BBI - Babcock & Brown Infrastructure

[persistentone]

yes i meant BBI dilution as a result of BEPPA being converted to ord shares. but also there is a small chance that BEPPA itself can be diluted because BBI could chose to raise more funds via debt, and the BEPPA terms only allow for future debt to rank equally with BEPPA. Meaning BEPPA cant fall further down the food chain as a creditor, but could find themselves ranking on par with new creditors.

I seriously doubt that the BBI management would allow BEPPA to dilute BBI holders. Fiduciary obligations aside, most BBI management probably get their incentive payments in the form of BBI stock. I cannot imagine the management would decimate their own shares. It would be against their self interest to do so.

 

[persistentone]

Does anyone know the Australian legal system well enough to know if the non recourse nature of most of BBI's debt would carry into a receivership? In other words, if they were in administration and one of the assets could not be sold for book value, would the lender have any recourse against the bankrupt estate?

One assumes the answer is no, and that the non-recourse nature of the loan carries through into receivership. But better to ask now than find out otherwise later.

 

[persistentone]

There will no quick re-rating of the BBI or BEPPA share price. Have a look at what some listed REIT's are trading at and the similarities are obvious.

Fund Name Price-to-Net Tangible Asset
Value per share (NTA)

APN European Retail Property 6%
Centro Retail Trust 5%
Galileo Japan Trust 6%
ING Industrial Fund 7%
ING Real Estate Community Living 5%
Macquarie CountryWide Trust 12%
Macquarie DDR Trust 3%
Mirvac Industrial Trust 12%
Reckson New York Property Trust 11%
Valad Property Group 5%

Average 7%

From Orbis Funds management:

"These REITs offer extraordinary value. You can basically buy these REITs for less than 10% of their latest independent valuations (net of associated debt), and well below the cost of building. Net income (excluding any items of an unusual nature) is more than 100% of the purchase price. While debt levels are higher than one would like, rentals, on average, cover interest twice. Many REITs have decided to slash distributions (effectively dividends paid to investors) and retain the cash to reduce debt, a sensible
strategy in our opinion and one which will reduce future risk. Nevertheless, with only 20% of profits paid out, we estimate the average distribution yield will be over 20%.
The two major risks for investors are that banks refuse to renew the REITs’ loans when they mature and tenant bankruptcy. Since they are still covering their interest easily and are reducing rather than increasing debt, we think it very likely that the banks will roll the debt forward. In fact, in December, a large consortium of banks extended Centro Retail Trust’s debt for two years despite it being one of the most leveraged players. Directors have also been significant buyers of a number of these shares in the last quarter. The risk of tenant bankruptcy is higher than usual given the weak economic conditions,
however this risk is very diversified.
Perhaps it is easier to see the value by reducing the parameters above into a single building. Take a building that costs $1 million to build and generates $70,000 in annual rental income with leases fixed for six years (the average length of leases in the table above). The building has a $570,000 mortgage which you have to take over with interest costs of $35,000 per annum. The equity should be worth $430,000 with annual pre-tax income of $35,000. The market currently offers this opportunity to us for somewhere between $30,000 and $40,000, down from more than $500,000 last year.
So while we are deeply disappointed by the losses suffered in 2008, we think that, in some cases, markets have hugely overreacted presenting investment opportunities which have not been available for decades. It is impossible to tell when markets will recover, but even if a recovery in prices is not forthcoming, income yields are very likely to exceed cash returns by a wide margin. When the recovery happens, the upside, as some of these values move to more normal levels, is very high."

Now I would put forward an argument that BBI is in a stronger position than the REIT's listed. What would you rather own in a severe recession? A diversified, 75% regulated portfolio of essential infrastructure assets or commercial property? On that basis, BBI should be trading at higher than the REIT average of 7c in the dollar and BEPPA should be even higher still.

Patience everyone. This will take a long time.

BB, are there any REITs you like currently? Have you studied the action in Goodman GMPPA? This is a similar situation to BEPPA, where GMPPA is an income security that actually benefits from Goodman Group GMG doing a dilutive raising. Goodman recently somehow got the Chinese to invest in him so there is a fortuitous credit spiral starting there that may help GMPPA a lot.

 

[nathanblack]

I seriously doubt that the BBI management would allow BEPPA to dilute BBI holders. Fiduciary obligations aside, most BBI management probably get their incentive payments in the form of BBI stock. I cannot imagine the management would decimate their own shares. It would be against their self interest to do so.

