BBI - Babcock & Brown Infrastructure

Mitsimonsta said:

While it will not be nice if it goes against us, I think that the cost is a drop in the ocean compared to the DBCT sale in all honesty. Sure, it may push the SP down, but that is an opportunity to sell beforehand and then buy more units afterwards.

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BB notes that BBI may go into administration, and people, like him, are thinking 3c or even lower if Euroports falls.

Ideally, we go to the bank, whisper how much we expect from DBCT, they relax the sweep for us to do our think with EuroPorts, increase interest rate by 0.5percentagepoint, bob's your uncle.... but, will the ideal world work?

Then again, no-one knows what the CP are, and BBI aren't telling... so no-one knows what will happen.

Actually, if BEPPA hits 25c, then I have a 200% gain on it. Using your example above, I would have turned $20K into $60K.

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Sorry Mitsi, I was referring to Nathans:
"although my average is quite high, my current $55k portfolio has been achieved by trading through an initial $20k."

If I had 100K units then daytrading them would be a useful thing.

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Another valid point.

ricee007 said:

BB notes that BBI may go into administration

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No I do NOT!!! although there is every chance the Euroports sale does not go through and then watch the BBI price get smashed.
Euroports may go into administration if the put option cannot be paid but I certainly don't think BBI will go into administration. Why would they? Their ICR is more than adequate. Admittedly a bit tight, but certainly a long way from breaching debt covenants.

banska bystrica said:

No I do NOT!!! although there is every chance the Euroports sale does not go through and then watch the BBI price get smashed.
Euroports may go into administration if the put option cannot be paid but I certainly don't think BBI will go into administration. Why would they? Their ICR is more than adequate. Admittedly a bit tight, but certainly a long way from breaching debt covenants.

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Welcome back?

your right interest is being covered so i dont see administration in the short term. the bank sweep facility is what got euroports into that mess, but if you look what happend with BBP i think the banks will coff up the required money to avoid any issues. especially if it is short term debt until DBCT proceeds come through.

i think locally we are starting to see funds coming back into the market, in forms of available borrowings and equity raisings. perhaps the credit freeze is thawing a little.

my holdings in BBI in particular are stagnant. come on announcement.

banska bystrica said:

No I do NOT!!! although there is every chance the Euroports sale does not go through and then watch the BBI price get smashed.

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I feel warm and fuzzy knowing that although BB is not posting, he watches over us.

Maybe Riceee meant something other than yourself BB? A different company? Anyway, I will still owe you a bottle of something eventually, just not Grange.

nathanblack said:

i think locally we are starting to see funds coming back into the market, in forms of available borrowings and equity raisings. perhaps the credit freeze is thawing a little.

my holdings in BBI in particular are stagnant. come on announcement.

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My opinion agrees on these two points. Considering selling out in the future as the Euroports date grows closer, and then buying back in, otherwise it is hold steady.

Mitsimonsta said:

I feel warm and fuzzy knowing that although BB is not posting, he watches over us.

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Agreed. As long as he continues to hit me when I make a mistake.

Maybe Riceee meant something other than yourself BB? A different company?

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As much as I would love to pretend that..... I misstated BB's thoughts...

Euroports may go into administration if the put option cannot be paid but I certainly don't think BBI will go into administration.

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I always thought it was strange that he thought Euroports may see BBI into admin....it turns out he just thought Euroports may go into admin, not BBI .

Sorry for misrepresenting your thoughts BB ... but I'm glad it brought you out of the woodwork.

Considering selling out in the future as the Euroports date grows closer, and then buying back in, otherwise it is hold steady.

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Valid thoughts...but, we have very little information. Selling out (or staying in) because of Euroports seems like a pure gamble to be honest.

Not only are you risking missing out on GOOD Euroports news... you also risk missing out on a MaqCap DBCT leak... or pre-announcment.

I mean, you do lower negative downside risk....... 8c-3c is certainly possible due to Euroports...

But, for me at least, BEPPA is a nice little long-term speccy (and BEPPA *SHOULD* be less effected than BBI).

YMMV, espcially as you intend BBI/BEPPA being a base for future share acquisitions...your risk profile is clearly different.

