BBI - Babcock & Brown Infrastructure

[persistentone]

Persistent1, its not a new idea and has been discussed before. the biggest dilemna is what price should BBI put on DBCT for purpose of floating? Be realistic in your answer to your self. Think along the lines would YOU invest into the float at that price.

If BBI tried to float it at say $2.8bil, the first thought that jumps into my mind is that they DIDNT recieve an offer of that much or more, otherwise they would acept it. Are you willing to buy in at an inflated price? Its a good idea and could have worked IF they went down that path from the beginning.

The other aspect is, assume they did sell 50% in a float at $1.4bil. most of that money will need to go to asset level debt reduction. Think if you buy a house do you inherit the previous owners mortgage aswell? so a 50% float will not reduce the corporate debt, we need 100% really.

Remember the "strategic" buyers view this asset differently than a retail investor would. The strategic buyer simply wants to control their supply chain to China, and possibly gain control of the asset in the long term in order to lower their costs of business.

A retail buyer would look at DBCT the way they look at a pipeline: as a way to get a tax-advantaged high-dividend yield with lots of growth opportunities for the dividend.

For something like this idea of floating DBCT to make sense, I think it would need to pay out a 10% dividend to the investor. Probably that is going to be hard selling the asset at a 12.5 enterprise value to EBITDA multiple.

If they did do a 50% sale at $1400MM, then cleared that much of the asset level debt, then that leaves BBI in a much stronger position going forward to pay off corporate debt. Because they clear $1400/$1806 = 77.5% of their interest expenses from DBCT, but retain 50% of the EBITDA.

In the big picture, they may still be between a rock and a hard place.

 

[nathanblack]

Remember the "strategic" buyers view this asset differently than a retail investor would. The strategic buyer simply wants to control their supply chain to China, and possibly gain control of the asset in the long term in order to lower their costs of business.

A retail buyer would look at DBCT the way they look at a pipeline: as a way to get a tax-advantaged high-dividend yield with lots of growth opportunities for the dividend.

As a retail buyer would YOU buy into the float if it valued DBCT at $2.8bil even though you knew "strategic" buyers had offered only $2.4bil? 15% odd premium?

Under what conditions would you buy into DBCT float? Debt repaid at asset level? control still with BBI? would you want your "share" to be structured as equity or debt? options attached to further increase equity in DBCT or even in BBI? at what value would you buy into DBCT?

 

[persistentone]

As a retail buyer would YOU buy into the float if it valued DBCT at $2.8bil even though you knew "strategic" buyers had offered only $2.4bil? 15% odd premium?

Under what conditions would you buy into DBCT float? Debt repaid at asset level? control still with BBI? would you want your "share" to be structured as equity or debt? options attached to further increase equity in DBCT or even in BBI? at what value would you buy into DBCT?

My point was that my valuation of DBCT would have little in common with the strategic buyers. I want good coverage for a strong dividend and a lot of growth opportunity. The strategic buy probably doesn't want that; they want to control costs on another business. So it's not the case that each type of buyer evaluated the same asset with the same goals, and reached different conclusions.

The bigger problem is that to pay the price BBI needs the retail buyer to pay, probably precludes paying a good dividend (if the dividend is based on what they can really afford and isn't itself the cause of more gearing). So it's all academic anyway.

 

[nathanblack]

The bigger problem is that to pay the price BBI needs the retail buyer to pay, probably precludes paying a good dividend (if the dividend is based on what they can really afford and isn't itself the cause of more gearing). So it's all academic anyway.

OK. So we agree it was a good idea, but aint going to happen.

Not exaxctly a growth asset either, there are a few minor expansions possible and the regulator can increase fees to grow with inflation and such. but over all its more defensive than growth.

 

[persistentone]

OK. So we agree it was a good idea, but aint going to happen.

Not exaxctly a growth asset either, there are a few minor expansions possible and the regulator can increase fees to grow with inflation and such. but over all its more defensive than growth.

Take a look at a satellite photo of DBCT sometime. It's unbelievably tiny really. Looks like plenty of expansion is possible there, and if there are really 20+ ships lined out to sea, you can easily imagine the facility handling twice or three times the traffic.

Then again, is coal export a growth business for more than 10 years?

 

[nathanblack]

Take a look at a satellite photo of DBCT sometime. It's unbelievably tiny really. Looks like plenty of expansion is possible there, and if there are really 20+ ships lined out to sea, you can easily imagine the facility handling twice or three times the traffic.

