Firstly, Babcock isn’t broke yet, despite all the post mortems in the weekend press. The 30 June accounts still showed net assets of $2.6 billion and the locked in management fees on its funds – $138m in the past six months alone – could be the company’s salvation. Considering the current market capitalisation is only $850m, a lot can go wrong before those buying at today’s prices are out of pocket.
Even if they do go down, they can take some comfort in the fact that they won’t go down alone. Babcock’s meteoric rise wouldn’t have been possible without overly accommodating bankers and, if it implodes, the pain will spread far and wide.
Bankers looking no further than their next bonus have been falling over themselves to lend huge sums at ridiculously low margins to the whole infrastructure sector, and Australia’s retail banks have been front and centre.
Yes the assets are safe. Yes the cashflows are predictable. And yes the assets can go bust if you load them up with too much debt.
In fact, due to the limited recourse nature of most of the loans – the lenders have recourse to a specific asset but not the whole Babcock empire – it’s possible the banks lose their shirts while Babcock goes on to prosper. Were Babcock’s power assets in Australia to go belly up (something looking increasingly likely), the equity losses could be offset by profits from the sale of its European wind assets. Investing in small slivers of equity is a high risk high reward game. The banks’ margins – significantly less than one percent at the height of the boom – on the other hand, don’t compensate them for any losses at all.
Babcock has been playing Russian roulette, but much of it has been played with someone else’s money.