BNB - Babcock & Brown

[reece55]

Recee55: Just how concerned how you?

Do you take the view that if BNB have been "economical with the truth" on this issue, it raises a whole lot of other questions?

Well, I'm not overly concerned (happy with the rest of the financials thus far after a cursory glance), it is however a large increase in property holdings to shelve on your balance sheet when the **** has fallen out of the housing market, particularly in the US

They do note that two of the properties obtained from the original portfolio were sold at a cap rate of 5.43% and their valuation is at 5.75%, so depending on how long they intend on holding them, it could be close to the mark. They have time on their side in the fact that the debt attached to the acquisition is fixed for ten years and interest only......

However, I would have thought that the value would have gone down, not up, in light of the sub prime. Hence why I will be looking closely at the disclosure in the full report.

Cheers

 

[Mr_T]

Reece55:

As I said earlier, the revaluation seems to have been made in the first half of 2007.

From page 63 of the Appendix 4D of the INTERIM 2007 report it states there has been a profit of 62,698,000 on the BNP property (I assume this was on revaluation).

This on a property bought on 28 February 2007. It seems a bit strange that it went up in value in so few months. Even though the subprime crisis wasn't apparent in the first half of 2007, property prices were on the most part falling.

On the other hand, it is possible that they snapped up a bargain. If this is the case, you'd think they would be more open about it.

By the way, if you want to see the apartments that we are discussing, have a look at http://www.bnproperties.com/ . From there, can see the apartments and what rents they are seeking. Wonder if mortgage problems in the USA have caused an increase in rental demand for this type of apartments?

 

[reece55]

Reece55:

As I said earlier, the revaluation seems to have been made in the first half of 2007.

From page 63 of the Appendix 4D of the INTERIM 2007 report it states there has been a profit of 62,698,000 on the BNP property (I assume this was on revaluation).

This on a property bought on 28 February 2007. It seems a bit strange that it went up in value in so few months. Even though the subprime crisis wasn't apparent in the first half of 2007, property prices were on the most part falling.

On the other hand, it is possible that they snapped up a bargain. If this is the case, you'd think they would be more open about it.

By the way, if you want to see the apartments that we are discussing, have a look at http://www.bnproperties.com/ . From there, can see the apartments and what rents they are seeking. Wonder if mortgage problems in the USA have caused an increase in rental demand for this type of apartments?

Hi Mr T
Not denying that a large part was done in the first half. What I was pointing our was that they have achieved a revaluation for the year of about say 8% on the whole portfolio, which under normal conditions wouldn't be so far from the mark, but in the current environment does look a little cooked (i.e., I would have expected lower revaluation in second half and therefore less than 63 Mil rev booked through the P&L for revaluations)...

I will take a look at the link and see whether we can't match them to current market conditions...... BNB may have got a bargain, but I highly doubt BNP would have just given it to them for a song!!!!

Cheers

 

[Mr_T]

Assuming the rentals cited on that website are monthly (not weekly) looks predominantly like low rent apartments.

Some say that demand for renting such apartments is now high due to so many people losing their homes.

Which of course doesn't mean that the capital value of those apartments hasn't fallen.

 

[reece55]

Assuming the rentals cited on that website are monthly (not weekly) looks predominantly like low rent apartments.

Some say that demand for renting such apartments is now high due to so many people losing their homes.

Which of course doesn't mean that the capital value of those apartments hasn't fallen.

Yes, the rent looks pretty cheap to me, at max 3 bedrooms in good sections of America, they are looking at around $230 per week..... Even for someone living here in Adelaide SA, that seems pretty cheap to me (then again, Aussie rents are stupid at the moment)......

So, in summary, feeling a lot better now after taking a peek at the properties, but it would be nice for them to give us a bit better disclosure on the valuation...

Cheers

 

[Mr_T]

I'm glad these issues are being discussed here. They are very important.

The interior of the apartments looks pretty average to me. Certainly not slums, but hardly premium housing. Which in the current market is probably a good thing.

I wonder how the capital value of such properties has held up in the USA?

 

[Mr_T]

This is VERY worrying. Have a look at this.

http://business.theage.com.au/whos-next-for-financial-judgment-day/20080227-1v3x.html

If Babcock's satellites keep sinking (they had a good day yesterday), this could precipitate a downward spiral in confidence which could zap the upstream profit flow to the bank. As Babcock's model is predicated on ripping out unrealistically high fees early, they could be in trouble if the new strategy to shift to a wholesale global infrastructure fund model takes time to evolve.

Both Macquarie and Babcock overpay for assets and load them up with debt. In the early years they often pay interest only and therefore display a higher cashflow, hence more income back to the bank. If asset prices fall, though, which they appear to be doing, this game is over. Shrinking confidence and investor support combined with the demand from wholesale investors for more skin in the game will make things very messy.

The revaluation game in property is over: vid Centro.

Babcock however shelled out $1 billion last year at the top of the market for US real estate then casually booked a $100 million revaluation to profit even though property prices were dropping in the US and Europe.

