It's a couple of weeks since the banks were briefed by BNB. There's 25 banks and if any one of them had serious problems with BNB we would have heard something already. You can't keep 25 banks quiet. Therefore the stock price has already started to recover.
BNB - Babcock & Brown
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Pilbara,
I have reproduced a cut and paste of a previous post of mine that I posted a few months back (when I still owned BNB). Frankly, if you don't realise that BNB do this kind of stuff, you really shouldn't be holding shares in them. Buying/owning shares in BNB is only for those that have their eyes fully open.
REVALUATION OF ASSETS
On the Appendix 4E of their accounts for 2007, page 68, there is an item of Revenue (which adds to profit) listed as "Fair value movement on investment property" in the amount of $100,631,000.
WHAT HAS BEEN REVALUED?
What exactly does this refer to? Some clues as to what this is referring to appear in the following:
Page 2 of "Full Year Results 2007 Announcement" attributes part of the increase of the revenue in the Real Estate division to the following:
"an uplift arising from the development of an Asian self storage portfolio.......and an uplift in the value of the BNP Residential Property portfolio in North America."
The "Full Year 20007 Results Presentation" also refers to "uplift in value" of Asian self storage and BNP Property in the USA in a few places.
So the $100M in revalued assets (which has increased profit) is due to 2 things:
a) its Asian self storage portfolio; and
b) rise in value of American BNP property
HOW MUCH OF THIS REVALUATION IS DUE TO ASIAN SELF STORAGE AND HOW MUCH IS DUE TO THE AMERICAN BNP PROPERTY?
Nowhere is it explicitly stated how much of the $100m is due to the revaluation of the Asian self storage and how much is due to revaluing the BNP Property in the USA.
LETS EXAMINE THE REVALUED BNP PROPERTY A BIT MORE
Since the BNP Property in the USA is more worrying of the 2, lets focus on that one.
Page 21 of the "Full Year 20007 Results Presentation" refers to
"The revaluation of the BNP multi-family portfolio in the US as disclosed at the interim result."
Frankly, IMHO this comment raises some red flags. It bascially implies that the revaluation was done before mid year, and so does not take account of events of the second half of 2007.
Page 23 of "Full Year 20007 Results Presentation" justifies this higher value given to the BNP properties by stating the following:
"The total investment is currently valued in excess of $1.8bn and includes nearly $1.5bn of non-recourse, debt. We remain very comfortable with the valuation of this portfolio on our balance sheet for a number of reasons including:
• Occupancy rates across the portfolio are well in excess of 90% and they have continued to experience strong NOI growth of approximately 4%.
• We acquired older properties in the high growth Sunbelt states. Our average price per unit for both deals is well below replacement cost for newly constructed comparable units.
• We financed our purchase primarily with 10yr fixed rate debt with a weighted average coupon of 5.65%. This debt is interest only and assumable.
• On December 21, 2007, we closed a sale on two properties from our Alliance portfolio at a cap rate of 5.43% based on in-place trailing 12 months NOI. We believe the assets in the BNP portfolio, which are on the balance sheet at an approximate 5.75% cap rate, are superior to the assets sold. At the end of the period Babcock & Brown’s direct and indirect equity in the portfolio was $136m."
Regarding the "$100 million fair value movement on investment property", this relates to the following accounting policy (excerpt from 2007 Annual Report)
The adjustment to book value (fair value) amounted a net gain of $100 million (5 percent gain) on this entire portfolio of $2 billion in property acquisitions.
The $100 million adjustment does not relate specifically to "an uplift arising from the development of an Asian self storage portfolio.......and an uplift in the value of the BNP Residential Property portfolio in North America."
In this period there were $2 billion of property acquisitions (at cost).
The adjustment to book value (fair value) amounted a net gain of $100 million (5 percent gain) on this entire portfolio of $2 billion in property acquisitions.
The $100 million adjustment does not relate specifically to "an uplift arising from the development of an Asian self storage portfolio.......and an uplift in the value of the BNP Residential Property portfolio in North America."
Specifically,I have found out subsequently that it relates ONLY to the BNP Residential Property, not to the self storage property. Which makes it even worse, given that the BNP property has dropped and in all likelihood is still dropping on a daily basis......
I think the review of BNB will never eventuate by the banks....if BNB falls, the big four will take another hit from asset writedowns....similar effect from CNP....
Therefore....regardless...the banks will just keep it float on top of the water....
BNB could be taken over by other financial institutions as their seeding assets for their funds, this does sound logical to me provided that BNB is at such low share price and has attractive assets......
If any potential takeover does occur, I would be laughing at hedge funds, as they will be the ones who will be buying to cover their short positions/losses, and helping to push up the BNB share price at the same time
I hold a small parcel of BNB in my portfolio and superfund.
