BBI - Babcock & Brown Infrastructure

[joe7068]

Am I understanding the announcement correctly?

BBI says they will convert the BEEPA etc. into ordinary units and then let the new investor run right over the stock through dilution.

Here's the thing though, I know these guys were never the smartest douchebags on the block, so of course they left things alone to the very end.

However if we going to get diluted like that why not give the present shareholders and even BEEPA holders the chance to participate in the prison style rape by allowing us to participate through a rights issue?

The banks seem to be ok with lending at the asset level and to be honest most of those assets are pretty stable income wise... (yes not all).


Given a period of 5 years or so those assets could be worked off at much better prices.

Just observing the screen all day on beppa leads me to believe that no 'cornerstone investor' is buying beppas.

It is starting to feel like a lottery ticket.

Why on earth would that significant investor be buying BEEPA's when BBI has already said that they are likely going to convert the hybrids and allow the investor to prison rape the unit holders?

What you said doesn't make sense.

 

[joe7068]

oops

sorry, I missed the part where we agree. Sorry about that. I should have taken a little longer to read your entire comment

 

[Zarate]

I was just commenting on other posters speaking of negative announcements so that the cornerstone investor could buy into beppa. There is no evidence of this on the screen.
----------------

I posted at then same time as you so disregard this comment too then i suppose lol.

 

[banska bystrica]

ROFL.

Mitsi think's he is the second coming of gekko...

mate, seriously give up. BBI and by association BEPPA have their balls in a vice and the cornerstone has firm grip on the handle.

Why you guys keep thinking you are going to get FV for BEPPA is so far beyond me. There is positively NO chance of this happening in the current investment environment and under the current circumstances.

I agree. BBI/BEPPA/SPARCS all have their balls in a tightening vice. The pity is that there is enormous value in this company but existing holders will not see any of it.
As of about 10 mins ago, I am completely out of BEPPA and still have my BBI short in play and in profit.
I would consider buying BBI after all the raping has been done, depending on the final post-dilutive NAV and the prevailing BBI price at the time.

 

[Zarate]

Hey BB if you don't mind me asking, where do you, or where can you short sell bbi? There have been times that i would have loved to have bought beppa and shorted bbi. at 10c vs 8.6c this morning for example.

 

[Tysonboss1]

Tyson:

Can you stop spamming the site with that really stupid quip. It wasn't funny the first time, nor is it funny the 100th time you've posted it.

It's really annoying.

In short, No.

I am sure as you progress through this forum you will find many people have put qoutes into the signiture block, some serious, some not so.

My qoute comes from a military unit I used to belong to (actually the combat medic qualified guys wore it on their pt shirts). But if you don't like it just dont read it.

 

[skc]

I agree. BBI/BEPPA/SPARCS all have their balls in a tightening vice. The pity is that there is enormous value in this company but existing holders will not see any of it.
As of about 10 mins ago, I am completely out of BEPPA and still have my BBI short in play and in profit.
I would consider buying BBI after all the raping has been done, depending on the final post-dilutive NAV and the prevailing BBI price at the time.

BB, my hats off to you in the way you have managed your trade / investment. Not because you made money, but because you identified value, positioned yourself accordingly AND analysed and made the right decision when new
information come to light.

It is starting to feel like a lottery ticket.

Unfortunately, the same cannot be said to many other holders on this forum. Many still coming up with fantasy scenarios. And for them, BBI is indeed just a lottery ticket.

 

[joe7068]

Okay… spent a little while working this out.

If the significant investor comes up with $1.5 billion and the stock is trading at 6 cents he will end up with

1,500,000,00/.06 =25 billion shares.

There are 780 million BEEPA’s and 146 million SPARCS requiring conversion at 6 cents which means they will have to issue

(780+146)/.06 = 15.4 billion shares

The total share outstanding will therefore be:

2.5 billion + 15.4 billion + 25 billion. (I think current unit holders outstanding is around 2.5 billion)

The current shareholders are raped in this instance. However I don’t really how this deal can work unless the significant shareholder gets a bigger ownership which means the offer will have to ask BEEPA holders to take a haircut otherwise the deal doesn’t go through.

Where would this be I have no idea, however my guess is that most BEEPA holders to cut and run at around 30 cents.

