BNB babcock & brown limited

long article worth a read

  1. 32,881 Posts.
    Bit scary, I'm a long term shareholder but it makes you think...................

    Centro ... bang! Allco ... kaboom! MFS ... kapow! ABC ... splat!

    Alright, who's next?

    Will it be Babcock, Asciano, Challenger, one of the Macquarie funds? The Rubicon stable of trusts and City Pacific are close to the edge. All have too much debt and too complex a corporate structure.

    After years of picking the dips in a bullmarket and riding the resources boom the big game is now selecting the next blow-up.

    The hedge funds are being demonised for destroying everyone's hard-earned dollars when in fact they are just speeding up the inevitable process of price-discovery by shorting susceptible shares.

    If they get it wrong another musclebound player will buy in and clean them up as they scramble to cover their position (they have to buy back the stock they have borrowed and sold ). Shorting lends liquidity. It should be applauded.

    Besides, your typical hedge fund is no Satanic cabal. It's just a couple of clever blokes in their forties who've had a successful run out of the markets, have geared up a bit of high-net-worth client money to the tune of six times and looked for any opportunity to make a dollar, short or long.

    As an almost punch-drunk Eddy Groves conceded in the wake of his perilous profit outing this week, if they (the hedge funds) present me the opportunity to buy then I'll buy.

    Groves' ABC Learning is teetering on the brink of a more intimate relationship with its bankers. Yes, there is a good earnings stream from the securitisation of toddlers, yes, the accounts and structures are suspect and yes, Eddie expanded belligerently and borrowed too much.

    The ferocity of the selldown in ABC though can probably be ascribed to additional factors.

    ABC has come very close to breaching at least one of its debt covenants. Those interested in tinkering with some detail can forget the accounts - peruse section 9 of the prospectus to last year's note issue.

    You see, the state of accounting transparency is so poor that retail investors have not got much of a hope of working out what's going on, barring a good nose.

    Check out Allco. According to the accounts released on Monday, it notched up a net profit of $84 million. You'd think things were going swimmingly looking at that number when Allco is really in the corporate hospice on a lifeline from its bankers who don't want to capitulate to bad debt writedowns until every prospect of a Lazarene recovery is exhausted.

    In the case of ABC, even if, say, a market cap covenant were triggered, its bankers would keep it alive if they deemed the cashflow was strong enough to service the debt. There is a blow-out in corporate debt on the way and the bankers have headaches of their own.

    Allco's plight is complicated by `cross collateralisation', that is, assorted lenders and entities owning assorted pieces of each others' assets and liabilities. It's tough to disentangle. And the Ferrier Hodgson throng of thirty which is acting for the banks are digging up all manner of layers and players whose interests are not aligned.

    Not assisting Groves ' peace of mind at the ABC briefing this week was the presence of one of his bankers. A rep from the Commonwealth Bank, the biggest lender, was asking some ticklers about another $150 million in debt which ABC had recently strapped on.

    With equity dwarfed on the balance sheet by operating leases and liabilities, and with free cash flow at a negative $400 million-odd and interest cover bare ... you can see why.

    As interest in stocks exposed to a banking blow-up has heightened, we called a range of hedge fund and regular funds managers yesterday to get their best picks. At this point - and in light of some fairly heated response from readers in recent days - we might stress that these are merely the ruminations of a few market practitioners.

    They concern things that have not happened yet and do not necessarily presage an Allconian, an MFSesqe or a Centro-style blow-up.

    They are, just as the Sunday papers have their hot broker tips, simply hot fund manager tips in the other direction. If we start to predict the future with great clarity you will see a new byline at the top of this column - God.

    To generalise, the hedge fund play du jour is `long' resources and 'short' financials. It has been a winner lately. It could change in a week.

    Right now though, financials include not just the banks but any stock which has been aggressive in its financings or is exposed to markets.

    Asset prices are at historic highs. They look like coming down. One reason a cynic could think the ASX has it in for hedge funds is that hedge funds have been shorting it.

    Other exchanges around the globe are being hit, ASX trades on a lofty PER multiple of 20-plus, listings have vanished and if the bear market takes full grip volumes will fall, hence profits too.

    The ASX is otherwise lowly - geared and in ship-shape, albeit a monopoly bound for more competition.