They let it happen with SPARCS didnt they? and its going to happen again in november with SPARCS. So i cant see how BEPPA is any different, wether its near term to get SPARCS and BEPPA off there books at a discount, to help straighten out there structure and pave way for capital raising.

or sometime in the future, when beppa is due or near due for redemption. it would be naive to think that beppa and sparcs will be paid out only in cash and that dilution isnt going to occur, its more a matter or at what point in time and at what price(what will bbi sp be at conversion time and will they convert beppa for $1+ or say 50cents)

 

[persistentone]

It's different because they have TWO YEARS to plan for the BEPPA refinancing. SPARCs is just coming due at the wrong moment.

I think the most likely scenarios in order are:

1) They sell assets and BEPPA become money good and get paid in 2012 by some form of replacement offering.

2) They make some kind of offer to BEPPA holders for a partial recovery or to transition to a new instrument. In case of a partial payoff, they finance that through a replacement offering in 2012.

3) BBI goes bust in which case BEPPA gets partial recovery on asset sales (this is highly contingent on the non recourse nature of the loans).

4) BBI lets BEPPA dilute BBI shares.

So I'm viewing the dilution of BBI as less likely than BBI going bust, and given the interest rate coverage of BBI I don't think that is very likely either.

 

[nathanblack]

i would agreed with your list of scenarios and pretty much in that order of likelyhood until i read the Australian Financial Review and they hinted at rumour of a capital raising ala AIO. AIO went that route, and RIO did similar when the assets up for sale couldnt achieve a satisfactory amount. obviously in both those cases the share price was adequate to raise further funds via share placement.

Reading between the lines, most rumours have some foundations. i would SUSPECT that:
1. BBI knows DBCT is a great assets and wants to keep a stake
2. DBCT offers are either all unacceptable; OR
3.the offers for minority stakes value DBCT higher than 100% offers

for example maybe they have been offered $1.4bil for 49% interest, but only $2.6bil for 100% sale. so i think the rumours are there because at some point they have decided to explore there options regarding raising funds so that they can either keep all or part of DBCT.

to raise more capital at these prices is impossible, but if they sold 49% and price jumps to 20 odd cents, they could probably try then. but any instos would want sparcs and beppa gone. who would invest large sums in bbi knowing that sparcs/beppa rank higher in liquidation.

the more likely scenario is to convert sparc/beppa into a combination of cash/bbi script at a premium to the current market value but at a discount to face value. it will alter the NTA and EPS but will please bankers bcos the gearing will be lowered.

it will then allow new bbi script (on equal terms, nobody ranking ahead)to be floated if funds are required or a new debt security that ranks above bbi ala beppa.

 

[persistentone]

i would agreed with your list of scenarios and pretty much in that order of likelyhood until i read the Australian Financial Review and they hinted at rumour of a capital raising ala AIO. AIO went that route, and RIO did similar when the assets up for sale couldnt achieve a satisfactory amount. obviously in both those cases the share price was adequate to raise further funds via share placement.

Reading between the lines, most rumours have some foundations. i would SUSPECT that:
1. BBI knows DBCT is a great assets and wants to keep a stake
2. DBCT offers are either all unacceptable; OR
3.the offers for minority stakes value DBCT higher than 100% offers

for example maybe they have been offered $1.4bil for 49% interest, but only $2.6bil for 100% sale. so i think the rumours are there because at some point they have decided to explore there options regarding raising funds so that they can either keep all or part of DBCT.

to raise more capital at these prices is impossible, but if they sold 49% and price jumps to 20 odd cents, they could probably try then. but any instos would want sparcs and beppa gone. who would invest large sums in bbi knowing that sparcs/beppa rank higher in liquidation.

the more likely scenario is to convert sparc/beppa into a combination of cash/bbi script at a premium to the current market value but at a discount to face value. it will alter the NTA and EPS but will please bankers bcos the gearing will be lowered.

it will then allow new bbi script (on equal terms, nobody ranking ahead)to be floated if funds are required or a new debt security that ranks above bbi ala beppa.

I agree with the first part of your scenario. BBI will sell enough of DBCT to relieve immediate financing pressures, and that sends BBI shares up significantly. At that point they do a financing to try to raise some additional amounts to buy more breathing room.

That's where I lose you. Why do you believe they would have a right to force BEPPA holders to convert immediately? I thought the first conversion date was July 2012? Does BBI have some option to force a conversion of BEPPA at an earlier date? What are details on that?