More interesting is Note 30 on interest bearing liabilities, buried deep in the bowels of the accounts. Current liabilities - usually more visible in the balance sheet - stand at $2.9 billion. That would suggest $2.9 billion in debt needs to be rolled this year.

Among the total liabilities is ``OTHER secured by marketable securities'' of $631 million (up from $328 million).

The note says ``OTHER: Babcock & Brown has short term loans that are secured by marketable securities. Several of the marketable securities are accounted for using the equity method because of the size of Babcock & Brown's ownership interest. The loans are repayable within one year''.

One can only assume that these marketable securities are the various Babcock trusts. Has Babcock borrowed against its satellites? If so, BBI is down 20 per cent since December, BBW down 20 per cent, BBP is off a tad more and BJT is roughly even.

And these are presumably the most marketable securities in terms of liquidity.

On top of that operating cashflow was $507 million in the red (up from just negative $76 million), total liabilities stood at $13.1 billion while the finance bill was a hefty $662 million. On those numbers things are starting to look positively Allconian - although the structures are simpler with less cross-collateralisation.

Still, and this is where accounting is so grand - depending on one's perspective - Babcock managed to book a net profit of $639 million and predicted more of the same.

 

[reece55]

This is VERY worrying. Have a look at this.

http://business.theage.com.au/whos-next-for-financial-judgment-day/20080227-1v3x.html

If Babcock's satellites keep sinking (they had a good day yesterday), this could precipitate a downward spiral in confidence which could zap the upstream profit flow to the bank. As Babcock's model is predicated on ripping out unrealistically high fees early, they could be in trouble if the new strategy to shift to a wholesale global infrastructure fund model takes time to evolve.

Both Macquarie and Babcock overpay for assets and load them up with debt. In the early years they often pay interest only and therefore display a higher cashflow, hence more income back to the bank. If asset prices fall, though, which they appear to be doing, this game is over. Shrinking confidence and investor support combined with the demand from wholesale investors for more skin in the game will make things very messy.

The revaluation game in property is over: vid Centro.

Babcock however shelled out $1 billion last year at the top of the market for US real estate then casually booked a $100 million revaluation to profit even though property prices were dropping in the US and Europe.

More interesting is Note 30 on interest bearing liabilities, buried deep in the bowels of the accounts. Current liabilities - usually more visible in the balance sheet - stand at $2.9 billion. That would suggest $2.9 billion in debt needs to be rolled this year.

Among the total liabilities is ``OTHER secured by marketable securities'' of $631 million (up from $328 million).

The note says ``OTHER: Babcock & Brown has short term loans that are secured by marketable securities. Several of the marketable securities are accounted for using the equity method because of the size of Babcock & Brown's ownership interest. The loans are repayable within one year''.

One can only assume that these marketable securities are the various Babcock trusts. Has Babcock borrowed against its satellites? If so, BBI is down 20 per cent since December, BBW down 20 per cent, BBP is off a tad more and BJT is roughly even.

And these are presumably the most marketable securities in terms of liquidity.

On top of that operating cashflow was $507 million in the red (up from just negative $76 million), total liabilities stood at $13.1 billion while the finance bill was a hefty $662 million. On those numbers things are starting to look positively Allconian - although the structures are simpler with less cross-collateralisation.

Still, and this is where accounting is so grand - depending on one's perspective - Babcock managed to book a net profit of $639 million and predicted more of the same.

Mr T
I'm not so worried personally.........

In regards to the 2.9 Mil in current loans, it is hard to tell whether this is loans that are required to be rolled over this year, or whether items such as the Corporate Facility which have no fixed term and available at relevant market rates. Often whilst these are termed current because they have no fixed term, in reality BNB may be able to have the loan as long as it likes. I will await the final report to review.

Re the 630 Mil secured by marketable securities, it would seem logical that they would leverage their investments in associates against debt to obtain the yield differential. Net investments in associates was 1.9 Bil, so it's not like they are lacking collateral on the loan..... No problem here IMO.

Re the negative operating cash flow, the answer is pretty obvious - there was a net gain of 766,099 on the sale of assets. They obviously pay their staff bonuses, asset management costs and transaction and promotion expenses relative to this profit. But the cash flow attributable to the net gain is in investing activities. Now, you could argue that they will be hard pressed for this all to occur again at the same level, but the relevant expenses associated with the transactions will also not be there and they are sitting in operating cash flow -'s.

I don't think we are looking at an Allco here - AFG cross collateralised and used their own shares as collateral in their sattelite funds and ripped huge fees for complicated financial instruments. BNB sells infrastructure to its funds that have predictable cash flows and does it in a transparent fashion. This is not to say that BNB won't have a harder time making money, but at the end of it all, they have a stable set of satellite funds that have, so far, stood up t o the credit crunch......

Cheers

 

[Mr_T]

Reece,

Thanks very much for that.

At the top of Note 30 of the Appendix 4E it says:

"Babcock & Brown has a $2.35 billion revolving line of credit of which
$2,109.8 million (2006: $798.5 million) was drawn at 31 December 2007."

