All three former Babcock & Brown satellites still carry the stench of their former manager. That makes it an interesting space for the contrarian investor and we have, at various times, been invested in all three.When I told a former investment banking colleague that Prime Infrastructure was one of the largest positions in the Value Fund, he threatened to take his money out. ‘I wouldn’t touch anything associated with Babcock & Brown’, he told me.
He is not the lone ranger there. Changing their names – Babcock & Brown Infrastructure became Prime, Babcock & Brown Wind became Infigen Energy and Babcock & Brown Power became Alinta Energy Group – hasn’t removed the stench from the former Babcock & Brown satellites.
That makes it an interesting space. We’ve already done well out of our investment in Prime Infrastructure. The other two aren’t without their merits.
We started buying some Infigen Energy at 64 cents. At that price the market cap was less than $500m and the wind farm operator has some $200m of unencumbered cash. The structure is hideously complicated but $300m for the existing wind farms looks an attractive price even under some very pessimistic assumptions. Unfortunately the price shot up before we could establish a meaningful position and, at higher prices, you need to take a view on the long-term price of renewable energy certificates both here and in the US. I’m working hard on that, but it’s not an area I’m comfortable with yet.
We also have a small position (less than 1% bought for approximately $0.05 per security) in Alinta Energy Group (AEJ). When the banks are selling their debt for 70 cents in the dollar, which is where AEJ’s senior debt is changing hands at the moment, you can normally assume the equity is worth nothing. Indeed, that’s exactly what I’d value the equity in this business at, except for one little quirk. This fund owns a bunch of power stations and the old Alinta electricity retailing business in WA. Most of the assets are pledged to the debt holders as security. However, the Redbank Power Station and, as of December last year, about $40m of cash sit outside the entity which has borrowed all of the money. So, if the debtholders pull the pin, AEJ securityholders will hand over the keys but should be left with $40m plus one power station with its own limited recourse and long-term debt.
Given the rate at which AEJ has been appointing financial advisors (there are now three investment banks on the job), who knows how much of the $40m is left. But I do think there is some interesting optionality in this situation and, with GPG owning 19.9% of the securities, at least one owner will be making sure we don’t get trampled on.