BBI 0.00% $3.98 babcock & brown infrastructure group

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    Satellites ready for afterlife

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    Matthew Stevens | November 22, 2008
    Article from: The Australian

    WHILE Babcock & Brown heads for the history books, the most sustainable of its investment satellites have finished building the frameworks on which to hang their individual cases for life after headstock death.

    A week is an awful long time in business these days. Just ask Babcock boss Mike Larkin.

    Larkin's week started with the cliche of good news, bad news, courtesy the sale of $2.3 billion worth of wind farms in Portugal and the announcement that the troubled Wachovia Bank might force the liquidation of Larkin's US joint venture with GPT.

    Then life got hard.

    By week's end Larkin was still trying to talk Wachovia down from the window ledge while he and a powerful and increasingly stressed cohort of the company's 25-strong banking syndicate attempted to thrash some good sense into Germany's Hypo Bank after it threatened to finally bring down this house of financial straw with a refusal to allow the company to access a reported $100 million of the company's funds.

    In between times, the ratings agencies busied themselves downgrading swaths of Babcock debt to just about default status while Larkin publicly confirmed what we all pretty much knew anyway, which is that Babcock is now essentially a liquidation project and that it is in the hands of its bankers.

    Meanwhile, beneath this thickening fog of failure, the board of Babcock & Brown Wind Partners completed work on changes to corporate governance structures which attempt to assert a growing independence from its manager and erstwhile parent.

    In renegotiating its boardroom and management relationships with Larkin's Babcock, the power group is walking a path forged by Babcock & Brown Infrastructure just a month ago. The new deals deliver both companies the roots of sustainability should Babcock & Brown implode, as most believe it now will.

    The board of the power group, for example, will now boast an independent director, three other independents and the chief executive, and include only one Babcock & Brown executive among its ranks.

    The board has given itself the power to directly employ management staff rather than relying on external direction, at a healthy fee, from Babcock & Brown.

    Babcock & Brown has surrendered, too, its exclusive hold on the financial advisory mandates for its offshoots and, most fundamentally given the headstock's financial trauma, it has accepted deep cuts in the base and incentive fee flows.

    Given there is no cross-collatoralisation with Babcock & Brown, there is a quite reasonable case which says the soundest of the satellites can sustain commercial life even after the collapse of the Babcock death star.

    Indeed, BBW and BBI might well benefit from Babcock's demise as it would speed the migration of the headstock management into the companies which own the assets, and permanently staunch the outflow of fees.

    This is not to diminish the nature of the life-threatening complexities ahead for BBW and, more particularly, BBI. It is only to suggest that those challenges might just as easily be faced on their own as under the banner of Larkin's tainted enterprise.

    Based on share price performance, the market seems to have decided BBW has some chance of survival while BBI is little more than a liquidation prospect.

    BBI closed at 2.8 cents a share last night, which means it is carrying debts of $9 billion or so on a market capitalisation of just $60 million. On Wednesday, Moody's downgraded the BBI family to Ba2 and signalled further cuts to come.

    And yet, the company recently sold half of just the New Zealand assets of Powerco for $1 billion, a price the equivalent of 25 times free cash flow.

    Now if you valued the whole of BBI's portfolio on that basis, its equity would be worth maybe $5billion. And the thing is, there is no particular reason not to use that sort of metric as most of BBI's assets are monopolies with EBITDA-to-interest cover ranging between 2.3 and 2.5 times.

    Those ratios would have to halve for BBI to be in breach of covenants, and that is an unlikely outcome given the individual price regulators would have to breach agreements to effect lower pricing.
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