THE stricken Babcock & Brown Power has failed to dampen fears it will default on a $2.7 billion debt facility, after conceding it will breach the covenants on the debt unless it secures an investment grade credit rating by June 3.
A rating is considered all but impossible for the power station operator to achieve in its current perilous state.
"The business is a going concern which faces a number of issues," said BBP's chairman, Len Gill, when he opened the group's half-year results briefing in Sydney yesterday. On Thursday BBP issued its second full-year profit downgrade since its November annual meeting.
BBP's chief executive, Ross Rolfe, confirmed that it would almost certainly need a reprieve from its bankers. "We feel we have a very strong working relationship with our banks but there are a couple of issues that are on foot for discussion over the next few months," he said.
Mr Rolfe declined to comment on speculation BBP had received a takeover approach from the Bahrain investment group Arcapita Bank. Nor would he discuss how many interested parties were looking at the company's assets, including the Alinta power business it bought at the peak of the debt-fuelled infrastructure asset boom in 2007.
BBP said it hoped that by next year it would enjoy a strong rise in earnings. "While it's a tough year this year for BBP and I think most Australian businesses, I guess what we do see is a light on the horizon which encourages us to be optimistic about our future," Mr Rolfe said.
BBP's recently appointed chief financial officer, Peter Brook, said BBP was at risk of breaching the covenant which requires it to generate cash flows 1.35 times its interest costs.
"It is a complex calculation. Nevertheless, the current earnings pressure that we're under does mean that there's obviously going to be some enormous pressure on our ICR [interest cover ratios] in the near future," he said.
Scant attention was paid to BBP reporting a 80 per cent fall in first-half profit to $17.8 million. Analysts pressed the company on the planned sale of its remaining power stations and its ability to repay its debts.
A UBS analyst, David Leitch, said it was clear BBP would default on its debt. "It's clearly going to go into default because it's not going to get the second debt rating. That's blindingly obvious."
But Mr Leitch said the question was what the consequences of a default would be. As BBP has been able to meet its interest payments so far, Mr Leitch said the company's bankers could seek to renegotiate the debt instead of winding the fund up.
Another problem BBP faces is the Federal Government's Carbon Pollution Reduction Scheme, which when enacted will trigger another review of the company's main debt facility."
Is this going to be a serious issue or just more of the ongoing BNB v Banks arm wrestle??
BBP Price at posting:
5.0¢ Sentiment: None Disclosure: Not Held
