BBI - Babcock & Brown Infrastructure

[banska bystrica]

I own a lot of BEPPA and I feel a very severe haircut coming for ALL...... maybe SPARCS holders get a reprieve as their $1 is due and payable in November. Might be easy just to let them convert. The dilution with this proposal will be so torturous it will not be pretty. A very stiff rights issue (has to be at least 4:1 at the current market cap) where Mr Cornerstone underwrites it will probably be in order or maybe Mr Cornerstone takes a convertible note?

BBI are caught between a rock and a hard place. Oct 30 is looming and they don't have the cash. They said so at the ABN Amro conference. We all know that anyway as anything above $50M is swept to the banks.
The cornerstone investor has played this perfectly. His timing is impeccable. Wait...wait...wait some more. Hope DBCT offers were all low ball and then pounce at the 11th hour.
Mr Cornerstone will demand plenty and he will get it. There is no alternative. If this deal falls through, expect a BBI price circa 2c and a BEPPA price circa 4c. Ugly but that's the reality.
I would accept 20c worth of BBI shares for each BEPPA in any deal because if the deal falls over, I will get three fifths of a banana sandwich. That's all.

Anyone who thinks they will ever see $1.00 for BEPPA is living in a fantasy land.

 

[Mitsimonsta]

Nice to see you still here BB after that disgusting post by TTC over the road.

I sent you a PM with my email, sign me up at the blog when it opens. I can provide webspace for you to get started if you like.

 

[kommy]

BB understand your pessimism, but lets wait until the announcement tomorrow!

My take is that if the deal is announced tomorrow then it can't be too bad as they would have spend a little time negotiating it. If it gets extended then your pessimism is warranted but until then its too hard to make a call.

 

[drsmith]

A very stiff rights issue (has to be at least 4:1 at the current market cap) where Mr Cornerstone underwrites it will probably be in order or maybe Mr Cornerstone takes a convertible note?

I was thinking something along the lines of Mr Cornerstone contributing equity in the form of a preference share/convertible note that ranks ahead of BEPPA.

With regard to your recent negativity have you looked at the reconciliation of EBITDA to operating cash on page 15 of the analyst's presentation and deducted the figures from the first half?

 

[banska bystrica]

Free cash flow for the six months to June 30 was $29M. This is a major collapse in free cash flow and it is obvious less and less free cash is flowing from the assets to the corporate level. The ICR on corporate debt is alarmingly low. They are being suffocated by the interest margins the banks are charging. I had sold 2,000,000 BEPPA (most since the report came out). I also shorted the head stock.
I still own 3M BEPPA and await the devil in the detail tomorrow morning. Any capital injection of $700M with a current market cap of $200M can only mean one thing. Massive dilution. How it all affects BEPPA/SPARCS/BBN020 is anyone's guess.

 

[Mitsimonsta]

By what time do they need to release to market in order to commence trading at market open, or request an extension of trading halt?

9.30am AEST?

I think there will be no trading tomorrow, negotiation will continue over the weekend and we will have a deal public on Monday morning.

 

[hardyakka]

I own a lot of BEPPA and I feel a very severe haircut coming for ALL...... maybe SPARCS holders get a reprieve as their $1 is due and payable in November. Might be easy just to let them convert. The dilution with this proposal will be so torturous it will not be pretty. A very stiff rights issue (has to be at least 4:1 at the current market cap) where Mr Cornerstone underwrites it will probably be in order or maybe Mr Cornerstone takes a convertible note?

BBI are caught between a rock and a hard place. Oct 30 is looming and they don't have the cash. They said so at the ABN Amro conference. We all know that anyway as anything above $50M is swept to the banks.
The cornerstone investor has played this perfectly. His timing is impeccable. Wait...wait...wait some more. Hope DBCT offers were all low ball and then pounce at the 11th hour.
Mr Cornerstone will demand plenty and he will get it. There is no alternative. If this deal falls through, expect a BBI price circa 2c and a BEPPA price circa 4c. Ugly but that's the reality.
I would accept 20c worth of BBI shares for each BEPPA in any deal because if the deal falls over, I will get three fifths of a banana sandwich. That's all.

