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BBI - Babcock & Brown Infrastructure

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Even if they could, why would BBI want to hang on to all their assets considering they get such poor returns from them?
 
Banska Bystrica's comment of the 16th February refers to the good quality of BBI assets. The leased coal port of Dalrymple Bay is one important asset. It is believed not insured against cyclones. This is a significant risk quantified in a special Analytical Report by the Bureau of Meteorology reproduced in full on
http://members.optuszoo.com.au/~tsjilek/
Were insurance now required, what would the value of the Dalrymple Bay lease be?
 
banska bystrica said:
Sweating bullets or confident? Cannot tell yet. I'll make a judgement call when I see the announcement with all the details.
Click to expand...

BearCuban on another forum said you might be the person I referred to on the other forum.

Hope so, because a few of us are missing your imput to balance out the negativity about BBI on the another forum. I got a few positive replies to saying that I missed your imput whilst you are on "holiday"

Don't expect everyone to agree with what you say, just want the most rational discussions based on research, media, co. reporting etc It is hard to cover all aspects of a stock and other peoples research helps fill some gaps.

My gut feeling on the TH is slightly negative ST, but LT positive and can improve my 7 cent average significantly down.
 
I think people should not fret until we see the details. It’s all speculation otherwise.
My information is that the “issues” are about price. Global markets have deteriorated since November and I think QIC are going to haggle for a lower price. They represent the Qld taxpayers at the end of the day. Even though they are a Top 20 shareholder in BBI, this investment in Powerco is worth approximately $1B, substantially more than their direct investment in BBI. So, whilst they want BBI to survive and prosper, it is more important for them that they get the best deal for Qld superannuation participants.

Personally, if the “new” sale price is around 10% less, I see that as being fine. It is still well above book value and therefore there should be no impairment on BBI’s assets as they are in the books at conservative amounts (Purchase price + development costs minus depreciation).

The only justification for a write down of asset values is if the assets have lost enough value to justify LESS than book value.

Let’s see what the details are first. However, it might be a very opportune time to top up in BBI/BEPPA as any negative reaction will be short lived in my opinion. I understand DBCT has not been sold YET but negotiations with multiple interested parties are at an advanced stage. No doubt BBI will fully inform the market once something on DBCT is formalized in writing.

A real cash flow problem emerges IF the Powerco deal does not proceed with QIC. My information tells me that is highly unlikely. QIC know BBI need this sale to proceed, QIC want it to proceed but QIC also want to save a bit of money as they are in the box seat here.
This is an example of the “risks” in a stock like BBI that has massive debt in a global climate that views debt as toxic. It’s all about risk/reward as I have said all along. If the heat is too hot, some people should get out of the kitchen. Talk of $1 per BBI share within 12 months is ridiculous. This stock deserves to trade at a big discount to NAV. My view all along has been that but I think a 95% discount is too much. A fair price in this market right now would probably be 40c which still represents a 65% discount to NAV.
This latest “hurdle” is another reason why people should consider holding BEPPA at almost the same price as BBI. Remember BEPPA holders get a full $1 per BEPPA before BBI holders get 1c in the case of an orderly sales process. A fire sale would mean zero for BBI and BEPPA holders but honestly, what bank is going to order a fire sale of infrastructure assets when the assets are performing and more than covering the interest payments?
If administration were to happen, I believe the banks would allow an orderly sales process because the cash flows are covering debt requirements. There is a viable business there in BBI, unlike BNB and other companies who are either wiped out or are on a knife’s edge.
 


May i ask the % split of BBI/ BEPPA you own.

Personally i transferred 100% of my BBI to BEPPA at parity, and am curious if you have been steadily transferring as much as possible from BBI to BEPPA in recent weeks with a ~1c price gap?

I'd predict your split is somewhere close to 80% BBI/ 20% BEPPA due to the difficulty of acquiring large numbers of BEPPA without climbing up the price ladder, but would love to better understand your thoughts and reasoning behind the balance of your BBI/ BEPPA holdings.