Then again, is coal export a growth business for more than 10 years?

Also the rail system leading to DBCT cant cope with much more, infact its not coping now. How much of the land is available and owned/leased by dbct for development and is the expense worth the return.

also how much can a lease really grow? although 99years is along way away, at some point the asset needs to depreciate to $0.

 

[hardyakka]

As a retail buyer would YOU buy into the float if it valued DBCT at $2.8bil even though you knew "strategic" buyers had offered only $2.4bil? 15% odd premium?

Under what conditions would you buy into DBCT float? Debt repaid at asset level? control still with BBI? would you want your "share" to be structured as equity or debt? options attached to further increase equity in DBCT or even in BBI? at what value would you buy into DBCT?

If DBCT was floated into a separate vehicle I would gladly swap $1 of BEPPA for $1 of ordinary units, each unit representing $1 NTA of DBCT, the NTA overpriced by 15%.

A very defensive income stream and I am getting a $1 of 15% over priced units backed by DBCT and its income stream and nothing else. Thats a great deal considering $1 face value of BEPPA costs about 12 cents.

 

[nathanblack]

If DBCT was floated into a separate vehicle I would gladly swap $1 of BEPPA for $1 of ordinary units, each unit representing $1 NTA of DBCT, the NTA overpriced by 15%.

A very defensive income stream and I am getting a $1 of 15% over priced units backed by DBCT and its income stream and nothing else. Thats a great deal considering $1 face value of BEPPA costs about 12 cents.

I wish they would offer something similar, id accept even less. i reckon we could sell a share in dbct on market for about its float price or certainly alot more than beppa trading price.

wont happen though because it brings no money to BBI, yes it removes $800mil beppa but thats long term debt. they need actual cash to reduce corporate debt more.

 

[nathanblack]

IF BBI were to refinance some corporate debt into asset level debt, which assets have most room to move(from a debt/equity and interest cover angle)?

Is that a solution, that either some corporate debt or even sparcs is recapitalised into asset level debt? maybe instead of selling DBCT, we can tap into $200mil of equity and do the same with NGPL, then sell PD Ports only.

I know from a SP angle, it will help only a little, due to increased certainty, possibly getting sparcs out the way and removing the bank sweep. Im only thinking of an alternative to selling, if BBI are having difficulty. Obviously asset level banks will only allow it if EV is enough and interest cover.

But IF we could unlock say:
DBCT($300mil)
NGPL($300mil)
PD Ports(sell and paydown as much as possible)

Then use that money to repay corporate level debt plus sparcs. No dilution, assets intact, still same debt just shifted from one place to the next, same interest cover, perhaps lower interest rate because loan is now secured against an asset.

After interest cover there should be money left over for BBI to put aside for beppa and save for a rainy day. under those conditions SP will rise, lets say to 25c. BBI then do a 1:1 right issue at discounted price of 20c. Proceeds can be used to pay outstanding dividend which is a requirement of beppa if equity is raised all outstanding divs must be paid.

remainder of funds raised used to lower debt ratio on the higher geared assets. which will further reduce interest payable, thus creating larger profit.

RESULT: SPARCS paid out in full. BBI no dilution. BEPPA worth $1 in 2012. WIN-WIN-WIN.

Obviously relies on banks being agreeable to restructuring asset level debt, and enough net equity being available. Corporate banks will definately agree(they get paid out). Asset level banks should agree if the ratio and cover is there, especially if BBI only roll the debt over into short term debt with the knowledge that after a capital raising they can payback some or all of the rolled over debt.

i know the only way to realise NAV value of 90c/share is to sell ALL assets at or above book value, and selling some assets will result in somewhere between current SP and the NAV, but surely 25c/share would still be a great result considering it deals with all issues and retains key profitable assets to improve value going forward.

Just a rant really, i know it wont happen, but it demonstrates there are options available.

 

[persistentone]

IF BBI were to refinance some corporate debt into asset level debt, which assets have most room to move(from a debt/equity and interest cover angle)?

Is that a solution, that either some corporate debt or even sparcs is recapitalised into asset level debt? maybe instead of selling DBCT, we can tap into $200mil of equity and do the same with NGPL, then sell PD Ports only.

I know from a SP angle, it will help only a little, due to increased certainty, possibly getting sparcs out the way and removing the bank sweep. Im only thinking of an alternative to selling, if BBI are having difficulty. Obviously asset level banks will only allow it if EV is enough and interest cover.