Could this be what you are referring to?

 

[Mr_T]

12 minutes into the Final Year 2007 webcast, Phil Green says the following:

"As at Dec 31, we had $240m of unused corporate facility and $364m of unrestricted cash. We have a three year Evergreen corporate debt facility whic is due for extension coming up now and we are confident that will be extended. We also already have approvals from some banks to actually increase that facility and one bank to join that facility which will increase our capacity at least in line with thecurrent covenants as obviously our net assets increase with retained earnings."


Not sure what to make of this, though the words "we are confident that will be extended" aren't quite as assuring as if he had said "we have received a new debt facility".

Still very worried.

 

[Mr_T]

Interestingly the guy who wrote the above article who described BNB as Allcoish is now backing down on this claims.

His name is Michael West (the journalist). He appears to now realise that BNB had 2.6 billion dollars in cash. Guess that should take away any fears we have of it being insolvent.

http://business.smh.com.au/a-sense-of-irony-helps-at-babcock/20080303-1whm.html


The issue facing Green and other leveraged deal-doers in the market is that the rumours are unlikely to go away for some time. Such is the nature of the beast, the sheer breadth of the operations.

As far as the Babcock structures go, there is nothing like the complexity or cross-collateralisation of Allco. They are even, generally, more transparent than Macquarie Group entities - certainly less complex in the satellites.

Still, while the overall liquidity position of Babcock & Brown appears to be comfortable with $2.5 billion in cash as BusinessDay has revealed, there are margin loans over the parent's holdings in the satellite trusts falling due this year. They are manageable at $631 million but way higher than last year's $328 million.

 

[Mr_T]

Why is this share still dropping???

NOT happy!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

If anyone has any recent broker reports, that would be much appreciated.

 

[ghostworld]

Why is this share still dropping???

NOT happy!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

If anyone has any recent broker reports, that would be much appreciated.

I believe the falls are broad based declines in financial stocks. The more complex the structure, the higher the decline.

Same can be said for most macquarie stocks. Have a look at MAP. I can't see the main reason for the big decline.

 

[mrgroundwork]

Mr_T i have looked at all the broker/analyst recs on the bloomberg terminal... pretty much 90% of the analysts in Oz have buys on it with consensus price forecast of about $30...

if i get time on Tuesday i'll upload the full list of all the brokers, their PX target and rating...

either they have their head up their a*se or BNB is being sold down without justification...

 

[YELNATS]

Interestingly the guy who wrote the above article who described BNB as Allcoish is now backing down on this claims.

His name is Michael West (the journalist). He appears to now realise that BNB had 2.6 billion dollars in cash. Guess that should take away any fears we have of it being insolvent.

Apparently Mr Michael West is in some bother on a number of fronts. City Pacific are looking to take him to court over his inaccurate writings concerning them.

 

[reece55]

Anyone see BNB's statement just after market close....

Phil Green is pouncing on the Rubicons just after Allco sold the whole lot down, announcing a 5% stake in all three..... As I have said many times, whilst all diversified financials are going to suffer in the near term, I believe that this one will end up coming out trumps.... the first move in what I envisage with BNB swooping on prey that are being sold down due to ludicrous leverage.....

Cheers

 

[nitpra]

These are the broker reports released on 29th Feb.

Citi 29-Feb-08 1 Buy, High Risk $26.41
Merrill Lynch 22-Feb-08 1 Buy, High Risk $31.80
UBS 22-Feb-08 1 Buy $30.00
Credit Suisse 22-Feb-08 1 Outperform $25.00
ABN Amro 22-Feb-08 1 Buy $22.50 59.8%
Aspect Huntley 15-Jan-08 1 Upgrade to Buy from Accumulate - -
Deutsche Bank 13-Dec-07 1 Buy - Re-Instatement of Coverage

 

[Mr_T]

If you read BNB's announcement on Friday regarding that they are not being subject to margin calls, they are basically admitting that they need to top up their margin loans to keep their LVR's at acceptable levels.

I wonder how long they can keep doing this.

Should we be worried?

 

[michelacuna]

Anyone see BNB's statement just after market close....

Phil Green is pouncing on the Rubicons just after Allco sold the whole lot down, announcing a 5% stake in all three..... As I have said many times, whilst all diversified financials are going to suffer in the near term, I believe that this one will end up coming out trumps.... the first move in what I envisage with BNB swooping on prey that are being sold down due to ludicrous leverage.....

Cheers

Hi reece55,

A question for you,
Why do you think BNB is so different than MQG? (I deducted this from your posts at the MQG forum and here).
As far as I can see BNB model was inspired by the MQG model and both revaluate their assets (BNB only real estate but that’s about one third of their business).
Yes, BNB is more transparent in its accounts but MQG is much bigger and complex.
At the current prices both are bargains, no question about that, but are these guys really better?

Regards,

 

[nick2fish]

Nice question... especially with both companies acting swiftly today to restore investor confidence and try to stymie the ridiculous speculative short selling attacks by hedge funds.