noteholders told sign or else

The Age
BusinessNews
February 7, 2009
THE future of fund and asset management group Babcock & Brown is in the hands of noteholders after a warning that if they do not sign up to its latest — and last — rescue plan agreed with banks, the ASX-listed company will be placed in administration.

In a deal under which proceeds from dismembering the group's business go to lenders on a "pay if you can basis" to recover $3.3 billion in borrowings, holders of B&B's subordinated notes stand to get very little or nothing for their investments.

B&B's board, which has been involved in two months of tortuous negotiations on a do-or-die refinancing package with its banking syndicate, had previously warned that its equity was worthless and shareholders would get nothing from the financial lifeline extended to the group.

Its noteholders, who are owed $615 million, have now joined them. Having frozen all dividend payments, B&B said it would not be in a position to resume paying interest on its subordinated notes either. The notes, which were issued at $100 each three years ago, are trading at $5.

That statement effectively left it to noteholders to decide whether to keep the group alive even though they stand to gain almost nothing by doing so.

With B&B's shares having been in a trading halt and then suspended for 20 days, that has triggered an existing clause in its arrangements with noteholders that they can claim repayment of their investment as of now.

"B&B is considering the implications the implications of this and also a possible restructure of the subordinated notes," the company said, but added there was no guarantee such a deal could be achieved.

If noteholders rejected the terms of the new financing deal by which its management team would sell off its remaining assets over two to three years to pay back the debt, then the ASX-listed company, Babcock & Brown Limited, would be handed to administrators "within the coming weeks".

The group said such a move would not affect the solvency of its main operating company, Babcock & Brown International Pty, which owns the assets and owes the $3.3 billion to the banks.

Under that scenario, the asset disposal plan would continue, with the management team given two to three years to recover as much as the money as possible when the market might have improved enough to get better prices.

The new deal with its banks is nonetheless onerous, with $1.2 billion needed to be repaid between September this year and April 2011 on interest rates of between 3.5 per cent and 6 per cent above short-term money market rates.

The group will have a further nine years to return the outstanding $2.1 billion albeit that the incentive will be to repay it as quickly as possible as a penalty fee of 20 per cent a year applies to the remaining sum if and when the debt facilities are cleared.

B&B's senior management, led by chief executive Michael Larkin, has agreed an incentive deal to protect their contract entitlements.