But IF we could unlock say:
DBCT($300mil)
NGPL($300mil)
PD Ports(sell and paydown as much as possible)

Then use that money to repay corporate level debt plus sparcs. No dilution, assets intact, still same debt just shifted from one place to the next, same interest cover, perhaps lower interest rate because loan is now secured against an asset.

After interest cover there should be money left over for BBI to put aside for beppa and save for a rainy day. under those conditions SP will rise, lets say to 25c. BBI then do a 1:1 right issue at discounted price of 20c. Proceeds can be used to pay outstanding dividend which is a requirement of beppa if equity is raised all outstanding divs must be paid.

remainder of funds raised used to lower debt ratio on the higher geared assets. which will further reduce interest payable, thus creating larger profit.

RESULT: SPARCS paid out in full. BBI no dilution. BEPPA worth $1 in 2012. WIN-WIN-WIN.

Obviously relies on banks being agreeable to restructuring asset level debt, and enough net equity being available. Corporate banks will definately agree(they get paid out). Asset level banks should agree if the ratio and cover is there, especially if BBI only roll the debt over into short term debt with the knowledge that after a capital raising they can payback some or all of the rolled over debt.

i know the only way to realise NAV value of 90c/share is to sell ALL assets at or above book value, and selling some assets will result in somewhere between current SP and the NAV, but surely 25c/share would still be a great result considering it deals with all issues and retains key profitable assets to improve value going forward.

Just a rant really, i know it wont happen, but it demonstrates there are options available.

You would never get a corporate lender to agree to take a step down to the asset level.

But maybe you could get some new lender to give asset level debt for the highest quality assets, specifically DBCT and NPGL. The new NPGL debt would then pay off the corporate level debt for NGPL, and the DBCT asset level debt would pay off some additional corporate debt. The DBCT asset has a strong growth path on EBITDA projected so you might pull that off.

At the end of the day, there is still $1250 of corporate debt to get rid of, and getting rid of $600M to maybe $800M of that as a debt for debt swap doesn't really get the corporate lenders off our backs. For BBI to restore operational flexibility we need those corporate lenders to get paid off in full and just go away. Anything less than that and we are in a slow burn.

Has anyone done an analysis to see if we turn off all growth capex and just do minimum maintenance capex (which is the mode the corporate lenders already have them in I am sure), given the EBITDA around $1100MM how long does it take us to pay off corporate debt in full? Assume that all lenders cooperate in restructuring debt repayment dates to accomodate the cash flows.

 

[nathanblack]

You would never get a corporate lender to agree to take a step down to the asset level.
secured against a quality asset, i'd consider it. plus i was more thinking unlocking the equity via new loan, then using that to repay corporate debt.



But maybe you could get some new lender to give asset level debt for the highest quality assets, specifically DBCT and NPGL. The new NPGL debt would then pay off the corporate level debt for NGPL, and the DBCT asset level debt would pay off some additional corporate debt. The DBCT asset has a strong growth path on EBITDA projected so you might pull that off.

we all agree equity>debt so there must be equity somewhere we can tap into. some estimates show that there is quite a buffer for beppa, so where is it? can it be accessed?

At the end of the day, there is still $1250 of corporate debt to get rid of, and getting rid of $600M to maybe $800M of that as a debt for debt swap doesn't really get the corporate lenders off our backs. For BBI to restore operational flexibility we need those corporate lenders to get paid off in full and just go away. Anything less than that and we are in a slow burn.

agreed, but we can combine it with asset sales and capital raising. a simplified structure will help everyone breath easier.

Has anyone done an analysis to see if we turn off all growth capex and just do minimum maintenance capex (which is the mode the corporate lenders already have them in I am sure), given the EBITDA around $1100MM how long does it take us to pay off corporate debt in full? Assume that all lenders cooperate in restructuring debt repayment dates to accomodate the cash flows.

thats basically what im saying/wondering. if we recapitalise our corporate debt into asset level debt, we survive. if we survive and make repayments from free cash flow, how long will it take to be 100% healthy and reduce our debt ratios without selling

 

[banska bystrica]

Has anyone done an analysis to see if we turn off all growth capex and just do minimum maintenance capex (which is the mode the corporate lenders already have them in I am sure), given the EBITDA around $1100MM how long does it take us to pay off corporate debt in full?