 

[persistentone]

They let it happen with SPARCS didnt they? and its going to happen again in november with SPARCS. So i cant see how BEPPA is any different, wether its near term to get SPARCS and BEPPA off there books at a discount, to help straighten out there structure and pave way for capital raising.

or sometime in the future, when beppa is due or near due for redemption. it would be naive to think that beppa and sparcs will be paid out only in cash and that dilution isnt going to occur, its more a matter or at what point in time and at what price(what will bbi sp be at conversion time and will they convert beppa for $1+ or say 50cents)

By the way, is SPARCS something we can invest in? What is the symbol? It would be interesting to see how that one is trading. And I guess they are getting preference over BEPPA now.

 

[nathanblack]

I agree with the first part of your scenario. BBI will sell enough of DBCT to relieve immediate financing pressures, and that sends BBI shares up significantly. At that point they do a financing to try to raise some additional amounts to buy more breathing room.

That's where I lose you. Why do you believe they would have a right to force BEPPA holders to convert immediately? I thought the first conversion date was July 2012? Does BBI have some option to force a conversion of BEPPA at an earlier date? What are details on that?

No they cant force BEPPA holder to convert early. But a 49% sale wouldnt be sufficient and if your choice was to vote down a conversion, they can point out the very real risk of liquidation or that they threaten to issue more beppa to the point that your beppa will see very little in liquidation. Besides they'd be offering a premium to convert, i suspect most would accept 50cent this year rather than a POSSIBLE $1 in 3years. the likelyhood of a re-rating to 50cents this year is unlikely so its the quickest, biggest return possible. throw in a priority and discount to any new offering as a sweetner.

im not saying they MUST or WILL get rid of sparcs/beppa, but i think its more on the cards now than ever.

 

[nathanblack]

By the way, is SPARCS something we can invest in? What is the symbol? It would be interesting to see how that one is trading. And I guess they are getting preference over BEPPA now.

its listed on the NZ exchange, so nothing stopping you but i guess your broker needs access and you need to be aware of different taxes that may apply. also they arent very liquid.

 

[persistentone]

its listed on the NZ exchange, so nothing stopping you but i guess your broker needs access and you need to be aware of different taxes that may apply. also they arent very liquid.

Does anyone happen to know the Reuter's symbol for SPARCS?

I guess the other thing to consider here is to wait until after any conversions take place, since a foreign holder of the security might not have a straightforward way of participating in any offers they make.

 

[nathanblack]

http://www.nzx.com/markets/nzdx/BBN010

thats the link for sparcs in nz but i need more words to get the post accepted

 

[persistentone]

http://www.nzx.com/markets/nzdx/BBN010

thats the link for sparcs in nz but i need more words to get the post accepted

Yes I found the BBN010 link as well and I cannot believe it but they are trading around 19 cents on the dollar.

What do others here think about the reason for that? Is it solely the liquidation preference in front of BEPPA? The market foresees that in a BBI liquidation SPARCS gets paid and BEPPA does not? I'm frankly surprised by the difference in valuation there.

And if you want to get really freaked out, in March the SPARCs were trading at 45 cents on the dollar in celebration of the BBN collapse. So SPARCS soar on the same news that sends BEPPA crashing. No rationality there?

 

[nathanblack]

im interested in others opinion too, but at a huntch i would suspect that SPARCS paying 8.5% versus BEPPA paying a bit above the current bank swap rate is the main factor. they are probably about 3% pa better off than us.

 

[persistentone]

This business is mediocre because of the extremely poor returns it generates on it's assets, a fact which is indisputable looking at their historical returns over the past 5 years. This has been mentioned numerous times and noone has disputed it. Until those returns improve significantly it will continue to be a dog of a business.

The share price on the other hand whilst it has been a dog, may do extremely well for those who bought in at the lows, if the company is able to survive and ekes out the the paltry returns projected by the likes of Wilson HTM.

Dhukka, maybe this is too old a post to bother responding to, but in going through old conversations I saw this and I have to respond.

You have a problem distinguishing what is a good *business* from what is a good *investment*. I agree that as a business BBI isn't that attractive because return on equity of 5% is nothing to brag about.

But with net equity per share of even 80 cents and trading at 8 cents, that gives you a 50% compounded annual return on the investment if it continues to return 5% on equity each year!! The business is a dog. The investment is fabulous. That's using your return on equity numbers.

