BBI - Babcock & Brown Infrastructure

banska bystrica · 26 July 2009

If one plugs in a low enough EBITDA multiple on RIO's assets, there is a case for RIO to be insolvent. Let's get real here guys. We have just been through the worst financial crisis in our lifetime. Take a look at what Powerco sold for in the midst of that. Look at the final EBITDA multiple even after the QIC haircut.
I think it's fair to say that if we have not the seen the worst of the GFC, BBI are in deep trouble. If we have seen the worst, they will survive but equity holders could be diluted to nothing. "Could" be, not a certainty at all.

BEPPA looks ok to me.

persistentone · 26 July 2009

nathanblack said:
interesting post. when you mention cyclical downturns did you consider the regulated nature of many of BBI revenue streams? were you compring BBI assets with regulated or non regulated assets? this can vary asset to asset and be country specific in nature.

als did you consider the impact of a minority DBCT sale? its a serious possibility that only 49% will be sold. what would happen then?

i agree euroports relies on a strong economy, but other assets have a regulated income stream.

Maybe Banska and others can comment on the business model at PD Ports and Westnet Rail. ABN Amro calls those assets cyclical. Certainly the rails in the US had their revenues and earnings hit in a big way because they are paid by the boxcar full of materials. I would think that PD Ports revenue has a large cyclical component because probably they get a fee for each ship that comes into port, but someone correct me on that. You have to believe there is a strong usage-based component to their revenue model.

Natural gas pipelines are beautiful assets primarily because the revenue is based on a reservation fee and the revenue comes in whether they pipe zero gas or keep the pipeline filled.

DBCT is unfortunately cyclical too, but we are just lucky to be in a sweet spot now with China's needing coal, so I would say that one asset is acting counter cycle to the overall economic downturn.

I did not model the 49%. But I just played with numbers and it looks to me that if BBI can get a 12 multiple on 2010 earnings for DBCT, they just might pull off the 49% sale. If I were them, I would be doing a 49% sale with a put option for the other 51%. That let's them play a dangerous wire act on liquidity, and it lets them cover their worst case in case they need to go back and raise more. Anything under a 12 multiple, and I think realistically it may end up becoming a 100% sale of DBCT eventually. They may still try the 49% / 51% trick.

banska bystrica · 26 July 2009

persistentone said:
DBCT is unfortunately cyclical too, but we are just lucky to be in a sweet spot now with China's needing coal, so I would say that one asset is acting counter cycle to the overall economic downturn.

DBCT is regulated. Take or pay contracts with customers. Number of ships visiting is irrelevant. BBI still get paid.

persistentone · 26 July 2009

banska bystrica said:
If one plugs in a low enough EBITDA multiple on RIO's assets, there is a case for RIO to be insolvent. Let's get real here guys. We have just been through the worst financial crisis in our lifetime. Take a look at what Powerco sold for in the midst of that. Look at the final EBITDA multiple even after the QIC haircut.
I think it's fair to say that if we have not the seen the worst of the GFC, BBI are in deep trouble. If we have seen the worst, they will survive but equity holders could be diluted to nothing. "Could" be, not a certainty at all.

BEPPA looks ok to me.

Just to make sure my intent is understood here, I am not a BEPPA "bear". But the conversation here was getting very old with select and the doctor simply making very general assertions without putting any data behind them. They were clearly just posting from intuition and were not willing to do real work to make an argument.

I wanted to at least put some kind of framework in place - with real EBITDA numbers and multiples - that puts forth a coherent, factually-based scenario and assumptions that are required for BBI to fail and for BEPPA to become worthless.

I'm trying to do this in a way that is honest, and also putting forth variations in the scenarios that show how BEPPA can achieve some real recovery.

No doubt there are errors in some of my EBITDA numbers and in some of the multiples, and it's a great conversation to have now to firm up those assumptions.

And then in the end everyone has to formulate their own decisions about risk and reward. For my sensibility, given the fragileness of my assumptions, a 10-to-1 payoff would compensate me for risks taken. For those who have greater certainty about outcomes, probably less payoff is required. But it's pretty clear to me that there is a real risk here of BEPPA getting back nothing, particularly if the DBCT sale is a disappointment.

persistentone · 26 July 2009

banska bystrica said:
DBCT is regulated. Take or pay contracts with customers. Number of ships visiting is irrelevant. BBI still get paid.

I stand corrected, and I guess that is why ABN Amro doesn't think this one is cyclical.

Excellent business model! What a shame to get rid of any part of such a good asset.

It's all hindsight now, but imagine how much stronger BBI might be now if they had avoided the three cyclical assets.

banska bystrica · 26 July 2009

persistentone said:
I stand corrected, and I guess that is why ABN Amro doesn't think this one is cyclical.