Approximately 5-6 years...................................................................................

 

[persistentone]

Approximately 5-6 years...................................................................................

I came up with three years, but I trust your numbers better than mine.

Pretty hard situation in either case....

 

[nathanblack]

I came up with three years, but I trust your numbers better than mine.

Pretty hard situation in either case....

in a relatively short time the company could be corporate debt free, without selling assets. but banks/ shareholders will not wait that long, pitty because i think the SP would be pretty healthy then. And each year the balancesheet will improve so even shorter term like 2years would be a pretty healthy low risk profile company. at such time other opportunities will arise to counter debt.

seems like resistance at 8c now, if that breaks near term, could get a bit of a run on. at 6c i was bullish on BBI(versus BEPPA), but at current prices and with current issues/future announcements im think BEPPA has got the edge over BBI again (risk v reward)

 

[persistentone]

Approximately 5-6 years...................................................................................

If management doesn't like the price offered for DBCT and decides to just payoff loans the hard way, do you think lenders will accomodate that, or do you think they will push for Administration?

Administration almost certainly will increase the lenders' losses. I'm thinking the lenders must prefer to get paid their interest and principal as long as the economy can sustain EBITDA in excess of interest?

If that scenario unfolds, then BBI and BEPPA enter a period of long long sleep. It would be years before the turn happens.

 

[banska bystrica]

Why would the banks "push for administration" when they have the sweep in place? The sweep achieves exactly the same as administration would. Free cash to the banks to reduce debt. BBI has never missed an interest payment to a bank. The banks cannot legally put them into administration until debt covenants are breached. We have been through the worst financial crisis in living memory yet BBI have still paid their bank debts on time. What grounds have the banks to put them into administration? NONE.

DBCT will sell for a very good price. Corporate debt will be reduced to the US$250M due in 2013 and then you will see a restructure of the debt/equity (BEPPA/BBI). My opinion only.

 

[persistentone]

Why would the banks "push for administration" when they have the sweep in place? The sweep achieves exactly the same as administration would. Free cash to the banks to reduce debt. BBI has never missed an interest payment to a bank. The banks cannot legally put them into administration until debt covenants are breached. We have been through the worst financial crisis in living memory yet BBI have still paid their bank debts on time. What grounds have the banks to put them into administration? NONE.

DBCT will sell for a very good price. Corporate debt will be reduced to the US$250M due in 2013 and then you will see a restructure of the debt/equity (BEPPA/BBI). My opinion only.

They could be forced into a breach of covenants on PD Ports, depending on how much business they lose there (and how much is offset by the new import centre), and PD Ports does have a lot of corporate debt. So there are scenarios where they breach covenants and the banks could push them into administration.

Having said that, I agree with you they should not want to do that. If DBCT does not sell, probably the most likely outcome is the banks restructure debt and continue to milk them. The only thing that changes that outcome is if economy worsens and EBITDA falls.

 

[investorpaul]

They could be forced into a breach of covenants on PD Ports, depending on how much business they lose there (and how much is offset by the new import centre), and PD Ports does have a lot of corporate debt. So there are scenarios where they breach covenants and the banks could push them into administration.

Having said that, I agree with you they should not want to do that. If DBCT does not sell, probably the most likely outcome is the banks restructure debt and continue to milk them. The only thing that changes that outcome is if economy worsens and EBITDA falls.

Correct me if I am wrong but isnt the BBI model to have all assets "held at arms length" so if PD ports goes into Admin they "cut it off" and the main company BBI survives.

EG If PD ports goes into admin, they cut it off, BBI survive but there share price would still get hammered. Obviously not ideal but better than the whole company going into admin

 

[nathanblack]

Correct me if I am wrong but isnt the BBI model to have all assets "held at arms length" so if PD ports goes into Admin they "cut it off" and the main company BBI survives.

EG If PD ports goes into admin, they cut it off, BBI survive but there share price would still get hammered. Obviously not ideal but better than the whole company going into admin

Yes, thats the idea of the non-recourse asset level debt. However some assets have corporate level debt associated with them too, eg PD Ports, so theoretically the corporate bankers have a claim too.

 

[random]

Is anyone else having a problem accessing the announcement by bbi this morning?

I've tried on the asx site as well as commsec to get it up on the screen.
The last announcement also took ages to access although the announcement icon was published.

Guessing its todo with the sale!