Big Four et al figure a functioning Babcock is still in their best interests

Age
Friday 5/12/2008 Page: 8

NECESSITY is the mother of invention in Babcock and Brown's deal with a subset of its banking syndicate that includes the Big Four banks. The $150 million bridging loan the banks have provided will keep Babcock ticking over until the end of this month at least, and heads off the quick appointment of administrators.

It renews Babcock's hopes of selling enough assets to get its $3 billion-plus debt load down to a point where a debt-for-equity swap will be possible, perhaps as early as April next year, and reduces the risk of a cascading crisis across the amorphous Babcock family of listed and unlisted investment vehicles. But this is still a liquidation of the head company.

The banks have just reaffirmed for the time being it is one best conducted unofficially, by Babcock, and with a debt-for-equity swap looming, the value of the company's existing shares is moot. Not all Babcock's 25 banks were willing to inject extra money: the Big Four were the key providers, although foreign banks also contributed.

But the ones that did not stump up did make concessions - to allow Babcock to defer interest payments on its existing debt if necessary, to waive covenants requiring minimum levels for net assets, earnings coverage of interest payments and a 25 per cent surplus of current assets over current liabilities, and, crucially, to give priority ranking to the $150 million of new short-term funding.

In each case, they agreed because the alternatives were worse. Granting repayment priority to the new $150 million line was viewed as a cheap concession against the risk of losses on the $2.8 billion main facility. Babcock also has about $600 million of subordinated notes on issue, and has agreed to a demand from the banks that it hold off on interest payments on the notes until the new facility is repaid.

Waiving the covenants also made sense, given that Babcock will be booking asset value write-downs at the end of this month that would have put it in breach, triggering another round of negotiations. One irony is that the funding wound that triggered Babcock's most recent near death experience healed itself. Two weeks ago, Babcock told the 25 banks in its main $2.8 billion syndicate that it intended to ring-fence its infrastructure division as a continuing business, and sell everything else, including its real estate and leasing divisions, which until then it had hoped to save.

The banks went away to consider the deal, but one of them, Germany's HypoVereinsbank, denied Babcock access to more than $100 million it held on deposit as part of a second, smaller debt facility. The dispute created the funding crisis that nearly pushed Babcock over the cliff - but receipts from the sale of European wind-power assets were already in the pipeline and have now arrived, allowing HypoVereinsbank to be paid out of the smaller facility. It remains a member of the larger syndicate.

Babcock is far from out of the woods, and its progress from here will largely depend on a series of decisions by the banks about the pace of asset sales. Its asset portfolio is large and diverse. Its infrastructure assets are valued at about $2 billion, and wholly and jointly owned real estate is in the books at a similar value, covering assets including shopping centres in Europe, residential properties in Germany, and self-storage units in Asia and the US.

Babcock's aircraft leasing business is worth about $250 million, there is a $380 million loan out to one of Babcock's listed satellites, Babcock Power and the value of management rights with satellites, shareholdings in them and co-investments is very much a mark-to-market exercise. The questions now are how much time does Babcock need to extract as much as possible on the assets it wants to sell, and how much time are the banks prepared to allow.

The loose plan is for the group to get asset sales going fairly quickly, but the banks in many cases will need to make case-by-case calls, choosing effectively between requiring Babcock to sell quickly at a larger discount, or allowing the company more time - time for the markets to recover, and time for Babcock to develop the assets further, by attaching customer contracts to power assets, for example.

To cite just one of the decisions ahead, Babcock owns ethanol plants in the US that are not totally servicing their debt load, but would also fetch only a fraction of their book value of about $200 million if sold urgently. The banks will make the call on that asset, and a host of others, as they look to claw back as much of their exposure as possible.