Consider the opposite case. Consider a wonderful business with a 30% return on equity. Make equity per share $1, but the current trading price of the stock is $10. In that case you end up with a 3% compounded return. Wonderful business. The investment is a dog.

Never examine return on equity in isolation. It leads to empty discussions. You always have to consider return on equity together with the book value to arrive at any kind of meaningful evaluation of the *investment*.

 

[mark_au]

No they cant force BEPPA holder to convert early. But a 49% sale wouldnt be sufficient and if your choice was to vote down a conversion, they can point out the very real risk of liquidation or that they threaten to issue more beppa to the point that your beppa will see very little in liquidation. Besides they'd be offering a premium to convert, i suspect most would accept 50cent this year rather than a POSSIBLE $1 in 3years. the likelyhood of a re-rating to 50cents this year is unlikely so its the quickest, biggest return possible. throw in a priority and discount to any new offering as a sweetner.

im not saying they MUST or WILL get rid of sparcs/beppa, but i think its more on the cards now than ever.

Hmm 50C now vs $1 in three years, now thats a tempting offer, i'll have to stay posted.
This thread seems to be picking up again, hanging out for the announcement, would be so good to be a fly on the boardroom wall

 

[Mitsimonsta]

I agree with the first part of your scenario. BBI will sell enough of DBCT to relieve immediate financing pressures, and that sends BBI shares up significantly. At that point they do a financing to try to raise some additional amounts to buy more breathing room.

This will end up as dilution by another name really. The fact is that they are increasing the number of shares exponentially for very little cash. You would need the BBI SP to be much higher than it is now.

That's where I lose you. Why do you believe they would have a right to force BEPPA holders to convert immediately? I thought the first conversion date was July 2012? Does BBI have some option to force a conversion of BEPPA at an earlier date? What are details on that?

BEPPA matures on June 30, 2012. Nothing changes that until a proposal is put forward by BBI EPS Pty Ltd and passes a vote of security holders.

No they cant force BEPPA holder to convert early. But a 49% sale wouldnt be sufficient and if your choice was to vote down a conversion, they can point out the very real risk of liquidation or that they threaten to issue more beppa to the point that your beppa will see very little in liquidation. Besides they'd be offering a premium to convert, i suspect most would accept 50cent this year rather than a POSSIBLE $1 in 3years. the likelyhood of a re-rating to 50cents this year is unlikely so its the quickest, biggest return possible. throw in a priority and discount to any new offering as a sweetner.

I cannot see it happening any side of 17 November 2010. That is the next reset date for SPARCS. If no reset if offered (or terms are voted down) then SPARCS matures and conversion takes place. Until SPARCS is out of the way, you will see nothing happen with BEPPA. BBI may see a capital raising but I do not believe it to be in BBI holder's best interests until the SP is > 40c and even then it really should be more like 60c.

im not saying they MUST or WILL get rid of sparcs/beppa, but i think its more on the cards now than ever.

I understand the idea you are promoting, but it simply cannot happen while SPARCS is in market. Once the cash sweep is gone, and SPARCS has converted (or been paid out), only then can BEPPA distributions resume. After BEPPA distributions resume, I think BBI will look to buy BEPPA back on-market at a discount.

im interested in others opinion too, but at a huntch i would suspect that SPARCS paying 8.5% versus BEPPA paying a bit above the current bank swap rate is the main factor. they are probably about 3% pa better off than us.

The SPARCS rate is now 10% - the reset terms stated this. Look at the SPARCS meeting results release.

I offer this post to ASF that I posted elsewhere.

One of the issues I have with BBI is the fact that they are likely to suffer massive dilution of their equity when SPARCS finally does convert, and yet the assets (and as a result of that, revenue also) is going to drop due to sales of the assets.

While it is too far in the future to speculate because we need to see how SPARCs converts first (I mean the conversion rate) and/or what other options are made available for that before we even contemplate BEPPA.

Of course, dependent on how many SPARCS convert on 17 November 2010 and at what ratio is going to be the biggest issue with BEPPA. It also depends if they offer to reset terms again, and at what interest rate. They then need to get that passed at a meeting.

There is also the option of paying out cash instead of stapled securities. I would imagine that this would have to be at a premium, possibly as high as 5% for a full conversion to cash and then sliding down to smaller amounts. Again, I have not read the SPARCS material in it's entirety, but I believe that this would have to be passed by the bondholders at a vote.

