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Babcock + Brown's fall « Previous | |Next »
August 21, 2008

So the global credit crunch has seen another Australian company hit the wall. This time it is the fund manager plus investment bank Babcock and Brown, who ride to fame and fortune on the back of cheap. Now they find that debt ($50 billion across the separate entities) is expensive and their asset value of their satellite companies are falling. So is their share price----Babcock and Brown's own share price has fallen by 90% this year.

Babcock's strategy was to buy more and more assets at top dollar using ever larger chunks of equity and deb, then sell them to investors at a premium. This brought big fees through the door, but like Allco Finance Group and Centro Properties, it has been hit hard by the crunch in global credit marrkets. Michael West in The Age says:

Babcock exploited public market money to forge a quickfire empire. We all own shares in Babcock satellites via the super funds. That was the point. Babcock simply mimicked Macquarie, rolling out stapled securities because trusts, as opposed to companies, are permitted to pay distributions out of capital _ that is, the money your investors have just given you, or debt you have just raised from the banks using the money which stockmarket investors have just given you.

The writedowns have begun, corporate finance has been axed, the dividend is gone, 400 staff sacked and a fire sale of assets is now on. It looks like a salvage operation to me. Will they be able to retain key staff? Or attract new investors?

They need to reduce debt and restore value to the ailing satellites---- such as Babcock and Brown Power--- whilst they are at the mercy of the market. So where were the regulators? Why weren't the contentious management agreements-----the 25 year management contracts that prevent Babcock and Brown from being sacked disclosed?

| Posted by Gary Sauer-Thompson at 9:15 PM | | Comments (1)


It seems to me that Babcock & Brown's business model (like Macquarie Bank's) is perilously close to a Ponzi scheme, so it's hard to have too much sympathy for the principals of the company or any investors who've been caught (although it seesm most of the serious money left about 6 months ago). I agree the regulators should have been looking hard at them a while ago, though.