Finally... this is one of those 1 in 100 chances..... BB, you don't happen to know much about HRR by any chance?

Cheers all,
With apologies,
Rhys

AIO's update to the market on its progress will have positive/negative impact on BBI tommorrow.

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At the moment BBI & BEPPA holders are in holding mode pending an announcement on the progress of DBCT, PD Ports, Euroports and possibly the management rights. I have taken a bit of time to reflect and my opinion is as follows.

We are hearing in the press and I am beginning to see in my workspace positive signs of a recovery of sorts, I suppose a key indicator from the Australian perspective are the growth numbers released by China and the upward trend in markets, both domestic and offshore. Some may consider those movement a bit of a dead cat bounce, but I do not share that view. So lets look at BBI items separately.

I do not consider Corus a major issue from the PD Ports revenue perspective as this will be materially offset by the Tesco facility and if I recall Aldi are also considering similar. The Corus JV partners have effectively screwed themselves because the issue is now political. If they return to Corus IMO any government supply contracts they get will require material be sourced from the UK, ie Corus. For other contracts the government will not forget Corus and that IMO puts them behind the eightball. The party that comes in to take on Corus will be viewed as a white knight and accordingly may be given preferential treatment by the UK government in supply contracts. These overall considerations will be taken account of by any potential purchaser of PD Ports.

Regarding Euroports I do consider the lack of cash to deal with the option exercise and Euro deposit as giving rise to a problem. This is because the banking syndicates would make available this cash, otherwise they would be effectively shooting themselves in the foot, especially knowing a sale of DBCT is imminent. IMO the cash will be made available, albeit it at short term penalty rates. This I feel will just have to be sucked up by BBI, and of course taken account of down the track when and if they are back on an even keel.

There has been some speculation that the current plethora of infrstructure assets on the market, especially those put up by the QLD government may reduce prices. I do not buy into this argument because those assets are to be liquidated over a 3 to 5 year time frame, ie at post GFC EVs. DBCT will come on the market this once at a GFC affected EV, ie reduced EBITDA multiple and I would be surprised if it ever came onto the market again. So IMO the assets coming onto the market make a good news story but that is about it.

There has been discussion as to the impact of dilution from SPARCS etc etc. Well to be perfectly honest as a BEPPA only holder this does not concern me in the least. At the end of the day if the BEPPA issue is not suitably addressed then BEPPA holders will effectively end up in owning the bulk of BBI via conversion. Those BEPPA holders will still end up with their face value in BBI units at whatever the current market value is, this of course will be a discount to NTA. Hard and simple, but that is business. So am I as a BEPPA holder really concerned? No I am not.

I am certain that someone will be thinking the market will never accept that. Well if BEPPA coverts to BBI it will be post SPARCS etc and corporate debt will be minimal. The market will recognise a revitalised deleveraged BBI (or whatever it is called).

What about debt and interest rates, yes corporate debt is a problem. Remove that via conversion and/or utilisation of DBCT proceeds then you are left with asset level debt. Basically in summary when pricing is set for a regulated asset cost of capital and debt is taken account of in the pricing calculations. So in effect it is passed on to the end user, the same happens for your water supply, electricity etc. Refinancing asset level debt I do not see as being a problem, especially when the assets are not revalued to market annually as is the case for property trusts. Also remember asset level debt is asset specific only.

What about the inherent value in BBI that is not really recognised in its financials? Look at the value of DBCT in the books ($1.9B if I recall) and its expected sale price, anything from $2.5B to $3B (I personally consider its final sale price will be at the upper end of that range). Irrespective, in this one asset alone there is $0.6 to $1.1B in value not recognised in the financials, NGPL is bound to have similar unrecognised value. Now you may see why I have little faith in analysts when they are unable to appreciate such simple concepts.

What about the famous (or infamous) death spiral. Well in theory it is possible, but then in theory the price of BBI should reflect NTA and BEPPA face value. In theory people should be able to meet their mortgage payments.
In practice BBI does not reflect NTA, BEPPA face value and persons who took out mortgages in the US their payment commitments (maybe sub-prime?). So isolated theoretical situations are one of a host of considerations which can influence a given event such as the BBI price. I give the death spiral view the credence it deserves and flush it down the crapper.

