The fate of Aussie investment and infrastructure management group Babcock & Brown is sending shivers way beyond Australia’s shores.
As Stephen Mayne noted on Crikey.com, you won’t see many more comprehensive board restructures than the one Babcock unveiled on Thursday, , “but which suits play where doesn’t really matter too much when you’re dealing with $50bn in debt and a crisis of investor confidence”.
That’s certainly what the market thought as Babcock shares plunged to another record low in Sydney after a radical management overhaul and disappointing half-year results.
As the FT reported on Thursday, Babcock’s board bowed to investor pressure by changing its senior management and promising to shun opportunistic deals.
Chief executive Phil Green and executive chairman and Babcock founder Jim Babcock agreed to step down from their positions after the ailing investment firm’s first-half net profit fell 34 per cent to A$211m.
That produced a fresh 30 per cent fall in Babcock stock to A$2.41; in May last year the price stood at A$33.00.
Despite the alarming share sell-off, Larkin told a press conference that Babcock was not under financial pressure and was supported by its lenders. “We have committed debt facilities to 2011,” he said.
His words failed to impress. As Mayne notes in a letter to Crikey subscribers:
The banks will no doubt be happy that well-known fix-it merchant Pat Handley, the former Westpac finance director, has stepped up to join the board as head of the audit and risk committee. He should be made chairman forthwith.
Founder Jim Babcock has stood down as executive chairman but, incredibly, the Babcock boys have installed Elizabeth Nosworthy as acting chair, when she’s already up to her eye-balls in disasters after the Commander Communications collapse. [Note a recent Crikey post on Nosworthy: "The unluckiest company director in Australia?"]
The worst feature of the board restructure is that both Babcock and Green are proposing to hang around like bad smells as non-executive directors. They should resign to give new CEO Larkin, the former Lend Lease executive who is currently Babcock finance director, a blank canvas to work with.
After all, if fellow executive directors Jim Fantaci and Martin Rey have quit the board, shouldn’t the two key architects of Babcock’s problems leave the board as well?
Michael Sharpe, chairman of the audit committee, has also resigned due to ill-health, although there’s no sign that these same health issues have yet forced him to retire from the ASX board.
All up, concludes Mayne, “this is a belated attempt to improve governance at Babcock when the key issue right now is the financial implosion from having too much debt in the middle of a global credit crisis”.
The house of Babcock has been fatally wounded, but exactly what happens to the $72bn in assets that it manages, much of which is sensitive community infrastructure such as roads, schools, ports and hospitals?
Commentators on another Aussie site, Businessspectator, look ahead to what we might expect from the new management:
“One suspects that Larkin, with his background as an accountant and experience in large companies such as Lend Lease and Westpac will ultimately take a tougher view of the value of the group’s assets”, writes Tony Boyd.
But, he adds, it will be difficult for Larkin to take a tougher line on valuations as he goes through the process of degearing the headstock which is carrying about A$3.6bn in debt including A$600m in notes that are trading at about 40 per cent below their face value. Meanwhile, Larkin’s remark on Thursday that he would not allow “opportunistic” investments any longer “effectively kills the corporate and structured finance division”, Boyd concludes.
Boyd’s fellow Businessspectator commentator Robert Gottliebsen meanwhile notes that while much of the chatter focuses on the solvency or otherwise of Babcock & Brown, perhaps a more important question is the terrible impact the Babcock crisis could have on Australia’s banks.
The Babcock group may be solvent, but it is in crisis. All the various entities have been borrowing on a non-recourse basis, so there are few if any cross-guarantees. What every bank now has to do is look at whether the assets over which they have security have a realistic worth that is greater than the loans in the satellite.
Lex, meanwhile, draws a broader bow on Babcock’s woes, asking: Are Aussie regulators asleep at the wheel? The financial engineering model – arguably patented Down Under and subsequently adopted across the globe – is fast unravelling. Babcock & Brown is just the latest in a clutch of debt-ridden vehicles to have hit the buffers. Moreover, it is hardly too big to fail. The group has a lot of debt but it is spread around 25-30 local and overseas banks.
Yet regulators are doing Australia a favour by taking a back seat, says Lex. “Inaction has forced lenders to step up or left funds themselves to sort out balance sheets. Banks are working with previous casualties such as Centro Properties and Allco Finance to restructure debt terms.”
But Babcock & Brown is a bigger problem. It has more debt, perhaps A$50bn. Its case is trickier. Banks have been brought on board and some extensions arranged. But there are doubts over whether it can continue to generate the deal fees that were a big part of its business. Fees from recycling assets and managing funds, linked to deal flow, will dwindle. That was always a risk with the model. There is no case for a bailout.