with such harsh consequencs attached..a timely reminder!
13 Oct 2009 Stephen Bartholomeusz A Babcock bellwether? Recent Bartholomeusz
There is an interesting ‘’money or the box’’ element to the decisions security holders in Babcock & Brown Infrastructure face as they contemplate how to respond to the proposed Brookfield Asset Management-led recapitalisation of their group.
As the independent expert, Grant Samuel notes repeatedly in its assessment of the proposal – which will see $1.8 billion of new equity injected into BBI – that the group has no choice but to raise equity. With $8 billion of debt at the asset level, another $1.2 billion at the corporate level, $300 million coming due early next year and $3.2 billion maturing over the next two years BBI is teetering on the brink of insolvency.
However, the issue that is worrying the security holders, and more particularly holders of BBI’s exchangeable preferences shares (EPS), is whether it needs quite as much equity as the Brookfield proposal involves.
For ordinary security holders, whatever happens they have effectively been wiped out. Under the Brookfield scheme they would be given 4 cents per security, or a total of about $104 million, more as an incentive to support the proposal than as a reflection of any residual value. Some of those security holders are so bitter about their BBI experience that they say they’d rather see it fall over than allow the existing managers a continuing role.
For similar reasons, the proposal would see holders of the New Zealand-listed SPARCS securities paid out at their full face value of $100 million to ensure they don’t have an opportunity to torpedo the plan.
For the EPS holders, the equations are rather different. The face value of their interests is $779 million, but they are being offered $48 million for accrued dividends and an estimated $285 million of value in the form of BBI ordinary securities. They would end up with just under 16 per cent of BBI if the Brookfield proposal succeeds. Brookfield would own between 35 per cent and 39.9 per cent.
There are some major players owning the EPS, including AMP, Hastings and QIC. The problem for them is that the sheer scale of the equity raisings will effectively crystallise their current positions and limit their upside.
They are pondering whether BBI could survive with less equity – creating more upside for them – while knowing that a smaller capital injection would also leave them exposed to greater risk.
The BBI transaction may be the first significant deal where anyone has suggested that a group can raise too much equity, or that investors have expressed a preference for greater rather than less leverage in order to retain leverage to the upside.
That may be an indication of how significantly the market and sentiment have turned. Earlier this year returns and dilution weren’t priorities for investors more concerned about simple survival.
There doesn’t seem to be any violent disagreement with the view that the Brookfield proposal would permanently de-risk BBI and leave it with a scaled-down, but still substantial and attractive, portfolio. The dissenters are focused on the degree of danger rather than the direction.
Grant Samuel, which deemed the proposal fair and reasonable, made it clear that the situation, when viewed from the security holders’ perspective, was anything but straightforward and that the extreme leverage in BBI and a wide range of asset values meant relatively small movements in asset values in either direction could have very significant implications for them.
There is a group of hedge funds represented by RBS hovering in the background with a proposal, dismissed by BBI, for a somewhat smaller equity injection. If the larger EPS holders were to vote down the Brookfield proposal, they’d need a fallback option.
While they might be prepared to contemplate taking on more risk than envisaged in the Brookfield proposal, they presumably wouldn’t want to flirt with the risk of an early administration.
(courtesy of Business Spectator)
BBI Price at posting:
3.7¢ Sentiment: Hold Disclosure: Held