I think I have ranted on way to long, so will close off by summarising:

• Corus and Euroports are minor hiccups
• BBI has massive unrecognized inherent value
• BEPPA holders are in a win-win situation.
• Indications are the end of the GFC is in sight and potential acquirers of assets recognise this.
  
  I know that there are many points people may disagree with, but this my opinion summarised.
  
  Disc-Hold significant number of BEPPA, ie money where my mouth is
  
  Cheers
  

Nice one HY.

I agree with most of your points. I especially agree with the comments regarding finding money for the Euroports options. The banks only want the sweep to maximise the chances of getting all their money back. Letting Euroports slip into administration so unnecessarily would go against that principle as it cuts off a nice source of corporate cash flow (ie debt repayment).

I have been doing a lot of thinking about what will happen with Beppa come 2012 should it become obvious that BBI can't prevent conversion. I am convinced that this will mean the BBI sp will hit 0 or a very close approximation to it. I'm just not calling that effect anything in particular. The interesting thing for me is that effectively means BEPPA holders will divide up the company amongst themselves. For this reason, I think it is wrong to think you will receive $1 of value for each BEPPA in this case. The BBI price prior to conversion will bare no resemblance to fair value, and so $1 worth of BBI will be a meaningless concept. Converted BEPPAs will have to be re-valued by looking at the NAV and cash-flows etc. That value could be lower than or quite possibly a multiple of $1.

Not sure if anyone can understand what I just wrote??

I hold Beppa only.

cpsharky said:

Nice one HY.

I agree with most of your points. I especially agree with the comments regarding finding money for the Euroports options. The banks only want the sweep to maximise the chances of getting all their money back. Letting Euroports slip into administration so unnecessarily would go against that principle as it cuts off a nice source of corporate cash flow (ie debt repayment).

agreed. bank sweep facility should never have been allowed to take a refundable deposit. but you must remember the banking syndicate enforcing the sweep is corporate level debt, and the banks at asset level are different. but if you look at OZL its clear short term finance will be available if required until proceeds of DBCT are available. if debt:equity ratio permit maybe they can add debt at asset level.

besides at this point the condition precenence has not failed, so the sale may go ahead...no refund required. or the sale maybe renegotiated ala QIC earlier.

I have been doing a lot of thinking about what will happen with Beppa come 2012 should it become obvious that BBI can't prevent conversion. I am convinced that this will mean the BBI sp will hit 0 or a very close approximation to it. I'm just not calling that effect anything in particular. The interesting thing for me is that effectively means BEPPA holders will divide up the company amongst themselves. For this reason, I think it is wrong to think you will receive $1 of value for each BEPPA in this case. The BBI price prior to conversion will bare no resemblance to fair value, and so $1 worth of BBI will be a meaningless concept. Converted BEPPAs will have to be re-valued by looking at the NAV and cash-flows etc. That value could be lower than or quite possibly a multiple of $1.

i agree that $1cash may not equal $1bbi. but the conversion with be at a 20day average. this average will be at a lower rate because bbi price will take dilution into consideration. so should be almost equivilent.

Not sure if anyone can understand what I just wrote??
I hold Beppa only.

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i understand.

also 2012 is along way away. beppa is on the books as a liability. bbi may offer rollover terms, early redemption, borrow to fund conversion, equity raising or convert to bbi if SP is worthy.

hate this holding pattern, i wish the announcement would hurry up.

cpsharky said:

I have been doing a lot of thinking about what will happen with Beppa come 2012 should it become obvious that BBI can't prevent conversion. I am convinced that this will mean the BBI sp will hit 0 or a very close approximation to it.

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Should it appear that conversion is likely to go ahead, what should a BEPPA holder do? This is something I have been trying to get my head around for some time. Won't the smart BEPPA holders try to sell BBI short prior to the conversion, with the shares acquired by conversion to be used as the replacement. If every BEPPA holder has the same idea and tries to do this before the VWAP calculation period, then you could very well end up with a VWAP significantly lower than say the average BBI price for the preceding month. As BBI spirals down, the incentive to short sell will increase. The dilution could be massive with a near zero price after conversion as you suggest.

