Key Advisers Sweating Over B&b

The Age

Tuesday June 17, 2008

Vanessa Burrow and Mathew Murphy

BABCOCK & BROWN'S financiers are bunkered down in Sydney, forced to discuss the investment bank's $2.8billion debt facility after the share price faltered.

B&B shares have closed at a $5.25 record low two days in a row. Market capitalisation has sunk under the crucial $2.5 billion threshold where its 25 financiers may call a review of its recently agreed loan.

B&B chief executive Phil Green acknowledged the investment bank, which operates 12 listed funds using a model similar to that of Macquarie Group, had lost investor confidence.

According to Credit Suisse analysts, B&B and its managed vehicles owe about $46 billion, about $31 billion of which is owed by the listed funds.

But, in a statement, B&B said it would reduce debt and "respond to market concerns regarding the listed fund structure".

B&B will speed-up strategic reviews of its listed funds using external advisers.

European wind farms worth an estimated $2 billion will also be sold, with first-round offers due this week. B&B said the sales, in conjunction with B&B Wind Partners, were expected to be finalised by October or November.

And Babcock & Brown Power (BBP) yesterday announced it had reached settlement on a $2.7 billion refinancing facility. BBP must also refinance a $360 million corporate debt facility, which the company said it hoped to complete by the end of August with a combination of refinancing and asset sales.

Fat Prophets head of Australian research Greg Canavan said B&B's financiers were probably unnerved by the breakneck share price plunge, but were unlikely to force a great deal of asset sales.

"I think the banks will just want to make sure that the assets are still generating all the profits that were projected," he said.

Any review would be conducted over four months, and would be resolved if B&B's share price rose above $7.50.

Earlier this year, a RiskMetrics report raised concerns with the so-called "Macquarie model" - where an investment bank buys highly geared assets, repackages them and sells them to a specialty listed fund.

The concerns included the "danger of overpaying for assets; fee structures that deliver high fees and provide an incentive to increase a fund's size; and accounting practices that have the capacity to provide an overly robust picture of a fund's profitability".

But Martin Lawrence, one of the report's authors, said this did not necessarily mean investors would turn on Macquarie Group."

Ultimately it will be about performance of the vehicles and confidence in the managers - that is not Macquarie specific," he said."

During times of market stress people are always going to have a closer look at these things ... Is it a loss of confidence in the model? Is it because investors are paranoid about large amounts of debt?

Time will tell."

Jamie Nicol, a director at individual portfolio manager Dalton Nicol Reid, said many businesses that relied on cheap debt to fund expansion had been "crucified" because of the credit crisis."

B&B certainly fits into this category and ... the lack of transparency and string of recent failures means the market is in no mood for a 'trust me' scenario," he said.

Macquarie declined to say whether it had concerns about its model given the shareholder exodus from Babcock & Brown.

But Macquarie did accept that the accounting standards under which its funds operated made it difficult to understand their underlying performance.

Babcock & Brown Infrastructure $14.8bn Powerco; IEG natural gas and LPG distribution, in Europe; Cross Sound Cable; Dalrymple Bay Coal Terminal (Queensland); PD Ports in Britain; interest in WestNet Rail; BBI Euroports; Australian Energy Transmission and Distribution.

Babcock & Brown Wind Partners $4.1bn 79 wind farms worldwide including four in Australia. Some still under construction.

Babcock & Brown Power $7bn Portfolio of 14 operating power stations in Australia and New Zealand. Interests in four power stations now being built including Tasmania's Tamar Valley project.

Babcock & Brown Public Partnerships $3.7bn Has 30 projects including the completed Royal Melbourne Showgrounds redevelopment project, the Long Bay Forensic and Prison Hospitals Project in NSW, Brisbane's RiverCity Motorway and NSW's Reliance Rail.

Babcock & Brown Japan Property Trust $2bn Retail, office and residential properties in Japan, 34% of which are in central Tokyo.

Babcock & Brown Residential Land Partners $445m Interests in 20 residential land developments, 18 in Australia, two in New Zealand. Victorian developments include Ascot Chase, Sandhurst Club and Sanctuary Lakes in Melbourne, Officer and Renaissance Rise in Mernda.

Babcock & Brown Capital Limited $6.7bn 57.1% of Irish telecommunications company eircom; Business Golden Pages in Israel.

Everest Babcock & Brown $1.8bn Number of investment funds with combined assets under management of $1.8 billion as of December 31, 2007.

Everest Babcock & Brown Alternative Investments $1.5bn Exposure to international absolute return funds and some direct investments.

Comes under Everest Babcock & Brown banner.

Babcock & Brown Global Investments Limited $466m Investments including music copyright assets. Also operating lease assets and loan portfolio.

Babcock & Brown Communities $2.4bn Owner, operator and developer of senior living communities.

Includes 29 aged-care facilities. Manages 56 retirement villages, some of which it owns.

Babcock & Brown Air Limited $2bn Has fleet of 62 aircraft, which it leases to 34 airlines in 18 countries.

UNLISTED FUNDS

- GPT JV: Joint venture between Babcock & Brown and General Property Trust.

Investments worth $7.4bn.

- UK Retail Property Syndicate: Retail property syndicates, worth $41m.

- Babcock & Brown European Infrastructure Fund: Fund reached final close in Nov 2007 with total commitments worth ?2.17bn.

- Babcock & Brown Asian Infrastructure Fund: Raising $US400m of capital.

- Capital Commitments for North American Infrastructure: Total amount raised $US1.4bn.

PRIVATE EQUITY

- Babcock & Brown Global Partners: Worth $623m.

- Babcock & Brown Direct Investment Fund: Three trusts with assets worth $516.3m.

- Babcock & Brown CDO (collateralised debt obligation) Investments

ASSETS UNDER MANAGEMENT

- Aircraft Warehouse Syndicate One: Total value of aircraft is $685m.

- Babcock & Brown Rail North America: 13,935 freight railcars on operating leases, worth $1bn.

- EuroRail: Joint venture with Halifax Bank of Scotland worth $923m.

- UK PFI Assets Under Management: PPP infrastructure deals worth $539m.

- Other Air Assets Under Management: 201 commercial jets worth $5.9bn.

- Structured Finance CDOs: Three CDOs and a closed-end CDO investment fund with $US80.2m of risk capital.

- European Property Mandates: Retail, residential and office portfolios with third-party investors. Total $2bn.

- US Property Mandates: Residential and retail portfolios worth $1.3bn.

SOURCE: BABCOCK & BROWN

© 2008 The Age

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