David Hamill, the former Queensland Treasurer who chairs Babcock & Brown Infrastructure (BBI), yesterday won grudging respect from security holders in the troubled infrastructure fund as he tried to reassure them their fund would survive the credit crisis.
The BBI annual meeting in Sydney lasted for three hours as the board and management were constantly reminded of their folly in paying too much for the Alinta gas assets and taking on too much debt.
It was clear from the comments made by various security holders that they had purchased BBI for its income. They believed the BBI promise that it would deliver reliable dividend payments sourced from investments in government-regulated, essential infrastructure assets with predictable long-term cash flows.
That belief in the company's ability to deliver reliable dividends was shattered yesterday when the board stopped all dividends indefinitely, including the planned 10 cent full-year distribution for 2009 and interest payments to BBI exchangeable preference shareholders. The suspension of dividends was a shock, because the BBI board reaffirmed the 10 cent distribution on the stapled securities as recently as October 8.
Saul Borowitz, a financial planner, said the BBI board were wrong to give security holders false hope about distributions being maintained. He questioned whether management understood the business and its financial requirements.
Borowitz confronted Hamill during the meeting and demanded that the board simplify the business. “I don't think the board has woken up that the market is looking for simplicity,” he said. “Give us a business that is simple to understand and work with.”
It was left to BBI chief financial officer Jonathon Sellar to explain why the BBI accounts were so hard to understand. Sellar was repeatedly forced to unravel the complexities of the BBI accounts and explain why equity accounting overstated the BBI gearing ratio. He said it should be 64 per cent and not the headline figure calculated using the BBI balance sheet of 75 per cent.
Several security holders questioned the board about why distributions had been reaffirmed in October and then suddenly scrapped in November.
Hamill said there had been a dramatic change in the past few weeks in the willingness of banks to lend. He said BBI had historically had relationships with about 42 international banks. Two of these no longer existed.
The banks were not willing to fund the purchase of assets, irrespective of the quality of those assets. This had led to a virtual freeze of BBI's asset sales program. However, the company was pleased to have sold half of its holding in Powerco in New Zealand for $NZ400 million ($350 million) to Queensland Investment Corporation at 25 per cent above book value.
Graham Einfeld, who invested in BBI when it was called Prime Infrastructure, said he had learned a hard lesson from the experience of investing in BBI. “If you are investing for income, diversify your investments across a range companies and funds,” he said.
BBI paid out $300 million in distributions in the year to June 2008 and then paid a dividend in September of 2.5 cents costing $59 million. BBI also paid $51 million in interest on its exchangeable preference shares.
Suspension of the 2009 distributions and interest payments on the exchangeable preference shares will save BBI about $280 million. However, the price of the stapled securities and the preference shares dived on the news.
John Fries, a BBI security holder who knows Hamill through their mutual board positions on the NSW Red Cross, reckons the suspension of dividend payments will probably save BBI.
“Let's face it, BBI is no different to anyone else in the infrastructure space,” he said after the meeting. “Everyone paid too much and borrowed too much”.
Fries believes BBI is undervalued. Investors had failed to focus on the quality of the assets and the fact that they were in the books at cost less depreciation. He said the average debt maturity of eight years meant the company was not cornered by major imminent refinancings.
He said security holders should be thanking Hamill for standing up to Babcock & Brown and negotiating a significant cut in the management fees and gaining board control over management team.
During the BBI meeting there were occasional spontaneous outbursts of applause. These were usually after someone had attacked Babcock & Brown.
Hamill said the complete severing of the relationship with Babcock & Brown was not a viable option because it would trigger the conversion of the 776 million exchangeable preference shares. He said that at current prices, that would cause a huge dilution of the interests of existing BBI security holders.
Hamill's connections with Babcock & Brown came under the spotlight at the annual meeting, when shareholder activist Stephen Mayne asked how far back the relationship went. This prompted a very long-winded answer that served to reassure security holders that Hamill had maintained his commitment to independence and not rushed to use his political connections as a lobbyist straight after retirement from office.
Of greater interest for security holders was Hamill's obviously deep understanding of the quality of one of BBI's prime assets, the Dalrymple Bay Coal Terminal. Hamill was in government and responsible for the asset when it was prepared for sale to the private sector.
Hamill emerged from yesterday's annual meeting with his reputation enhanced. He had already shown through his actions since becoming chairman of BBI in August that he can and will put the interests of security holders ahead of Babcock & Brown.
He might be one of those rare politicians who can make the transition to big business without bringing the kiss of death.
BBI Price at posting:
7.7¢ Sentiment: Hold Disclosure: Held
