Babcock shares as good as worthless
Babcock shares as good as worthless
Babcock & Brown's share price was 15.5 cents when markets closed for the 2008 year. It last traded yesterday at 38.5 cents, an increase of 148% (having been as high as 49 cents during the day). The optimism is beyond me.
The company is going to limp on for a while yet, that much is clear. Babcock's banking syndicate has agreed to a restructure of the company, suspended covenants on its debt facilities and converted the interest payable on the facilities to a 'Pay If You Can' basis (where do I get myself a loan like that?). They think the business is worth more as a going concern than in liquidation and they're right. Some of its most valuable assets – the management contracts relating to its $70bn of listed and unlisted funds – would be worthless in the event of liquidation.
But the probability of existing shareholders getting something out of it is close to zero. Part of the deal is a capital restructure, 'which is expected to include a debt for equity swap, acceptable to the banking syndicate'. So the banks are going to convert some of their debt into ordinary shares. Fair enough.
The problem is that Babcock owes some $3bn, dwarfing its current $143m implied equity value by a factor of 20 to 1. So any swap of debt for equity is going to mean the debt holders end up with close to 100% of the equity and existing shareholders an extremely small percentage of a large number of shares. Put simply, the banks are going to take the equity and then manage it as they see fit.
That makes buying shares today a risky business indeed.
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The reason for the massive increase in share price from 15 cents is covered in this excellent article by Ian Varrender in SMH today.
http://business.smh.com.au/business/the-regulators-fiddled-while-we-got-...
Do you have any idea whether the subordinated notes BNBG are likely to be worth anything after the restructure?
Here's what I wrote in response to a similar member query on TII.
'It's impossible to know what's going to happen here but I'd recommend giving BNBG a wide berth. I'll be very surprised if the notes aren't included in any restructure and expect them to be just as heavily diluted (for all intents and purposes, wiped out). The banks would be nuts to swap their senior debt for equity that ranks behind the notes.
And I'd say the chances of the next distribution being paid are nought. We'll know more before they start trading again in any case but I don't think there's much chance of anyone other than the banks getting much out of it (and the banks themselves are likely to take a hair cut).'
It's a good explanation of why the share price went up but I don't buy the whole 'blame the shortsellers' crusade. BNB's demise has nothing to do with shortsellers and everything to do with a reckless acquisition binge. Large positions should be disclosed but they've hardly used their position to manipulate the situation. If they were smart enough to see it coming and make money out of it, good luck to them.
What do you think about shorting BNB now?
A question for Steve Johnson. I note you said some time back a sum of parts valuation for BBI was probably not a very good way to value BBI in case they had to sell their assets in a firesale.
If you value BBI on a free cash flow basis (FCF), you get approximately 300M per annum free cash flow or the equivalent of 12c per BBI share. One cannot deny the asset quality or the cash flow. They have not breached any debt covenants. If they have FCF of 12c per share, they are trading on less than 1x FCF. That is oversold surely? Other utilities trade at roughly 5x FCF which would value BBI at 60c. Most of the corporate debt doesn't fall due until Dec 2011 so what's the panic all about? Interested in your thoughts. I bought BBI at average 4c in late November and BEPPA at average 10c.
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