Cheers
 
I'm 60/40 (BBI/BEPPA) now but will be aiming for 20/80 in the next month or two. Anything around a 2c difference is worth switching. There is currently 3.25c owing to BEPPA holders and this must be paid before BBI holders get anything in distributions.
In a liquidation, remember BEPPA gets paid out in FULL before BBI holders get anything. Normally, note holders/bond holders get nothing in a fire sale liquidation but I don't think these assets will sold in a fire sale. It's just not possible to sell ports and gas/electricity assets quickly. The banks know this.
 
Why are people getting all worked up over when the announcement is due? If it's too hot for you, get out of the kitchen. QIC have pulled this stunt so why are people blaming BBI management? I'm convinced that most holders of this have weak knees. Getting all wobbly over when the announcement might or might not be coming. I hope it's not until 5.00pm just so the weak holders can sweat a bit more.
 
Announcement is good news. Sale will go through for 58% rather than 50%. Looking at the original agreement that netted NZ$400M and this one for NZ$423 for 58%, you can see that BBI have only been given a very small haircut by QIC.

The 200 basis points increase in corporate debt facilities is what one would expect in this Global Financial Crisis. It is offset by the base rate having come down by at least 200 basis points so it's probably cash flow neutral.

I will be switching out of as many BBI as I can and buying BEPPA whilst there is a forced seller in BEPPA willing to dump them at zero premium considering there is over 3c owing in accumulated dividends. The fact that the bank has demanded corporate debt repayment out of cash flows confirms there will be no BBI distribution for quite a while (unless they unload 100% of DBCT for around 2.4 Billion). This is extremely positive for BEPPA holders as we know management cannot do anything but repay corporate debt. Once corporate debt is negligible, each BEPPA is almost guaranteed to be worth $1 worth of BBI.

By the way, the panic merchants are showing poor characteristics (jelly legs) regarding investing in risky stocks like BBI. As I said, if it's too risky, get out and invest in WOW.
 
By the way, all credit to Dr Hamill and Mr Kendrew. I understand negotiations went into the early hours of this morning.
A big tick for both men as well on deciding to hedge their foreign currency exposures in September last year. The NZ$ has lost a bit against the AUD since November but cash flow will not be affected because of the hedging.

Smart astute team this one at BBI now without the BNB influence.
 
Reading between the lines on the PowerCo announcement is it IMO a definitive step in the right direction and will cause major investors to start to take notice.

The price renegotiation I consider irrelevant as it is not material. What has clearly been demonstrated is that, in the worst financial markets any have ever encountered, the BBI assets can be realised in an orderly sale process well above book value. What does this tell you about the quality of the assets and the new management team.

I am expecting further positive news regarding asset disposal negotiations and the half year results to be announced tomorrow. If the market reads these results similarly then IMO we will start to see a long term upward trend in the BBI and BEPPA prices, more so the latter due to the reduced risk.

When you consider that various so called "experts" are commenting that we will start recovering from the GFC in later 2009 or early 2010 then the longterm effect on the BBI price is obvious.

In summary IMO these financials are the by far the most important for BBI. They will either support my view regarding the assets and management and clearly demonstrate, as is the nature for infrastructure assets (especially regulated), that they are a defensive asset class with a much greater capability to ride out a financial storm or the opposite.

In summary if tomorrow results are above neutral and can be regarded as positive I will be opening a nice bottle of wine.

Cheers

NB/I hold only BEPPA.
 
Hot off the press from ABN Amro.

* BBI have announced that it expects to achieve financial close on the
Powerco sell down (to QIC) today

* The terms of the sell down have changed to a 58% interest for NZ$423m
from a 50% interest for circa NZ$400m. This would suggest that the revised terms are in QIC's favour, but not of huge significance to BBI given its need for cash. Effectively the premium to book value has decreased from 25% to 12%.