 

[hardyakka]

There has been a fair panic today, so I am going to look at this logically. Below are some numbers I have put together, follow those through and you will understand my logic. You can flex these as you chose, but it really boils down to the discount the market applies to the Net Assets of a revived Prime Infrastructure Trust

Known data

• *]Net Assets $1720M
• Units on issue 2591M
• Net Assets 67 cents
• BBI conversion rate 7 cents
• Total value of SPARCS and BEPPA $771M

(I am ignoring accrued BEPPA interest and assuming both are converted at
the same time)


Conversion at 7 cents

• 13605M units on issue ($771M @ 7 cents +2491M)
• Net assets now 18.3 cents ($1720M+$771M / 13605M)
• BBI price drops to 1.33 cents (pro-rata with dilution ie 2491M/13605M X 7 cents)

Investor comes in with $1billion

• Net assets now $3491M ($771M + $1720M + $1000M)
• Units issued to new investor=75012M ( $1000M/1.33 cents)
• Total units on issue 88618M (75012M + 13605M)
• Net Assets 3.94 cents ($3491M/88618M)

What does conversion mean?

1M BEPPA would convert to 14M units (1/771 x 11014M)
14M units represents $560,000 of Net Assets (14M x 3.94 cents), ie 56 cents per existing BEPPA.

The 56 cents is a function of the Net Assets attributable to the ordinaries issued as satisfaction of BEPPA/SPARCS conversion.

BUT
What value would the market put on these Net Assets?
By this time:

• Corporate debt will be virtually eliminated,
• Sweep gone
• Investment grade rating back,
• No debt problems
• Institutional buying will commence
• Cashflows from expanded DBCT received
• GFC recovery well underway.

Considering this I think the market would pay at least 50% of Net Assets as a market value for regulated quality income stream


So the if market price represents 50% of net assets, then the price for 1M BEPPAS would be $280k (Net Assets $560k x 50%)

What upside/downside is not counted above?

Downside-None as assets that are overvalued are fully impaired as at June 2009

Upside-The difference between the market value and book value of DBCT and NGPL, which I consider to be at least a $1billion.

Am I selling out of BEPPA..no, but I know its going to be a bouncy ride

Any comments?

NB- When checking I just noticed that I have used 2491 rather than 2591 for current units, the 100M makes little difference to the numbers.

Cheers

 

[banska bystrica]

Your figures assume BEPPA and SPARCS get converted at full face value. ie $1

The reality is that they will get converted at 10c in the dollar if they are lucky. So, if you use a 7c conversion price, BEPPA holders will receive 1.428 new BBI's for each BEPPA they hold. Then they screwed with dilution. The BEPPA price should now trade at 1.428X BBI's price which values BEPPA right now at 8.7c.

The other problem right now is that there is a huge chance the new investor will walk. The fly in the ointment to BBI's plans was the ASX not granting a suspension. BBI needed NO trading and a last sale price of 7.8c. By allowing the stock to trade, the ASX have enabled the dargie death spiral to really gain momentum. We know BBI will convert the hybrids before any recap plan so the dilution is guaranteed. Because the dilution is guaranteed, more and more BBI holders will bail out as the price goes lower. This will send the ords and the hybrids into freefall. We saw the start of that yesterday. Once the daytraders realise they are playing a deadly game, both BBI and BEPPA will accelerate downwards and any plans to raise capital will have been scuttled.
In reality, I think any recap plans are in grave doubt now and unfortunately BBI played their last hand. There is no going back now.

It is not a guarantee that it is all over for BBI but it is for current BBI holders and BEPPA and SPARCS holders are shark bait for the BBI directors. None of us knew this but BBI showed how they felt about BEPPA holders when Lowy Financial was trying to negotiate in 2008 on a sensible plan on how to deal with BEPPA. BBI management ignored them and even threatened them with conversion on BBI's terms if they tried to pursue the matter further.
Quote: "It's understood Lowy Financial, the biggest holder of the preference shares, started talks as early as mid-2008, when securities nose-dived below $1. The talks broke off in November after BBI threatened to issue new convertible securities...."

 

[nulla nulla]

If I were a potential cornerstone investor and: the company I was being invited to invest in at say $0.075 per share was trading below this amount; and I had had access to the books and been able to evaluate the true market worth of their assets; I would probably find it very hard not to take advantage of the opportunity to soak up a considerable holding at the lower market price.
The recent turnover is significantly higher than previous trading spikes. I am curious to see who will be disclosing recent substantial acquisitions.

 

[banska bystrica]

If I were a potential cornerstone investor and: the company I was being invited to invest in at say $0.075 per share was trading below this amount; and I had had access to the books and been able to evaluate the true market worth of their assets; I would probably find it very hard not to take advantage of the opportunity to soak up a considerable holding at the lower market price.
The recent turnover is significantly higher than previous trading spikes. I am curious to see who will be disclosing recent substantial acquisitions.

