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.