* The application of the proceeds is not unexpected with the removal of
A$130m Powerco Tasmania debt, a reduction of A$116m corporate debt with the balance circa A$100m together with cash balances being paid meet Westnet Rail minority obligation (~A$145m).

* The Bank requirement to sweep all future cashflows and asset sale
proceeds to pay down debt is not a surprise. This is what BBI and we
expected would have to happen anyway. We estimate that BBI will have to pay down at least a further A$600-800m in corporate debt before it will get anywhere near an investment grade rating in the current market.

* Distributions will not be paid and BBI EPS dividends will remain deferred until BBI removes the cash sweep obligation by either: removing all corporate debt (asset sales); reduces corporate debt (asset sales and cash sweep) and refinances remaining corporate debt; OR reduces corporate debt (asset sales and cash sweep) and attains investment grade credit rating from Moody's.

* We continue to expect further asset sell down in Euro Ports which could net circa A$300m if the recent sell down terms and conditions are achieved.
We suspect DBCT is also attracting some interest, which we have an equity value of circa A$600m to A$700m (100%). However, BBI is not in a
particularly strong bargaining position and the European and Coal markets are not at their healthiest at present.

* The banks have also increased corporate debt margins by 200bps, which we estimate will add an extra A$30m to annual debt costs. Not of huge
significance but it may just prolong debt repayment.

* Today's announcement is in fact a pleasant surprise, we were fearing the worst. Anyway this eases slightly our short term debt concerns. However, BBI is not 'out of the woods' yet. The next milestones include:
• tomorrows HY result and underlying cashflows;
• PD Port refinancing expected to announced at tomorrows result;
• asset sales to further reduce corporate debt;
• NZ$210m Powerco refinancing (48%) due in Aug 09;
• A$250m DBNP (50%) refinance due July/Aug 09; and,
• €130m Europort refinance due July/Aug.

* The underlying asset value remains far higher than the current market
price. However, this will continue to be overshadowed by debt reduction and BBI's ability to meet its debt obligations and refinance commitments. This news is positive for existing BBI holders but we still think it is too early for new entrants to be chasing the stock just yet.
 
Thanks Banksa

What is your opinion re: ABN's view of the amount BBI would net given a 100% sale of DBCT and current market conditions for the sale of such an asset?

Also on another note I seem to recall that the regulator will review the contract price DBCT is able to charge this year as well - do you have any information on this and how it would affect revenues?

I understand this is pure speculation especially given that the financials should be released today..

Cheers

OzeBuDDha
(holding BBI)
 


Thanks for that, best neutral post i've seen in this time of Babcock bashing. Might hold on for a little longer now. Dunno about accumulating more though.
 
The interim report highlighted two important points.

1. BBI still have a long way to go to reduce corporate debt but they are making progress
2. NO ASSETS WERE IMPAIRED.

Now, for all the positives and negatives, I think it can be best summarised as follows.

BBI have an NAV of $1+ and the NAV is not pie in the sky. It is based on cashflows and stringent assets tests. As at Dec 31, 2008, there was no impairment. In other words, if BBI sold off all their assets at book value and then paid back corporate bank debt, asset level debt, NZ bonds and BEPPA, there would be approximately 3 billion in cash left over. That equates to $1.25 per BBI share. Let's call it $1 being ultra conservative. You can buy BBI for 6.5c. That's right! Less than 7c in the dollar. Some corporate bonds in the US with weaker agency ratings than BBI are trading at 20c in the dollar. The current share price implies eventual administration. There is still a chance of that but less than 7c in the dollar is way overdone. I bought more BEPPA on Friday and will continue to accumulate whilst they are trading around parity with BBI.
 
BB,
I have just undertaken a detailed analysis of the financials and concur with your view, my comments are below.

Having been through the BBI financials in detail the following summary is my view of BBI. There are more positives than negatives very simply because that is my interpretation of the numbers.

Current Environment
As we all know times are tough. There is recession, business and consumer spending (especially discretionary spending) is down (offset a little by government stimulus packages), the AUD is low, interest rates are at record lows, cash is king and businesses are going to the wall left right and centre (due either to gearing or lack of product demand). This will be the situation at least for another one to two years.