This was the trading on the 400M turnover day two Wednesday's ago.

Comsec clients bought 240M and sold 260M
ETrade bought 108M and sold 108M
AS Perth broker bought 42M and sold 42M
D2MX bought 34M and sold 33M

Just traders having fun. No insto will touch this.

 

[erasmus]

I got home late yesterday and read the announcement i did not have time to sell,needed time to look at the ramifications of this announcement,that's a shame,i think a death spiral is a distinct possibility.If the cornerstone investor does come to the party and that's a big if,holders will be like my poor little avatar doggy.

 

[hardyakka]

Your figures assume BEPPA and SPARCS get converted at full face value. ie $1

The reality is that they will get converted at 10c in the dollar if they are lucky. So, if you use a 7c conversion price, BEPPA holders will receive 1.428 new BBI's for each BEPPA they hold. Then they screwed with dilution. The BEPPA price should now trade at 1.428X BBI's price which values BEPPA right now at 8.7c.

[/I]

BB,

The conversion terms of BEPPA (section 7 of the BBI EPS terms) give a conversion formula based upon Face value + accrued interest. I am puzzled as to where the terms allow conversion of BEPPA to BBI based upon current market prices which is used in arriving at the ratio of 1.428.

Cheers

 

[Tysonboss1]

BB,

The conversion terms of BEPPA (section 7 of the BBI EPS terms) give a conversion formula based upon Face value + accrued interest. I am puzzled as to where the terms allow conversion of BEPPA to BBI based upon current market prices which is used in arriving at the ratio of 1.428.

Cheers

In the annoucement they hinted to the fact that they think that Beppa holders will have to take a hit for the team,

They only way I can see this happening is if they come up with a new arrangement and get Beppa holders to accept the new terms, So the new terms will have to be acceptable if they have a chance of being passed.

There is plenty of value there for the cornerstone to extract without screwing Beppa holders.

 

[suhm]

I think that it would be unreasonable to expect that the ordinary shareholders would agree to be diluted into insignificance without BEPPAs agreeing to share some of the jailhouse loving from the new investor.

Net asset values are also predicated on BBI remaining a going concern, so in this concern BBI is at the mercy of the banks refinancing their loans on acceptable terms or the new investor bringing in cash to settle the debt.

Depending on how the conversion factor works, and how retail holders get treated in the 2nd round of dilution (given managements form to date and how retail holders have been treated in most cap raisings I don't have much hope in this regard and the new investor would want to keep a fair proportion of the upside), there may be value left in the BEPPAs depending on the price you pay.

I think there are far to many variables to tell at the moment, even going short BBI ordinaries would hold the risk of the new investor recapitalising the company at prices above the current sp, but with a large enough allocation to ensure they are the largest shareholder in the new entity.

Note. I've been burnt in the past buying convertible preference shares in a company in a death spiral so it may cloud my opinion. The contracts are so complicated, and they have so many clauses in place that they let management do almost anything they want.

http://www.bbinfrastructure.com.au/media/387445/bbi eps terms.pdf
http://www.bbinfrastructure.com.au/media/387442/bbi eps constitution.pdf

For probably 4-5m management could cause a change of control event and convert the BEPPAs as such an event would have occured with the administration of BNB without management ensuring the responsible entity stayed in place. Note 5.3 B 3

Edit: means they can convert BEPPAs whenever they want.

Looks a bit like russian roulette to me at the moment.

 

[banska bystrica]

There has been a fair panic today, so I am going to look at this logically. Below are some numbers I have put together, follow those through and you will understand my logic. You can flex these as you chose, but it really boils down to the discount the market applies to the Net Assets of a revived Prime Infrastructure Trust

Known data

• *]Net Assets $1720M
• Units on issue 2591M
• Net Assets 67 cents
• BBI conversion rate 7 cents
• Total value of SPARCS and BEPPA $771M

(I am ignoring accrued BEPPA interest and assuming both are converted at
the same time)


Conversion at 7 cents

• 13605M units on issue ($771M @ 7 cents +2491M)
• Net assets now 18.3 cents ($1720M+$771M / 13605M)
• BBI price drops to 1.33 cents (pro-rata with dilution ie 2491M/13605M X 7 cents)

Investor comes in with $1billion

• Net assets now $3491M ($771M + $1720M + $1000M)
• Units issued to new investor=75012M ( $1000M/1.33 cents)
• Total units on issue 88618M (75012M + 13605M)
• Net Assets 3.94 cents ($3491M/88618M)

What does conversion mean?