Is there any mechanism built into the conversion process to prevent this happening?

i think it would be hard to prevent short selling or similar 'manipulation' from forcing the price down. but all that assumes a low bbi price. if bbi is say 50c then dilution would be alot less. and as i mentioned they would rather fund buyback with debt surely than do what your proposing.

personally if bbi was in the shape your proposing, nearing 2012, i would probably be out of my position by then. why would you hold?

bellenuit said:

Should it appear that conversion is likely to go ahead, what should a BEPPA holder do? This is something I have been trying to get my head around for some time. Won't the smart BEPPA holders try to sell BBI short prior to the conversion, with the shares acquired by conversion to be used as the replacement. If every BEPPA holder has the same idea and tries to do this before the VWAP calculation period, then you could very well end up with a VWAP significantly lower than say the average BBI price for the preceding month. As BBI spirals down, the incentive to short sell will increase. The dilution could be massive with a near zero price after conversion as you suggest.

Is there any mechanism built into the conversion process to prevent this happening?

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The process you have described is exactly why the BBI price will hit zero soon after is clear that conversion can't be avoided. Massive dilution can only be prevented by a majority of holders agreeing to new terms (a restructure) or by the company having enough funds to prevent conversion by redeeming in cash. It doesn't make sense to suggest that the VWAP might happen to be high enough at the time - anyone holding BBI when it is clear that conversion can't be avoided should sell at _any_ price IMO.

My strategy at present in this situation is to simply hold onto BEPPA and collect my gazillion BBIs. If the company is still viable, then a parcel of BBIs converted from a BEPPA (lets call it a BEBBI) will have a value that can be calculated from NAV or FCF valuations. No need to panic sell. Just calculate (or wait for someone else to tell you) what your BEBBI is worth, and make your hold/sell decision based on that. In fact, BEPPA should trade at the BEBBI valuation prior to conversion as well if the market is being rational.

Please remember that this is all hypothetical and is only relevant if BBI can't sell assets to free up enough cash by 2012 or otherwise restructure BEPPA. I am confident that BBI will in fact be able to prevent conversion. Still, it highlights why I choose to hold only BEPPA even at current prices.

I think as 2012 approaches, BBI management will be increasingly desperate to ensure that conversion doesn't happen. They will fire-sale assets if necessary to get the cash they need.

The company has a responsibility to their shareholders to prevent dilution, so significant NAV destruction could be the result of the desperation to get the cash needed to prevent conversion. This would be great for BEPPA if they do in fact get the cash to pay out $1. It would be bad if even after the fire sale they could not prevent conversion. Post conversion, BEPPAs converted value will have been significantly destroyed. That is a real way in which BEPPA value could be much less than $1.

In 3 years, it's completly feasible that 1/2th BEPPA holders will want to convert to BBI... and half will want to restructure BEPPA with a greater interest rate (above 90 day rate)....

(Half is clearly a number I just made up, but.)

To pay out the half, it would require a $440M or so loan.... which sounds quite likely to get in an improved economy (three years) for a company with over $10Bn in assets....

Especially if BBI had, say, already $220M in cash.

$220M Cash
$220M Corporate Debt
$440M BEPPA rollover to new BEPPA2......

Even if share price is only around 30c, that doesn't lead to VERRRRRRRRRRY significant dilution (significant, yes... catastrophic...no.)

Bellenuit's 'death spiral' scenario in 2012 could happen .I do believe after everything i have seen in the last 18 months in the share market that management of pretty much any company regard shareholders and note holders in little regard and management will do what is necessary to safeguard their jobs and entitlements.
The proposal to SPARKS holders failed and what you ended up with was debt removal at the expense of shareholders, the proposal BBI made was very generous,it was rejected.There maybe more dilution to come.
I cannot say what things will be like in 3 weeks for BBI, let alone 3 years.
I have BEPPA as a speculative punt and if the price goes up i will start offloading till by 2012 i have minimum exposure.That assumes a lot will go right.
DBCT is the main prize,Euroports ,pdports and westnet rail who knows,the next 3 months are going to be critical to the health of BBI.