Anyone who thinks they will ever see $1.00 for BEPPA is living in a fantasy land.

Hi BB,

Good to see you back, you have been getting a bit of crap across the road, I get the feeling that many posters there are simply envious. Not that I would know that as I was banned from there yonks ago<s>.

I do not concur with your view on the value of BEPPA, I would be looking for greater value but via an alternate solution that IMO would be agreeable to all.

BBI does not want dilution or cash outflow and would like to increase net assets by removing a significant portion of the BEPPA liability for zero cost. This can be done if 50 cents in the $ of BEPPA is converted to a preferred note with a coupon of say 350 bps above BBSW and the income flow is secured against DBCT or NGPL cashflows (after senior debt rights), this ensuring a quality credit rating. If the notes are listed they can be traded and persons can access capital. Also there can be stepups or capital redemptions every say 5 years. Hence BBI can redeem or buy back the notes once it has recovered.

No dilution, no outflow of cash, secured high return to note holders. If you bought BEPPA below 10 cents then that would equate to a return of 40% pa (assuming BBSW +350bps =8% on 50c in the $ of BEPPA).

Cheers

 

[Tysonboss1]

I own a lot of BEPPA and I feel a very severe haircut coming for ALL......

I would accept 20c worth of BBI shares for each BEPPA in any deal because if the deal falls over, I will get three fifths of a banana sandwich. That's all.

Anyone who thinks they will ever see $1.00 for BEPPA is living in a fantasy land.

I understand where your coming from, however I don't share your feeling of impending doom.

BB you always seem to get a touch of cold feet leading up to these sort of announcements,

I am actually quite looking for to the annoucement, I have a positive out look.

 

[Mitsimonsta]

I understand where your coming from

(snip)

BB you always seem to get a touch of cold feet leading up to these sort of announcements

If I had as much cash invested as he has, along with the awesome profits so far and sitting on the paper profit he is with a trading halt pending reapitalisation, I would be hell worried too.

I've spent $2600 on BEPPA - that is alot in my portfolio - and I am very nervous. Still, we all have to start somewhere.

 

[banska bystrica]

B & B Infrastructure awaits white knight:

Matthew Stevens | September 04, 2009

Article from: The Australian
HIDDEN beneath the complication and debt that has overwhelmed Babcock & Brown Infrastructure is an "Aladdin's Cave" of value for an investor with patience and deep pockets.

But anyone expecting this morning will bring the "abracadabra" moment that immediately opens the way to new riches is going to be disappointed.

BBI is expected to come out of 48 hours of trading halt today with confirmation that it is pursuing a recapitalisation through an equity raising rather than asset sales.

BBI is expected to confirm a broad framework for a recapitalisation that will likely involve investment both in the headstock and directly in some of the core operating assets.

It is speculated BBI could raise up to $500 million through a placement equivalent to 75 per cent of the headstock at a small discount to the prevailing market price -- and possibly more through the sale of direct interests in some core operation assets.

But today's statement is unlikely to deliver too much detail on the who, how, what and when of the progress towards introducing a new cornerstone investor to the only sustainable arm of the global folly that was Babcock & Brown.

The company is apparently keen to make it very clear to its flotilla of penurious shareholders that there is a lot of water yet between BBI and a secure, more prosperous future.

The one "W" question we can answer right away though is why someone would want to take a punt on BBI.

The crucial thing to understand about the BBI situation is that, while there is an awful lot of debt sitting within its corporate walls, the situation is not quite as complicated as it might appear at first.

Yes, BBI speaks for $9.9 billion of debt and about $3.5bn of it matures between now and July 2011. And that is before taking into account some $800m of hybrids, some $100m of which is due for re-set in November.