I feel that talk of BEPPA resetting (while I expect it) is a little premature until we get to the next SPARCs reset date which is 16 months away. Again, there would have to be some fairly big margin interest jumps in order to satisfy the BEPPA holders. SPARCS went from 8.5% to 10% p.a. but since BEPPA is floating rate (BBSW + 1.15%), I would suggest that the bonus component will need to at least double to ensure a motion to be passed.

Really, it is DBCT sale news that will generate the cash to pay down the corporate debt, which should mean that the cash sweep should cease. Hopefully the asset-level debt can start to be paid down after that. Right now, BBI needs to bring down the debt amounts so that when it comes to refinance, they are not put in a worse position by higher interest rates that are sure to be imposed by creditors.

BEPPA is not a sure thing. But for me, the risk taken in dollar terms is not massive, and I can stand to lose my entire holding and not commit suicide. I got into BEPPA as I believe that the current price is undervalued, and if everything does come off, then it will drive my portfolio into its next phase.

My aim was 50,000 units @ 10c average ($5k to purchase $50K debt). Much higher than that and I would start to become uncomfortable about the capital at risk. Each person is different, some may feel uncomfortable at $1k of capital invested. Some might feel happy to put in $20k and look for more. It's all about your current financial position and goals.

I believe in the capability of BBI to pay the accrued distributions of BEPPA at 30 June 2012. I do not believe in BBI's capability to buy back the EPS at that date, or willingness to convert to stapled securities on that date due to dilution of current stapled security holders, hence I expect reset terms to be offered that are attractive enough to achieve a positive vote to the proposal.

I also expect that once SPARCS and the cash sweep is gone, and BEPPA holders are up to date in distributions, that BBI will look to start repurchase debt on the open market. As soon as this happens, watch the SP rise. This is one way that BBI can address the question of stapled security dilution while retiring debt at a discount.

 

[persistentone]

Stealing from one of BB's earlier posts, what is the status on repayment of the BBI debt we have due through end of 2009? Here are the ones he listed:

Dampier to Bunbury May 2009 AUD 4 4
Natural Gas Pipeline September 2009 AUD 96 96
WestNet Rail June 2009 AUD 19 19
Multinet Gas June 2009 AUD 4 4
Network July 2009 AUD 27 27
PD Ports July 2009 £ 100 208
BBIPAL (WaterContainer Transport and Tarragona Port Services)
August 2009 EUR 51 102
Powerco August 2009 $NZ 109 90
August 2009 $NZ 67 55
WA Gas Networks September 2009 AUD 15 15
BBI Finnish Ports October 2009 EUR 88 175

How much of this can we pay out of cash flows and which ones will require asset sales to cover?

I assume the sweep agreement for corporate debt allows the principal on all of these debts to be paid first?

 

[hardyakka]

A few comments:
a) If additional BEPPA are issued that rank equally with existing BEPPA then they will cost the purchaser $1 cash for each BEPPA issued. I doubt anyone would pay $1 when they can be bought on market for about 10 cents.

b) If Sparcs convert to BBI in a few years you will have BEPPA outstanding to either be repaid or converted. If BEPPA converts then BBI holders (including those ex-SPARCS holders who now hold BBI from their conversion) will be diluted out of existence. The end result being existing BEPPA holders will own the vast majority of BBI.

c) There is unrecognised inherent value in BBI of over a billion.

d) IMO PD Ports is immaterial when compared with the implications of the DBCT sale. there is about $150M if I recall of debt related to PD Ports at the corporate level. I would like to see BBI retain this asset until markets pick up.

e) BEPPA holders have a "cushion" of about $3.5B, this being NTA plus a $B of inherent value not recognised in the financials, this $1B being after $0.5B general provision for write-offs.

So am I concerned about my BEPPA holding, simply no.

Cheers

 

[Mitsimonsta]

How much of this can we pay out of cash flows and which ones will require asset sales to cover?

I assume the sweep agreement for corporate debt allows the principal on all of these debts to be paid first?

If you are a BBI/BEPPA holder, then why not ring the Investor Relations line and ask?

A few comments:

-A big snip-

So am I concerned about my BEPPA holding, simply no.

Agreed. There is $3.5B worth of writedowns that has to happen before my $1 of debt is at risk.

All rests on DBCT. If a great price ($2.8 Billion or more) results then I think the PD deal might be called off or delayed.