BNB - Babcock & Brown

It's not the employee's fault that the SP is falling? Are their problems 100% the result of bad luck?

If the previous post about a covenant is correct then it will be clearly in the employees' interests to not get bonuses. They are better off not having bonuses and at least having a job.

Mr_T said:

It's not the employee's fault that the SP is falling? Are their problems 100% the result of bad luck?

If the previous post about a covenant is correct then it will be clearly in the employees' interests to not get bonuses. They are better off not having bonuses and at least having a job.

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Your 2nd point i can accept, however i think with holding bonuses would be a very short term fix in current market climate, imo.

No it is not the employees fault the price is falling. 99.9% of their employees have very little direct influence over the SP.

People like:
traders who have been profitable all year for the bank

the IT guy who has done his job nicely all year

the middle management who has kept costs under control

an analyst who has highlighted good opportunities and warned of possible problems

Why should all these guys not recieve bonuses?


The fall in SP is mainly due to market sentiment. Have BNBs profits fallen dramatically? (i have no idea i dont follow them)

Point is, if anyone is to blame it is senior management (thats why they get paid the big bucks, to take the blame), however sentiment has also played a HUGE factor in the SP performance

Employees are getting bonuses but just not as much as they should be...

But it's to do with any company, Computer sales down... profit share will be lower

Well this is getting frustrating. All we hear from BNB is sugar and spice and how well things are going. And the market keeps selling it down.

I am finding it increasingly harder to believe that the market doesn't have some basis for dumping this stock. I don't think that the excuse of "market sentiment against financials" is as believable as some would like to think.

Mr_T said:

Well this is getting frustrating. All we hear from BNB is sugar and spice and how well things are going. And the market keeps selling it down.

I am finding it increasingly harder to believe that the market doesn't have some basis for dumping this stock. I don't think that the excuse of "market sentiment against financials" is as believable as some would like to think.

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Bear Stearns said everything was cool last week before it went Belly up this week ... In this environment I don't think people will takes management word for it especially when your model is based on a lot of cheap debt.

ROE said:

Bear Stearns said everything was cool last week before it went Belly up this week ... In this environment I don't think people will takes management word for it especially when your model is based on a lot of cheap debt.

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But doesn't Phil Green have a reputation as a man of honesty (unlike his brother Max Green who was murdered in Cambodia over 10 years ago for embezzling $40 million)

Just a follow up on the info about loan covenants -

This info was on "market talk" on Iress. They do not archive this stuff so I can't post the link. I don't know how credible this info is??

To clarify what was said:

A review event would be caused on B & B debt if market cap falls below $3 Billion for a period of 4 months (I think i said 3 before but i have confirmed that it said 4).

That puts it about 10.20.

Like I said before, I don't hold BNB and I'm not short either. Just letting you know.

I found this link, same info.

http://www.egoli.com.au/egoli/egoli...EA76-4822-9B28-A77BFEFA6319}&Section=Warrants

CitiWarrants: Babcock & Brown - Converts Market Sentiment into a Business Cost
18/03/2008

Taking a hit for the Satellites ”” Despite having the balance sheet capacity to repay satellite margin loans and maintaining belief in the fundamental value of these entities, BNB has bowed to market pressure and refinanced margin loans against its satellite investments at a heavy cost, converting a potential timing issue into a real business cost, reflecting an unusual sign of desperation.

High Interest Rate + a 4% Option ”” Terms weren’t disclosed but likely involve an interest rate of >10%pa, plus an option over 14.3m shares, albeit at a strike price of $23ps. While a seemingly desperate move, it at least reassures of the group’s long-term commitment to its satellites, while shareholders would presumably accept this option being exercised given the current share price.

Market Cap Clause ”” BNB also disclosed a market capitalisation clause with respect to its corporate debt facilities which provides for a review event should the group’s market cap fall below “a little over $3bn” for 4 consecutive months.

Negotiating a Debt Expansion ”” Despite this, BNB continues to reiterate that its banks remain supportive and it is currently negotiating an expansion of its corporate facilities which may include a lowering of the market cap review level, albeit at a likely higher interest cost.

I think they're refinancing about $450m aren't they? I guess if the debt covenant gets evoked, they can dip into their $500m of bonuses. As I said in an earlier post, better for employees to give up their bonuses than not to have a job.