Therefore....regardless...the banks will just keep it float on top of the water....BNB could be taken over by other financial institutions as their seeding assets for their funds, this does sound logical to me provided that BNB is at such low share price and has attractive assets......
If any potential takeover does occur, I would be laughing at hedge funds, as they will be the ones who will be buying to cover their short positions/losses, and helping to push up the BNB share price at the same time
I hold a small parcel of BNB in my portfolio and superfund.
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I managed to average my price down to $14.99 so I hope it can hold over $15 and then continue on the wave upwards. I'd like to see $20 by end of June.
obviously the stock price is quite far from what you hoped? did you lose much? bnb has taken a huge hit, dont think it will recover soon.
I think the "big 4" aussie banks are smaller players in the 25 bank syndicate which provides the $2.8 billion revolving line of credit to BNB. Only 3 months ago BNB allowed 5 more European banks to join the 20 others, and increase the facility from $2.3 billion to $2.8 billion. This suggests exposure of $100 million per bank.I think the review of BNB will never eventuate by the banks....if BNB falls, the big four will take another hit from asset writedowns....similar effect from CNP....
Recently when buying Angel Trains, BNB had no troubles organising another banking syndicate to raise 2.8 billion pounds, comprising the following financial institutions: "BNP Paribas, Banca IMI SpA, Calyon, Commonwealth Bank of Australia, DEPFA Bank plc, Dexia Credit Local, HSH Nordbank AG, ING Bank, KfW IPEX-Bank GmbH, Lloyds TSB Bank plc, Mitsui Banking Corp, Natixis, NORD/LB Norddeutsche Landesbank Luxembourg S.A., RBC Capital Markets, The Royal Bank of Scotland, Sumitomo Mitsui Banking Corporation, Unicredit Market & Investment Banking and an institutional funds manager, Queensland Investment Corporation."
Angel Trains is now owned by BNB European Infrastructure Fund, an unlisted fund. The 2.8 billion pound loan to buy the asset does not appear on the BNB balance sheet. However the 3.6 billion asset of Angel Trains will be included as "Assets under Management", which at 31 Dec 2007 stood at over 70 billion dollars, surely now heading for 100 billion dollars by the end of this year.
I'd say BNB is aiming for the following headline numbers in the next year or two: 100 billion dollars of Assets under Management, and 1 billion dollars profit.
Pilbara,
I highly recommend you look at some of my previous posts, esepcially the ones I made before I sold my BNB (selling them at 14.50 and buying BHP at 35.50 with the proceeds is one of the best decisions I ever made stockwise - cause I decided to stop believing the BS from BNB management and invest in a company that actually does something productive and produces a positive cashflow).
1 Billion dollar profit? You have got to be kidding. From what? Revaluing BNB's stake in Tricom?
Mr_T,
Is there anything else that puts you off BNB apart from the revaluation? I've seen many posts from you and they all refer to the validity of the $100m revaluation but you don't mention anything other than that. I agree that it would be nice to see more details about what was revalued by I have some faith in the audit process and that they would be ensuring that the assets were valued using a fair process.
I'd also like to clarify that when property is revalued the change in value must be taken to the P&L (either as income or cost). In the old days it would be taken to reserves but that is no longer the case. I think this is important to note because it seems as though some people think that BNB are engaging in 'dodgy' accounting practices, but this is not the case.
If BNB is renting out these properties then they would be valuing based on DCF - taking expected occupancy, average rates and then projecting them out over a long-term timeframe (say 10 years plus). The events of the last year are not really going to affect the long term value of such properties. I guess it all depends on what timeframe you're working to - I'm looking at the long term so will hold my shares for now.
I'm interested to hear about what else puts you off Babcock other than the suspicious reval.
Kloid
Is there anything else that puts you off BNB apart from the revaluation? I've seen many posts from you and they all refer to the validity of the $100m revaluation but you don't mention anything other than that. I agree that it would be nice to see more details about what was revalued by I have some faith in the audit process and that they would be ensuring that the assets were valued using a fair process.
I'd also like to clarify that when property is revalued the change in value must be taken to the P&L (either as income or cost). In the old days it would be taken to reserves but that is no longer the case. I think this is important to note because it seems as though some people think that BNB are engaging in 'dodgy' accounting practices, but this is not the case.
If BNB is renting out these properties then they would be valuing based on DCF - taking expected occupancy, average rates and then projecting them out over a long-term timeframe (say 10 years plus). The events of the last year are not really going to affect the long term value of such properties. I guess it all depends on what timeframe you're working to - I'm looking at the long term so will hold my shares for now.
I'm interested to hear about what else puts you off Babcock other than the suspicious reval.
Kloid
Bollocks. That real estate is valued by DCF is BNB's spin, it isn't reality. The rent you collect on your estate can remain the same, if the market values your property at less than it used to, then it is worth less, you can scream DCF till you are blue in the face. Its worth what people are willing to pay to buy it.