But the fact is that around $8bn of bank debt is secured by BBI's assets and it is being comfortably supported by the largely regulated revenue flows of those operations.

The immediate issue for BBI is that it has about $1.2bn of corporate debt which, while it is being serviced pretty comfortably from cashflows, is likely to be called by the banks as re-payment falls due between now and 2014.

At headstock level, there are three multi-currency facilities maturing between February 2010 and February 2011 which would, at current exchange rates, require about $750m to repay. In the past, BBI would either have extended the terms of that debt or traded one or more of its strong pool of infrastructure businesses to cover the repayment. But that game of soldiers died with the GFC.

BBI has been attempting to sell assets, including crown jewels such as the Dalrymple Bay coal port and its British ports business, without a whole lot of success for the past year or so.

What deals BBI has been able to complete have essentially been done at pricing metrics that have proved so self-defeating and value-deflating that the concept of a heavily discounted, control-changing equity issue now looks very positive indeed.

Over the past year or so, Australian corporates have raised $80bn in new equity which has promptly been delivered to banks in the form of debt repayment.

Time and time again we have seen the compounding impact the stabilisation of balance sheets has had on individual company share prices.

BBI is banking that it can repeat that virtuous cycle of recovery and the hedge funds are lining up to bet that it can. And here is how one of them is betting the BBI situation will pan out.

First, BBI finds a cornerstone investor prepared to stump up with maybe $500m at say 6c a share.

Then, given BBI continues to generate, post-capex, free cash at the current rate of $150m annually, it can quickly and easily start paying down the $750m of debt due over the next two years.

Given refinancing risk is mitigated as the balance sheet is fundamentally re-cast, investor sentiment would then shift and there will be a re-rating of the stock.

Now, if you use Asciano as a ready reckoner, then BBI might move reasonably quickly to maybe the 15c-a-share range, which means our cornerstone investor has made circa $700m-$800m.

The reason why some reckon this is all a bit of a no brainer from an investor's point of view is that the bulk of BBI's business is not even as cyclical as, say, Asciano and neither do they face the same structural risks as Asciano.

About 75 per cent of BBI's income flows from regulated assets where pricing reflects the cost of capital and locked-in rates of return.

When Asciano went to market it was overrun by demand and ended up doubling its raising to $2bn. The net result is that the share price has tripled and Asciano is suddenly back in the game.

The other thing to appreciate here is that BBI has prepared well for a white knight by internalising the management contract with Babcock & Brown at a cost of only $2m a year for four years.

While that represents a near 50 per cent increase on the fee flow from 2008, it is only 10 per cent of the flow from years past and country miles short of the terrifying $350m price paid by Macquarie Airports for the recovery of its right to manage itself from parent Macquarie Bank.

The management contract, mind you, remains a bit of a complication for the crew working on BBI's cornerstone investor option.

The issue there is BBI's $800m worth of hybrids. They can be converted on the sale of the B&B management contract and their conversion would plainly be seriously dilutive. Dilution is not something any new investor would contemplate lightly.

Given B&B is in the hands of an administrator and that the management contract is worth about $8m over 4 years, it would seem pretty likely that an early monetisation of the contract might be a serious option."

http://www.theaustralian.news.com.au/business/story/0,28124,26022835-5001641,00.html

 

[banska bystrica]

According to the Financial Review, the restructure is not complete and far from certain therefore the stock will probably be suspended before opening until any deal is actually finalised. Looks like our capital will be tied up for a while yet....... and oh so many opportunities elsewhere.

 

[banska bystrica]

The Australian Financial Review claims that the cornerstone investor is actually Brookfield Asset Management, the owner of the Multiplex Construction Group, not Borealis Infrastructure as previously thought.

The total recapitalisation process is touted to involve capital injections at the asset level, a restructure of debt at the head stock and the identification or reaffirmation of assets up for sale. In total the package is thought to be worth $1.5BN and aims to see a more sensible gearing level of 65% to 70%.