Excellent business model! What a shame to get rid of any part of such a good asset.

It's all hindsight now, but imagine how much stronger BBI might be now if they had avoided the three cyclical assets.

True but we would never have got the opportunity to buy them at 2.5c in November either...........................

fuzzie · 27 July 2009

persistentone said:
I keep seeing this "Australian ET&D" referred to as "ex-Alinta". Alinta is an Australian natural gas retail supplier? Did they sell Alinta, and if not why it is referred to as ex-Alinta?

The history of BEPPA and Alinta assets are intimately entwined with a takeover/merger/restructure of two other companies AGL and Alinta. My understanding is:

AGL was formed in 1837 and listed when the ASX opened in 1871. In the 1990s, AGL purchased electricity networks in Victoria, pipelines in WA and utilities in New Zealand. AGL acquired customers in South Australia, Victoria and New Zealand. In 2000, the group spun-off its transmission pipelines into APA. The NZ business was sold in 2004. Alinta made a David takeover attempt of Goliath AGL and the pair wasted millions fighting each other for years. B&B got involved and eventually AGL and Alinta turned around and merged their respective infrastructure businesses in October 2006, with AGK (new AGL) emerging as a new separately listed entity. Alinta owned old AGL assets and APA picked up some more. At this point the B&B crowd engineered a restructure and old AGL and Alinta shareholders ended up holding shares in AGK, AAN, APA, BBI, BBP and BEPPA. I think this is where BEPPA originated and was issued as part payment to cover purchase costs of Alinta assets.

persistentone · 27 July 2009

fuzzie said:
The history of BEPPA and Alinta assets are intimately entwined with a takeover/merger/restructure of two other companies AGL and Alinta. My understanding is:

AGL was formed in 1837 and listed when the ASX opened in 1871. In the 1990s, AGL purchased electricity networks in Victoria, pipelines in WA and utilities in New Zealand. AGL acquired customers in South Australia, Victoria and New Zealand. In 2000, the group spun-off its transmission pipelines into APA. The NZ business was sold in 2004. Alinta made a David takeover attempt of Goliath AGL and the pair wasted millions fighting each other for years. B&B got involved and eventually AGL and Alinta turned around and merged their respective infrastructure businesses in October 2006, with AGK (new AGL) emerging as a new separately listed entity. Alinta owned old AGL assets and APA picked up some more. At this point the B&B crowd engineered a restructure and old AGL and Alinta shareholders ended up holding shares in AGK, AAN, APA, BBI, BBP and BEPPA. I think this is where BEPPA originated and was issued as part payment to cover purchase costs of Alinta assets.

Wow, that's a complex history. It looks like BBI is now calling what used to be Alinta by the name WA Gas. Based your description, it may be the case that some of the other gas assets they are holding are broken out from the old Atlinta.

Looking at all of the Australian gas assets that BBI now holds, which of these are *not* pure pipeline plays?

Tysonboss1 · 27 July 2009

fuzzie said:
old AGL and Alinta shareholders ended up holding shares in AGK, AAN, APA, BBI, BBP and BEPPA. I think this is where BEPPA originated and was issued as part payment to cover purchase costs of Alinta assets.

they also got shares in BBW which has since been renamed infergen energy.

Beppa is an IOU ( I owe you ) that was paid to shareholders rather than cash.

random · 27 July 2009

Can i ask "the panels" view what impact a rising $AUD will have on the viability of BBI in the short to medium term (if any).

Personally i believe that the $AUD will rise over the next 6 months so ride with me on this even if you believe that it won't. Assume that it will rise against the $US predominantly but to a less extent UK pound and euro.

A US90c is not out of the question IMHO for the $AUD.

Your thoughts would be appreciated.

banska bystrica · 28 July 2009

random,
NGPL is a US based asset with US dollar cash flows and US dollar debt. Ditto for Euroports and PD Ports.
BBI do also undertake some FX hedging.

investorpaul · 28 July 2009

New BBI announcement RE: Euroports

BBI Announcement

Just reading it know, what are the implications of this?

shiftyphil · 28 July 2009

Announcement just out about Euroports. Only skimmed it so far, but this looks to be positive. But I need to type more to get it to post.

All conditions precedent associated with the transaction have been satisfied and as such completion of the Amended SSA is targeted to occur in late July or early August and a further announcement will be made in due course.

investorpaul · 28 July 2009

My understanding is that we basically:

1. Sold part of our stake in Euroports - We still retain a percentage
2. A capital reserve has been created at the Euroports level to cover medium to short term liabilities
3. A share equalisation process in the future (not sure on the impact of this???)
4. Movement of 100% ownership Benelux port and BBI port acquistions luxembourg. (not sure on the impact of this either???)
5. BBI recognises a pre tax impairment/loss of 120 million euros.

