure. However, BBI is paying its bills and have refinanced their debts. They still say they have shareholder equity in the order of $1+ billion as at close of FY09 (aka worst year since the great depression)
When October comes, why would they want to put BBI into administration?
Who stands to gain from such an action? Would the troubled Euro banks have the stomach to play such games? I think their resources are best directed at chasing the real basket cases on their books.
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