It is claimed that the deal will not launch today because the approval of all the lenders has not yet been achieved.

However many still doubt that this highly complex transaction will get across the line and it is thought that at least one major asset sale will still have to take place.

It is thought that BBI wants to retain DBCT despite the fact that it has been on the market for months now and despite the consortium involving Xstrata, Anglo and Rio Tinto showing interest in the asset.

Credit Suisse and Macquarie Capital are advising BBI management and Gresham is advising BBI's independent directors. The AFR claims the negotiations are likely to be protracted and that this could lead to BBI being suspended from trading until the finer details of the recapitalisation are sorted out.

 

[banska bystrica]

Please obtain a copy of today's Financial Review and go to Page 47.

There has been a fight going on since last year between Lowy Financial Group (who own 7% of BEPPA) and BBI management.

It is a very sobering read and one that does not fill me with any great confidence.
Quote: "The BEPPAs are in a weak position. They need to play a reasonable game."

I still own 3M BEPPA and I am about to be stitched up. At least I am free carried.

If BBI/BEPPA start trading today, I am out of my BEPPAs pronto.

 

[deano9801]

news just in.....Notice of ceasing to be a substanial holder. asx web site. Does this mean it has been bought out by Norges Bank?

 

[banska bystrica]

As I said over the road and got blasted for it. Daytrader mugs were buying this last week and the instos were dumping to them.

Why were management not considering this sort of recapitalisation deal when I approached them when the stock was 15c in January? The haircut for everyone would have been far less severe. What would I know though? I'm just a private investor.

 

[deano9801]

What do we all make of the "Debt Refinancing Update and Potential Recapitalisation " document? What will this do to the SP today?

 

[Mitsimonsta]

BBI Release out. Still negotiating. A couple of very worrying statements in there, including haircuts to both BEPPA and SPARCs, possibly at 'below recent trading price'...

Will return to trade this morning.

ASX Release

4 September 2009

DEBT REFINANCING UPDATE AND POTENTIAL RECAPITALISATION

As previously disclosed, Babcock & Brown Infrastructure (ASX: BBI) has $9.1 billion in total proportionate debt and $1.2 billion in corporate level debt facilities as at 30 June 2009. Of this amount, BBI has approximately $2.7 billion in proportionate debt maturing in FY2010 and FY2011, including approximately $300 million of corporate debt required to be paid down in February 2010. Accordingly, the Board of Directors and management of BBI have been actively pursuing a range of options to provide BBI with the capacity to address these pending maturities. In the absence of repaying or extending these facilities, such facilities will become due and payable on maturity.

Until recently, BBI has focused on sales of significant assets as its primary strategy for achieving debt repayment. However, achieving asset sales in the current environment on terms which would realise sufficient funds for the necessary reduction in BBI’s debt is proving difficult, with timing and value outcomes uncertain. Based on present circumstances, BBI’s current asset sales programs (net of expected disposal costs and taxes) are unlikely to realise sufficient proceeds to meet BBI’s FY2010 debt maturities.

As such, the Board has also been focusing on the possibility of engaging in a comprehensive equity recapitalisation transaction combined with sales of certain assets. In this regard, BBI is in active dialogue with a potential cornerstone investor. The Board believes that the participation of a well-capitalised investor would significantly increase the likelihood of a transaction being successfully completed prior to the group’s debt facilities maturing.

The terms of a transaction with the potential cornerstone investor have been discussed (although the structure and details of any such transaction are not yet finalised). A comprehensive recapitalisation on the terms discussed requires the consent of existing lenders and BBI has approached the lenders to obtain their consent to the recapitalisation. To assist its recapitalisation objectives, BBI has appointed financial advisors to the proposed recapitalisation, and Gresham Advisory Partners have been appointed as financial advisors to the BBI Boards.