    The really vulnerable companies are those who have expanded quickly using leverage. The prime candidates have already been hit. Now the speculation centres on a number of listed property trusts including the Rubicon stable, Valad and a couple of the Macquarie offerings.

    To the chagrin of key shareholder Robert Champion de Crespigny the mineral sands player Iluka too is one to watch. Management didn't help the stock price recently by flagging they might do a rights issue.
    That got the shorts fired up. Gearing is too high.

    A couple in the Packer stable are regarded as being a bit too edgy on the leverage front, Challenger and Crown. The first an opaque structure, impossible to dissect, and the second a load of debt.

    In infrastructure, it's the usual story of robust assets in an ocean of leverage. Duet group has high gearing as does SP Ausnet to a lesser degree.

    Then there's ports and logistics company Asciano which isn't giving a lot away until it hands in its maiden , though delayed, earnings report in a few days. The assets might be solid but the structure is silly and the leverage dangerous.

    Macquarie Communications would appear to be the most vulnerable Macbank satellite with its skinny interest cover and testicular 350 per cent-odd gearing. Try working this one out from the accounts, even if you are a forensic accountant.

    As one sage observer noted in the wake of the usual impenetrable earnings release, capex towers over depreciation, and while the company was insisting a $300 million loss (arising from a $600 million loss on interest rate swaps) had nothing to do with cashflow, a loss is a loss.

    The toll-road plays look like they'll be in for a lean share price run too. Incidentally, QBE's results - met with a 10% savaging in the shares - do not bode well for the insurers.

    Mindful that insurers earn their money from two sources, writing insurance premiums and getting return on their investments, premiums are coming under pressure and investment values are tumbling.

    While solid industrials such as Woolies (a spectacular result), Telstra (a gritty, encouraging result in a defensive stock), Cochlear (dazzling) and Flight Centre (a ripper) have now become the market darlings (although high PEs are susceptible too in a falling market) the former heroes such as Macquarie and Babcock are entirely reliant on the market turning up, quickly, to return to cherished status.

    Macquarie, the mothership, could be okay thanks to diversified income streams, yet it still seems way overpriced. As for Babcock, we need to make a mea culpa here for a recent cursory run-down on the parent results. We missed a bit, a rather big bit.

    If Babcock's satellites keep sinking, this could precipitate a downward spiral in confidence which could zap the upstream profit flow to the bank.

    As Babcock's model is predicated on ripping out unrealistically high fees early, they may be in trouble if the new strategy to shift to a wholesale global infrastructure fund model takes time to evolve.

    Both Macquarie and Babcock overpay for assets and load them up with debt. In the early years they often pay interest only and therefore display a higher cashflow, hence more income back to the bank.

    If asset prices fall, though, which they appear to be doing, this game is over. Shrinking confidence and investor support combined with the demand from wholesale investors for more skin in the game will make things very messy.

    The revaluation game in property is over: vid Centro.

    For its part, Babcock however shelled out $1 billion last year at the top of the market for US real estate then casually booked a $100 million revaluation to profit even though property prices were dropping in the US and Europe.

    More interesting is Note 30 on interest bearing liabilities, buried deep in the bowels of the accounts. Current liabilities - usually more visible in the balance sheet - stand at $2.9 billion. That would suggest $2.9 billion in debt needs to be rolled this year.

    Among the total liabilities is ``OTHER secured by marketable securities'' of $631 million (up from $328 million).

    The note says ``OTHER: Babcock & Brown has short term loans that are secured by marketable securities. Several of the marketable securities are accounted for using the equity method because of the size of Babcock & Brown's ownership interest. The loans are repayable within one year''.

    One can only assume that these marketable securities are the various Babcock trusts. If you forage back to last year's accounts, there it is, margin loans. Has Babcock borrowed against its satellites? If so, BBI is down 20 per cent since December, BBW down 20 per cent, BBP is off a tad more and BJT is roughly even.

    And these are presumably the most marketable securities in terms of liquidity. BBI meanwhile is just raising money for another related party transaction.

    On top of that, operating cashflow was $507 million in the red (up from just negative $76 million), total liabilities stood at $13.1 billion while the finance bill was a hefty $662 million. On those numbers things are starting to look positively Allconian - although the structures are simpler with less cross-collateralisation.

    Still, and this is where accounting is so grand - depending on one's perspective - Babcock managed to book a net profit of $639 million and predicted more of the same.

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