Future Environment
Once we move out of the current negative environment debt availability will increase along with demand as business and consumer confidence grows. This will stimulate the demand for goods and services, especially resources. I would expect this to strengthen the Australian dollar and give rise to interest rate increases to curb inflation.

BBI Financials-Negatives
-Whilst cash flow positive the margin of operating cashflow at the moment is on a knife edge. This has been exacerbated by the 200bps increase in the cost of corporate debt.
-Contingent liability to the ATO of $143M. BBI is confident of a win, however a degree of risk exists.
-The obvious, the level of debt and associated costs, one comforting factor is the majority being asset specific only.
-Repayment of SPARCS, this is a short term cashflow issue only. BBI must address this so they are not screwed at the last minute as they were with the PowerCo sale. The financials specify that they expect to repay these from operating cashflows so dilution of equity will not occur.
-Interest rate swap charge, this is both a positive and negative. The IFRS MTM of the cost of swaps, whilst a none-cash item, is material. However when you consider the positive aspects of the charge it is not material.

BBI Financials-Positives
-In these markets the diversified nature of the primarily regulated revenue streams have held ground or improved (except for PD Ports and Euroports which are marginally down). This reaffirms the defensive nature of the assets. In a more normal market these would improve as confidence returns.
-Sale processes at various stages to release funds to reduce debt. My personal view here is that at least 50% of DBCT should be retained.
-FX and interest rate swaps, the IFRS charge represents the full MTM at balance date. However when you consider in the future environment interest rates will trend upward as economies recover then the amounts actually realised over future years will be much less.
-Unqualified audit report, it is simply another indicative factor on the overall health of BBI.
-I am always very careful of Goodwill charges and am pleased to see the asset virtually halve as it relates to discontinued operations.
-Asset values, no impairment charges in the worst possible market from what some naively consider is a distressed vendor.
-Unsolicited approaches by third parties seeking an interest in the assets. This simply reaffirms the quality of the assets and magnitude of $, especially with regulated income, seeking an equity home. Gives a brief explanation of the competition Australian funds face for quality infrastructure assets.

http://www.financialstandard.com.au/news/view/25111/

-NTA, note that these numbers are after recognising the full liability for the SPARCS and BEPPA. The BBI price is a factor of about 15X the current unit price. Quality geared REITS run at a factor of about 2X, so the BBI price should be about 7 times what it is now.
-Most importantly of all, management. There is a quality team running BBI. Without good management it does not matter how good your assets or business is, you will be stuffed.

Priority Issues
Increase operating cashflow & reduce debt. IMO a 50% sale of DBCT and a few other assets will significantly achieve this. Thus bringing BBI back into the quality investment arena.

Conclusion
IMO these financials will be the worst that will be issued by BBI and there is nothing unexpected. I consider overall BBI is on the recovery path and the price on a definitive upward trend with the first major impact of the unit price to be when there is certainty about DBCT disposal.

I hold a significant number of BEPPAs and will now be building a BBI stake.

Note that the above is what the guy in the pub told me a mate of his overheard in another pub, so it might be an idea to complete your own analysis and formulate your view accordingly.

Cheers
 
You are effectively buying $1 worth of net assets for 6.5c. The mammoth discount can be attributed to a few things but I think the debt is the number one concern, with the perceived Babcock and Brown association coming a close second.
 
Agree on the debt issue but the name issue, whilst important is secondary. The key driver for increases in unit price will be institutional demand and those boys will look at the fundamentals as against the name.
Cheers
 
Great to read these anaylsies after BBI's latest announcements.. I feel that the share price has been over done in the doom and gloom. I think this is a quality company with solid assets.

What we all now need is more editorials like that in the latest Bmag, actually talking up the economy and its underlying strength rather than all the self perpetuating doom and gloom of how bad it all is...


I have increased my holding of BBI by another 50,000,
cheers
 
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