It is likely that there will be a requirement for full conversion of EPS and SPARCS in advance of, and in order to facilitate, any equity recapitalisation and that the ownership interests of BBI ordinary securityholders, and EPS holders and SPARCs holders post-conversion will be significantly diluted by the recapitalisation.

The transaction mechanics, including any conversion of hybrid securities and the basis on which it would occur, have not been determined. The value outcomes of the transaction for BBI ordinary security holders, EPS holders and SPARCS holders are not certain and may attribute a value to those securities that is less than face value or recent trading prices.

Furthermore, associated sales of assets may be at amounts lower than their current book values.

Given the range of potential outcomes of the transaction, as has been speculated in the press, BBI sought suspension of its securities while the transaction was further developed and negotiated. This request was not granted. However, BBI stresses that the current position is highly uncertain, and that there is no assurance that agreement will be reached in relation to any transaction.

In recognition of the time and cost commitment required of the potential cornerstone investor, BBI has entered into an interim agreement with the potential cornerstone investor to continue to negotiate in good faith the development of the proposed transaction. This agreement includes a non-solicitation obligation on BBI, a capped cost reimbursement provision in favour of the potential cornerstone investor and a three month right of first refusal over the sale of certain assets, if BBI chooses to seek to sell those assets.

The process of finalising transaction terms and obtaining bank approvals is anticipated to take several weeks. There is no assurance that agreement will be reached in relation to any transaction. BBI will provide a further update when further information is available.

ENDS

 

[fuzzie]

Surely talk of BEPPA holders taking a haircut refers to the big holders who bought in at face value and are expecting to get a decent wad of that value on the conversion date.

What I'm reading says to me they want cash back and don't like the idea of rolling over to new script as they still won't be getting great yields and there is a weak market for large trades to unload into.

For punters who bought in around the lows and see this as just being a good yielding return once distributions resume, maybe there is not so much cause to be so worried?

I would guess there is unlikely to be acceptance by those biggest holders of BEPPA's to take a 90% cut on face value, but as for holders with an average buy in around 8-10c who don't want to carry a big CGT bill this year, is there really so much bad news here?

 

[hardyakka]

BB,

The impression I get from the AFR article is that ideally major BEPPA holders want to avoid any significant discount on face value, generally most are agreed that this is simply not practical.

Another issue that crops up, which adds significant value from the “cornerstone investors” viewpoint is what will be their actual function. If the investor is going to undertake a funds management role, that would equate to an annual fee of a minimum of 0.5% of gross assets. That excludes any performance fee. Fund managers will often ensure that their funds hold an equity interest so as to ensure thay retain management rights, look at the Macquarie model.

So potentially what is there:

• Fund management income stream in the form of a base fee;
• Performance fee (this would be material and have massive upside considering the base BBI is coming from);
• BEPPA resolution at a discount (40 cents in the $ discount adds about $300M to net assets);
• Possibly marking to market BBI assets, considering the recent impairment charges this would take up the MTM of DBCT and NGPL, that would be close to $1.5 to $2B.
• Capital raising from existing BBI holders, existing unitholders would be effectively contributing to the resolution of BBI problems.

In summary the upside IMO is massive, however at the expense of BBI and BEPPA holders who bought in at the peak.

Cheers

 

[hardyakka]

BBI Release out. Still negotiating. A couple of very worrying statements in there, including haircuts to both BEPPA and SPARCs, possibly at 'below recent trading price'...

Will return to trade this morning.

I do not see any problems at all with that statement. It is simply telling me that BBI securities are likely to be below their existing prices, ie maybe drop from 8 cents to 5 cents resulting from dilituion.

BEPPA/SPARCS holders will take a major cut and not see $1 of cash/shares in lieu, rather maybe 50 cents, a drop of 50% on a debt instrument. Any who bought in at the lows is still a major winner, 600 plus %. The losers are the investors who bought in at the peak.

Now lets watch the panic

Cheers