They still have NGPL but it will take time to sell BBI's stake,they may use this asset to deal with BEPPA holders at a later date.There are a lot of possible scenarios to deal with BEPPA ,too far away and BEPPA for now is cheap debt for BBI.
I hold very boring stocks in my portfolio,this is my one speculative punt.I bought in early march at 7c a BEPPA,i can only hope i have not done my dough in praise of folly.

Good luck to all holders

On a point of clarification regarding any dilution arising from the conversion of BEPPA to BBI in 2012 should this arise.

The key point is that if NTA is $2.4B, BBI shares on issue 2.4B and BBi is at 30 cents, then that would give a market cap of about $0.8B.

Without fiddling with numbers basically the existing BBI unitholders would be diluted out of existence as the whole market cap of BBI would be transferred to BEPPA holders on conversion.

That may leave you with a squillion units, but your units still represent the same percentage share of total BBI NTA. It is then a simple matter of consolidation via reconstruction, ie 1 BBI "New" for every 100 BBI Old units. Your % share in the company is unchanged.

So at the end of the day in the above situation there is no corporate BEPPA debt and the ex-BEPPA holders now own the vast majority of BBI whci is at a massive discount to NTA. How can you lose?

Anyway, whilst this demonstrates upside in BEPPA I do not think it will occur as I expect BBI to represent 50% of NTA by 2012.

As regards BBI going into administration, well it survived the GFC, albeit battered and bruised. Need i say any more.

Cheers

cpsharky said:

I think as 2012 approaches, BBI management will be increasingly desperate to ensure that conversion doesn't happen. They will fire-sale assets if necessary to get the cash they need.

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By 2012 interest payments on beppa would have resumed so there would be alot of people happy to reset, IMO.

and I think that once corp debt is paid and the cash sweep lifted, BBI would be using any available funds to buy back beppa, at any price below 80c, it would probally be the best investment management could possibly make.

nice little gain today on strong volumes.

regarding beppa i think there will be several options for holders come redemtion time, and everyone will choose the one that suits them most. it might be a matter of choosing the best of several bad offers, or all options might be real winners.

looking at sparcs, i would certainly have converted last month. convert $1sparc into $1bbi at low price, then waith for dbct announcement. if the announcement is positive those bbi could double and you would have 2 people:
1. sparc holder. $1 face value, but worth significantly less on market, even post announcement. lets say 80c, or;

2. sparcs convert. $2 worth of bbi shares post announcement.

the risk v rewards for me, i would have converted.

cheers

IMO I can see the demand for BEPPA increasing significantly. This is because consider the following:

• NTA is about $2.4B
• value not recognised in the books is about $1B to $1.5B, this being the excess of EV over book of NGPL and DBCT. But if you are prudent and assume the book value of all other BBI assets is impaired by say $0.5B, then assume the net book value not recognised is the lower end of this range, ie $1B.
• This gives total equity attributable to BBI after an impairment of $0.5 of $3.4B (1+2.4).

This $3.4B is the "safety cushion" available to BEPPA holders to absorb any financial issues before the financial outcome of BEPPA holders is affected. The lower the BBI price, then the greater % of these NTA that BEPPA holders will ultimately own in a conversion situation.

Even in a worst possible case scenario such as administration (which I think is unlikely) this safety cushion has to evaporate before the $1 face value of BEPPA is affected (I have ignored accrued interest).

Now if we can work simple numbers like that out on the back of an envelope, dont you think that market makers may also have looked at a similar situation?

Another reason why I am a happy longterm BEPPA holder.

Cheers

BEPPA SP:
Ouch. Looks like people are jumping with Sell orders 'At Market' to fund their cheap RIO shares..... (traded at 10.0c as I originally posted this)

I'm holding long term and short term movements don't worry me
I'm holding long term and short term movements don't worry me
I'm holding long term and short term movements don't worry me
I'm holding long term and short term movements don't worry me
I'm holding long term and short term movements don't worry me
I'm holding long term and short term movements don't worry me
I'm holding long term and short term movements don't worry me

Yes, I am clicking my heels together, Tin Man, the Lion and Scarecrow all say HELLO!

OUCH!!!!!!

EDIT: Back at 11.5c on edit, good to see there is strong demand for value accumulation on BEPPA