A most disappointing day for BNB. Whilst a 6.7% rise might look like a good result, the reality is that this has to be looked at compared to other financials. Macquarie was up 13.7%, the Big 4 banks were up 6.7 - 8%. BNB has got a bigger battering than all of these in the past few weeks, now it is not "catching up".

If anyone is interested, this is what FAT Prophets have in today's report:

Babcock and Brown (BNB)
As shown on the chart, Babcock and Brown has breached major support at $14.85, touching a low of $11.90 this week. This is some 65% below the all time high of $34.78 from June 2007. Although losses have already been substantial, at present, the trend remains down and additional falls appear likely in the near term.

does anyone have any recent broker recommendations on this ?
i have quite a few of these stocks and am getting really burnt by them..
it's so frustrating !!!

VViCKiD said:

does anyone have any recent broker recommendations on this ?
i have quite a few of these stocks and am getting really burnt by them..
it's so frustrating !!!

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Ignore the brokers, history proves they are a little slow in downgrading assumptions in a bear market (mainly because there main purpose is to provide a reason for their broking dept to sell the stock to investors)....

I am a fan of this business, but the chart continues to scream sell unfortunately.... todays open at 14.20 and rapid sell down doesn't inspire me..... I still continue to believe it will be around for the long run, but it's going to take a long time to shake the negative momentum........ I would prefer to watch it hit above $15 and stay there before I would consider a position...... if at all with banks of all shapes and sizes imploding.....

Cheers

Reece, I wouldn't mind hearing your opinion on this.

The Business Spectator has a nice new interview with Phil Green:

http://www.businessspectator.com.au/bs.nsf/Article/KGB-INTERROGATION-Phil-Green-CV4VJ?OpenDocument

There is one thing about this interview that concerns me, were Robert Gottliebsen asks Phil Green about their notes. I didn't realise that these notes yield 30%, and I'm not that satisfied with Phil's answers.

Here is an extract:

RG: Why do you think your listed notes yield around 30 per cent. Do you think that might have something to do with the 78 per cent look through gearing?

PG: Look, we think that in this market there is an enormous amount of dislocation in valuation. We think they probably trade at that because of very low liquidity. I mean if you look at the volumes, the amount of actual debt that’s traded over the last month at that price, I don’t think it adds up to a lot in a month.

RG: Why don’t you buy them back? At that price.

PG: Because we don’t want... because at this point in time, you know, we want to preserve our liquidity to grow our business… on the one hand you say you say we should be de-gearing, on the other hand you want us to increase our gearing.

RG: It’s just the amount – the 30 per cent tells you that the... it’s a very high figure and anybody…

PG: Robert... Robert... in this market if people want to judge the sustainability and the strength of our business off the back of where our hybrids trade on very thin volumes then that’s their judgement. All we can do is deal with our business, run our assets, manage our balance sheet in the way that we think is most effective.

There may be a point in time where... the best thing we can do with our cash is buy back our notes. ...We manage our balance sheet the way we think it’s best managed and at the moment notwithstanding where those are trading, the rate of return that we get on supporting our development business in wind energy is still much higher than buying back those notes.

Thanks for posting the interview..

I was surprised when bnb did not climb back in % terms as much as Macquarie bank.. and then it gave up all the gains yesterday..

is 10 dollars a significant value for the stock price.. If BnB is only 50% geared.. then why is it being hammered.. does anyone know what the employees are thinking, given they own a fair chunk of the company?

Can someone explain to me look through gearing? It didn't make sense what was said in the interview. What is the actual amount of gearing of BnB?

thierry said:

Thanks for posting the interview..

I was surprised when bnb did not climb back in % terms as much as Macquarie bank.. and then it gave up all the gains yesterday..

is 10 dollars a significant value for the stock price.. If BnB is only 50% geared.. then why is it being hammered.. does anyone know what the employees are thinking, given they own a fair chunk of the company?

Can someone explain to me look through gearing? It didn't make sense what was said in the interview. What is the actual amount of gearing of BnB?

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It seems some people on the sidelines without knowledge of credit markets or even pricing of debt instruments should not be making these kinds of comments. The person interviewing Phil Green obviously has absolutely no idea, only that the yield is now about 30%....