BNB revaluing real estate is a symptom of a greater disease - delusion and opaqueness. I have raised many other points in my posts, sometimes copying articles of Michael West, Crikey, etc. Bottom line is the model BNB (and others) use is dead. The concept of spinning off satellites and extracting huge fees from them just isn't going to work anymore, people are not interested in putting money into satellites that pay huge fees. So whilst their existing satellites will continue to exists (with lower fees as fees are partially a factor of satellite market value) there just won't be new ones under the current model. Which will put a major limit on that aspect of profit growth.
Other point that has been made over and over again is that as far as operating cashflow goes, they are clearly in the red. What kind of profit is that? In the old says, a negative cashflow from operations might have been tolerated, thesedays the market isn't so wiling to forgive. Which can only be a good thing.
Anyway Alan Kohler summed it all up recently in this article:
http://www.businessspectator.com.au/bs.nsf/Article/Beautiful-plumage-FMSYG?OpenDocument
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BNB bankers remove market cap clause. Perhaps a re-bound now? Glad i held onto some of these. Shot straight upto $7.44, hopefully can continue that run up.
I prefer to have independant thought than have a bunch of journos tell me what to think. Clearly the banks have no problem with the BNB as evidenced by the recent multi-billion dollar financing of the Angel trains acquisition followed today by the news that the debt covenance clause will be dropped and there won't be a review of the company's operations.
As to DCF property valuations being "bollocks", a DCF valuation would be more relevant for rental properties. The market valuation would only be useful if they plan to sell, which unless you know something that I don't is not the case. What evidence do you have that the rentals on these particular properties have gone down so much?
Kloid
DCF valuations that are in conflict with what something can sell for are bollocks. Market value is market value is what it can be sold for, not sure this concept requires further explanation. It says amples about the arrogance of BNB management that they think they know how to value things better than the market. No one is alleging rentals have fallen.
According to your logic, if the value of my Melbourne house doubled, but rentals stayed the same, then the house hasn't really doubled in value. Especially if I'm not about to sell it.
Banks are happy? The whole Angel thing was approved before the steep fall in the share price. The banks are very worried (I know someone who works in ANZ and told me that the concern is not minor), but they realise things might be a whole lot worse if they enforce the covenant, eg the market loses all faith in BNB and/or BNB is forced to into firesales.
It's done by the fees they charge for doing deals like that Angel Trains purchase. Also the revenue streams from "Assets under Management" are huge due to the 75 billion of assets.
An increasing percentage of these assets will go off balance sheet into unlisted funds. BNB will get a large one-off fee for setting up these funds, and a regular funds management fee.
Investment banking can be very profitable given the trust of bankers and institutional investors.
BNB have a huge pipeline of wind assets. They will sell 3 billion of this soon, but that will be replaced by another asset of similar magnitude when the development pipeline brings it online.
BNB will have to writedown a lot of other assets, like the USA Real Estate, maybe by 100s of millions, and this will affect the profit/loss by maybe 250 million.
I believe BNB do not writedown their holdings in their listed funds. These holdings have halved in value or worse, but I don't think it will affect the balance sheet.
Lets follow this to its natural conclusion.
Who is going to buy/own these unlisted funds? Why would people buy them if these funds pay such large fees to BNB and so erode the returns of the funds?
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Careful mate, you seem to be saying that you know someone in ANZ who is part of the review committee, and if he told you this non-public information, that would likely be a criminal offense.
a) No, he's not that important, not part of review committee.
b) Even if he was - how would it be a criminal offence? Please specify which criminal law he has broken?
Institutional investors need funds like this, because:
1. an individual investor cannot afford to buy one of these huge infrastructure assets
2. an individual investor wants to own a diverse portfolio of infrastructure
3. an individual investor cannot organise a large banking syndicate to obtain a geared investement in infrastructure.
4. infrastructure is usually a monopoly with steady cash flow
BNB delivers this for a price, and their competitive advantage in this market is based more on the quality of the deals they make than the level of fees.
Yeah, I realise that is Uncle Phil's spin, I just wonder how it accords with reality.
Institututional investors like Chinese and Middle Eastern sovereign funds could easily afford to buy infrastructure directly. In many cases there is no need for a middle man. They are cashed up and don't need credit at all in many cases. And if they do need credit, they can get it more easily than BNB in many cases (which admittedly is not that big an achievment these days).
Furthermore, even if insitutional investors do go through BNB, it is unlikely they will tolerate the rate of fees that retail funds give to BNB. They are too smart for that, notwithstanding Uncle Phil's claim to the contrary.
Bottom line is this - institutional investors are big and powerful, there is not much value adding that BNB can do.
