AUSTRALIAN INVESTMENT firm Babcock Brown Ltd, whose Babcock Brown capital Fund owns Eircom, won a reprieve from its lenders, sending its shares up as much as 18 per cent yesterday.
Two-thirds of Babcock Brown’s 25-member bank consortium agreed to drop a clause which gave lenders the power to review terms of a A$2.8 billion corporate debt facility if Babcock’s market value fell below A$2.5 billion.
The company’s market capitalisation fell below that level earlier this month, sparking a major sell-off as investors feared creditors might invoke the review clause and force the firm to quickly repay the debt.
In return for dropping the review clause, Babcock Brown agreed to pre-pay some of the debt and pay a higher interest rate – a half percentage point more – on the three-year debt facility.
If fully drawn, the higher rate would cost Babcock Brown an extra A$10 million over the three years, chief financial officer Michael Larkin told a media briefing.
“I suppose this has taken away one uncertainty which was hanging over the share price,” said Peter Vann, head of investment research at Constellation Capital Management.
But Mr Larkin added it was still unclear what debt-to-equity ratio Babcock was targeting over the next year.
Babcock shares rose 18 per cent after chief executive Phil Green said he would appoint advisers to help with assets sales to cut debt. The global credit seizure has brought into question his strategy of borrowing to buy utilities such as wind farms and bundling them into funds. The company’s market value of A$2.48 billion is still a far cry from its A$11.6 billion value in June 2007.
“This may instill a bit more confidence in the company,” said Seán Fenton, who manages the equivalent of $700 million at Tribeca Investment Partners in Sydney. “They’re still operating in an environment of tight credit, soaring inflation and depressed asset prices. Babcock needs to get some good assets sales underway and repay debt.”
Babcock, which manages about A$72 billion in global infrastructure assets, said it would pre-pay about A$400 million of its debt using the proceeds from previously announced asset sales once the transactions are closed.
The firm is the latest Australian company to fall victim to the global credit crunch, following the high profile collapse of Centro Properties Group and Allo Finance Group Ltd.
“While Babcock Brown’s reputation has been damaged by the significant share price decline, this move by the banking syndicate will help restore some confidence,” Citigroup said in a note to clients. Citigroup estimated the additional interest burden at A$14 million.
“But the ultimate financial impact of the reputational damage created over recent months is more difficult to estimate,” the report added.
Despite the recent events, Babcock Brown said its underlying business remained on course and the company was still expecting A$750 million in group profit for 2008.
Babcock, like bigger rival Macquarie Group, buys assets such as ports and power utilities and then bundles them into listed and unlisted funds from which it earns management fees.
Worries about its debt levels also raised questions about the viability of its business model, which is highly dependent on easy access to capital.
