Babcock & Brown’s capital comes from a combination of bank debt, subordinated equity and ordinary shares. I’ll run through each in turn.
The senior debt is comprised of a $2.35bn revolving line of credit, of which $1.92bn had been used at 31 December, and a US$200m facility, which was fully drawn at 31 December.
The annual report puts the margin on both facilities at 1.3%, but a recent announcement from Babcock regarding its lenders’ waiver of a right to review the facilities said the margin had increased 50 basis points to 200 basis points (2%). I’m not sure where the extra 20 came from but we’ll take them at their latest word.
It’s impossible to know what other conditions are attached to these facilities but they most likely include debt-to-equity and interest cover provisions.
|Facility||Amount as at
|Line of credit||$1.92bn||2.00%|
|US facility||US$200m ($205m)||2.00%|
|Aussie subordinated notes||$414m||2.20%|
|Kiwi subordinated notes||NZ$225m ($199m)||2.20%|
The subordinated debt comprises two subordinated notes listed on the Australian and New Zealand stock exchanges. There are 4.14m Australian securities on issue with a face value of $100 each and 225m New Zealand securities with a face value of NZ$1 each. Both facilities accrue interest at a margin of 2.2% over the relevant bank bill rate and are fully subordinated to the corporate facilities (if it all falls apart, the corporate facility providers get their money first).
They also both convert into shares at maturity. For the Aussie notes that’s in 2015 and for the Kiwi notes it’s 2016. Despite reset dates five years before maturity, the subordinated nature and conversion into equity makes this sort of financing relatively safe for shareholders. As a potential investment in their own right, both are trading at huge discounts to face value and we’ll include them in our valuation analysis.
Taking the non out of non-recourse
Before moving on to shares and options, it’s worth noting some of the other details regarding interest-bearing liabilities – some of the non-recourse debt is a little more recourse than management would have you believe. This is debt that relates to specific projects and the lenders can’t come after the rest of Babcock’s assets if disaster strikes. But the fine print shows that it doesn’t quite end there. Babcock has ‘given undertakings to inject equity into the project-specific entities in certain circumstances’ and it has also ‘given performance undertakings’. In other words, Babcock is going to share in the pain if something goes wrong.
Finally, at 31 December there were 294m ordinary shares on issue and 34m options. Of the latter, almost 23m are exercisable at $5 per share and the remainder at prices between $13.31 and $25.54 – so there’s the potential for some dilution.
It’s not a particularly complicated structure, but there is a substantial amount of debt in front of shareholders and a significant number of options on issue.
And that brings to a close nine days of preparation. Next up it’s time for the big one – trying to estimate what it’s worth. Given the uncertainty to date, I’m not feeling confident. But it will be an interesting exercise nonetheless.