Any way, Im still reading/digesting it all.

fureien · 28 July 2009

whats share equilisation mean? although it wont impact till 2012-13 is it a good or bad thing :S

it also says capitalisation by all shareholders....more cap raising??

my sell order got processed this morning near day high at 8 cents so im not complaining but the fact that this news hasnt made the sp go nuts with the momentum from yesterday can only mean its not that great news right?

reason i ask is i was intending to buy back in

drsmith · 28 July 2009

banska bystrica said:
Silence at this point in time from the doomsayers.

Ok, I'll give them a leg up. I'll slash $300M from PD Ports, $300M from Euroports, $400M from Alinta and $400M from Westnet Rail.
These are all "end of the world" valuations. There's potentially $1.4Bn in write-offs.

Now, NGPL, DBCT, PowerCo are all performing at or above expectations despite the GFC. It's hard to imagine a more bearish period so I cannot see any possible impairments from those. IEG is performing so lets slash a mere $100M off it.
The rest are small fry and not material.

So, what have we got? Potentially $1.5Bn in impairments. That still leaves BEPPA worth $1. Trading at 12c? I'm comfortable and if they get cheaper due to panic if Euroports doesn't settle, I'll step up for some more.

According to today's announcement on the part sale of Europort's, BBI will recognise a pre-tax impairment/loss on disposal of 120m Euros. Given that this is for a 40% interest the total combined loss/writedown is likely to be 300m Euros or approximately AU$520m at todays exchange rate.

The ultimate outcome however has the potential to be much worse as, according to the announcement, BBI may lose as much as 65% of Euroports under the sale depending on performance.

investorpaul · 28 July 2009

Does this announcement leave any room for reducing the debt at the asset level? Or are all the funds put towards the recapitalisation process?

A previous distressed net equity value discussed for Euroports was -113 m AUD.Does the 120 Euros ($207 AUD) pre tax impairment/loss mean that the actual net equity value achieved is -$207 AUD?

Sorry for the above questions, I am just trying to get my head around the announcement and plug the new figures into a spreadsheet.

persistentone · 28 July 2009

Since this was an equity investment, one hopes that some of that money reduces debt at the asset level, but honestly this agreement looks like bad news top to bottom for me, and to me it creates more doubt than it removes. I am very surprised to see the stock rally on this at all.

First, they have $809MM AUD net debt in Euroports. $140MM Euros is about $242MM AUD, so even if 100% paid down debt it still doesn't make a big dent in the debt level.

Second, none of the monies (apparently) are going back to BBI, so it does nothing to clear corporate debt.

Third, the agreement apparently has some kind of huge dilutionary formula (the details of which they conveniently remove from the press release) that allows the investors to grab 65% of the asset if the port doesn't perform well.

I can't see any way to dress this event well. I guess the only bright news is that this financing might prevent Euroports from declaring its own administration, and I assume the operating cash flows keep coming back to BBI to pay off debt. But we impaired the asset.

It's not a big surprise to me, since in my distress analysis I had pretty much written off Euroports and PD Ports as failed cyclical assets. The big surprise to me is that the stock is rallying on this news. I don't understand the market's logic.

I didn't analyze how this impacts on interest coverage. Does BBI get 100% of the EBITDA of Euroports going forward? If we lost 40% of the operating cash flows, then it's a catastrophe since we would be making interest coverage worse not better (we would at best pay down 29% of debt but lose 40% of the operating cash flow).

drsmith · 28 July 2009

persistentone said:
I didn't analyze how this impacts on interest coverage. Does BBI get 100% of the EBITDA of Euroports going forward? If we lost 40% of the operating cash flows, then it's a catastrophe since we would be making interest coverage worse not better (we would at best pay down 29% of debt but lose 40% of the operating cash flow).

I would estimate that BBI will lose 34% of EBITDA plus the coupon rate on the convertible bond which accounts for the other 6%.

Whether or not that equates to 40% of EBITDA will therefore depend on the bond coupon rate. It would be very interesting to know what the bond coupon rate is. The terms of the convertible bond are also not detailed in the media release.

random · 28 July 2009

I don't think that the news here is all that bad, in fact i think it is probably modestly good at best, however i also reckon that the wording of the announcement is very calculated.
The spin here is obviously meant to give a positive impression but a lot of time has been spent on the choice of phrasing.
What is required by the market place is clarity.
This report is not giving us the clarity required by shareholders.
This is not to say that the information isn't accurate.
It may make the ownership of the assets simpler but it is not clearer because we have been given some of the information but not all relevent info in my opinion.

Full transparency is the go here, no jibber jabber please.

BBI - Babcock & Brown Infrastructure

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