1M BEPPA would convert to 14M units (1/771 x 11014M)
14M units represents $560,000 of Net Assets (14M x 3.94 cents), ie 56 cents per existing BEPPA.

The 56 cents is a function of the Net Assets attributable to the ordinaries issued as satisfaction of BEPPA/SPARCS conversion.

BUT
What value would the market put on these Net Assets?
By this time:

• Corporate debt will be virtually eliminated,
• Sweep gone
• Investment grade rating back,
• No debt problems
• Institutional buying will commence
• Cashflows from expanded DBCT received
• GFC recovery well underway.

Considering this I think the market would pay at least 50% of Net Assets as a market value for regulated quality income stream


So the if market price represents 50% of net assets, then the price for 1M BEPPAS would be $280k (Net Assets $560k x 50%)

What upside/downside is not counted above?

Downside-None as assets that are overvalued are fully impaired as at June 2009

Upside-The difference between the market value and book value of DBCT and NGPL, which I consider to be at least a $1billion.

Am I selling out of BEPPA..no, but I know its going to be a bouncy ride

Any comments?

NB- When checking I just noticed that I have used 2491 rather than 2591 for current units, the 100M makes little difference to the numbers.

Cheers

hardyakka,

Very valid scenario IF management elect to convert full face value of BEPPA but they indicated otherwise in yesterday's announcement, didn't they?

 

[Tysonboss1]

I think that it would be unreasonable to expect that the ordinary shareholders would agree to be diluted into insignificance without BEPPAs agreeing to share some of the jailhouse loving from the new investor.

That's really the risk you take with an ordinary share like BBI.

An Ordinary share has no limit on it's potenial returns, where as beppa operates more like a bond, where it's returns are capped.

So no I don't think Beppa holders should be exposed to the same pain threshold that BBI holders are. they should be protected to some extent from the downside simply because they were not exposed to the potenial upside had everything gone well.

I mean if everything went well and BBI ended up at $2 paying an 10% dividend, Would BBI shareholders want to give up some of that gain just because Beppa was capped at $1 paying a 5% div, offcourse not.

So thats the risk BBI holders took, I hold BBI shares as well as Beppa and that was my thought process, I understood that BBI had more downside risk but also more possible upside.

At the end of the day, BBI has a contract to repay $1 + interest to Beppa holders, It's not really any different to their loans from the banks.

By all means they can make an offer to Beppa holders for early conversion at a discounted rate, But Beppa holders are under no obligation to accept and the terms should not be a discount of more than 50% of face value, Infact I think 50% discount would be extremely generous.

 

[hardyakka]

hardyakka,

Very valid scenario IF management elect to convert full face value of BEPPA but they indicated otherwise in yesterday's announcement, didn't they?

BB,

Conversion

The key point that you have raised which could invalidate the scenario that I put together is the conversion ratio for BEPPA.

Management as I understand it must convert by reference to the formula in the trust deed, which is a function of BEPPA face value and the current weighted volume average BBI price, which I have assumed to be 7 cents.

The critical question is what rights do management have to vary this conversion formula.

For example by converting BEPPA to BBI as a function of the current BEPPA and BBI price. This gives a ratio of about 1.4 BBI per BEPPA as against about 14 BBI per BEPPA when the face value is used.

As I understand it management has no such power to convert BEPPA by reference to market price as against face value. If there is this power canb you point me to it in the trust deed.

I appreciate that management could get this power by varying the trust deed which would require a vote of BEPPA holders.

BBI Announcement

"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."

The above is very cleverly worded and refers to a value outcome, ie final diluted value. IMO it recognises that BEPPA and SPARCS will be converted by reference to face value and diluted, whilst BBI will simply be diluted.

Both of those scenarios will eventuate and result in a final value less than face value (BEPPA & SPARCS) and of current BBI price (BBI through dilution).

IMO this would be in accordance with the trust deed conversion requirements. Management are basically saying forget your $ face value, you will be converted and diluted in a big way. The only plus from that is that an interest in Net Assets is effectively transferred from existing BBI holders to the converted SPARCS and BEPPA. Thus resulting in my assessment above.

Irrespective, risk has increased and rewards reduced.

Any thoughts?

Cheers

 

[my03]

I guess the big question for pref holders is that, after reduction of face value, after conversion and after dialution, will I end up on top of what the current SP? I think thats the main factor in influencing pref holders to bail. We can all speculate but we wont really know until it is announced, and there are many more sessions till then alot of days for the things to sink in, alot of days for people to panic.