First, lets actually understand the instrument issued, they are unsecured subordinated cumulative resettable notes. It has always surprised me how unsophisticated the Australian market has been with these kinds of issues in the past. BNB are giving you 2.20% above BBSW (Australian Bank Bill Swap Rate) and you are taking on: debt, that in the event of default, ranks BEHIND that of all creditors other than those creditors who have specifically requested to be ranked further down the chain or the ordinary shareholders. I don't know about you, but even before this crash in debt markets, 220 bps really isn't enough to essentially be taking an equity tranche in a debt issue. AFG's Mobius trust used to love investing in these kinds of instruments and even they were smart enough to request above 500 bps, even without the conditions we have today.

So first factor is that in my view, the instrument should have traded well below par from the beginning. Next point, consider the conditions we are now faced with. Spreads between AAA - BBB have widened to ridiculous levels depending on the firm. Now consider the Bear Sterns incident - does it really surprise anyone that they are trading at low levels in light of the security provided. Because, to me, it seems fairly logical thats where they are. As for whether Phil would want to buy them back, do you really think he is going to be dumb enough to issue another say 80 Mil BNB shares that are going to further depress the BNB share price? Although, considering the discount they are trading at, it could definitely be beneficial to convert them to scrip because they would actually have a gain on disposal of debt securities (hilarious)...

Enough of my rant, personally I wouldn't pay much attention to the interview because obviously the interviewee has absolutely no idea... As for whether I would rushing out to buy BNB scrip, as I have said previously, I would be looking for a break of $15 and start to see some support for the stock. Because regardless of the fundamentals which I think long term are strong, people don't like this stock at the moment. Bare in mind it's 3 return since listing is still over 70%!!!!!! It's been a rocky ride so far..

Cheers

Lets use a term deposit as a benchmark. If you stick money in one, you'll get about 7% interest. Close to 100% safe.

Clearly, this kind of unsecured note is going to pay a higer rate. But so much higer? An extra 23 percentage point?

Using a crude analysis, does that mean that the market thinks there is a one in four chance BNB will be unable to pay its debts (ie become insolvent)? Or even taking into account that risk is "overstated" in markets now, does it mean there is a one in five or one in six chance?

Mr_T said:

Lets use a term deposit as a benchmark. If you stick money in one, you'll get about 7% interest. Close to 100% safe.

Clearly, this kind of unsecured note is going to pay a higer rate. But so much higer? An extra 23 percentage point?

Using a crude analysis, does that mean that the market thinks there is a one in four chance BNB will be unable to pay its debts (ie become insolvent)? Or even taking into account that risk is "overstated" in markets now, does it mean there is a one in five or one in six chance?

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I'd say that it's pretty hard to actually value a debt instrument like this because there is no underlying security or credit rating provided. BNB itself has a BBB rating, but your not actually getting that in this issue because the notes are sub debt. My personal view would be that the pricing is more to do the fear in holding any sub debt, specifically if the underlying entity is an investment bank (i.e. Bear Sterns syndrome).

In saying all this, the pricing is extreme - only timbercorp's debt is priced cheaper in amongst the convertibles - as the debt is convertible into BNB scrip based on a VWAP calc and the share price is so gappy, could be conversion risk.

By the way thierry, look through gearing is where you analyse a company's debt after factoring in investments in associates, JV's and other structures. For example, BNB holds an interest in BBI, which is held as an asset in the balance sheet at cost +/- share of profit/(loss). Look through gearing is where you factor in say BNB's proportional share of BBI's gearing... So the 78% number probably would be more accurate... Points however to anyone who can calculate MQG's look through gearing...

Cheers

Reece,

Where did you get the info that Mobius was an investment vehicle?

Mobius was an issuer of sub-prime and non conforming RMBS (and not a very smart at that).

Cheers.

Thanks for your comment Reece.

Next concern: I hear that Babcock and Brown Power has something like $3.1b of debt that will need refinancing soon.

This article says that http://www.theaustralian.news.com.au/story/0,25197,23385762-5012439,00.html

"ANOTHER Babcock & Brown entity that will remain a focus of attention is Babcock & Brown Power, which is set to refinance a big wad of debt within the next few months.

While chief executive Paul Simshauser has told the market he has received underwriting offers for a $3.1 billion debt refinancing, the market will remain nervous until the deal is done."

Question (to REECE): does the fact that they have recieved underwriting offers mean the refinancing is a "sure thing"?


How likely is it that they won't be able to? If they can't, will it be a domino effect, ie the end of the whole Babcock empire?