Thursday, June 12, 2008

Short people got no reason

They got little hands
And little eyes
And they walk around
Tellin' great big lies
They got little noses
And tiny little teeth
They wear platform shoes
On their nasty little feet

Well I don't want no Short People
Don't want no Short People
Don't want no Short People
Round here

-- "Short People" by Randy Newman


Sooner or later, most things make their way to Australia, which tends to put it in some kind of time warp. To truly understand that concept, go there and spend some time. Then go to New Zealand.

And so it is that the Lucky Country's Lucky Stock Market is now, only at long last, coming to grips and gripes with the demons that have terrorized the markets in New York, London, and (gasp) Shanghai. Nearly everywhere, so it seems, except, perhaps, the Gulf States. (And as an aside, the property market will suffer the same fate, too.)

The latest bugabear (perhaps related to the Koala Bear, but not to Guambats) to come out of the woodwork is Babcock & Brown, known as B&B, "Australia's second-largest securities firm".

It so happens that Guambat's favourite after-dinner tipple is a B&B (Benedictine and Brandy), which has become so old fashioned as to be hardly had these days. So it was with shock/horror that Guambat read the headlines over the net Down Under:
"B&B in freefall" and "B&B hammered".
Now, B&B (of the non-tipple variety) is small poTAYtoes/poTAHtoes by truly large market standards, but it is of no small import on the Australian finance scene, 'struth. So, this event has been a bit earth-moving for the Aussie market today.

And to prove the point that the Blokes (and a Sheila) from Oz do learn a thing or two from their O/S "peers", the cry has gone out that poor old B&B has been buggered by short people -- and don't mention the Business Model (the company "buys ports and tolls roads and bundles them into listed and unlisted funds").
Rumors also came out on Wednesday that Babcock & Brown was being short-sold by speculators

Sydney-based Babcock has been targeted by unidentified short sellers, spokeswoman Erica Borgelt said. "We believe the stock is being shorted, but we don't know by whom," Borgelt said. "Our business is carrying on as normal. We are none the wiser." [Fair dinkum; that's straight from the article.]
But, for Guambat and others, it all comes back to that old Black Magic Business Model and a little help from a Black Swan.

The Black Swan was the unlikely (?) explosion in its "satellite" natural gas facility, the ramifications of which were ineffectively hosed down with statements and news reports such as this:
It is believed the company's ["Western Australia's biggest natural gas retailer"] problems with the Apache explosion have been considered by its banking consortium and have not affected the pledge to loan $2.7 billion.

Instead of refinancing the full $3.1 billion, the company has announced asset sales to make up any shortfall. Babcock & Brown, which launched BBP and is one of its prime investors, has also offered to step in to make up any shortfall.

The power generation company will be hoping that its statement will reassure analysts who have raised concerns that a reduction in energy supplies to Alinta - the largest retailer of natural gas in Western Australia - could have a flow on effect to its earnings, which would then hit Babcock & Brown Power's distribution to investors this year.
But the Business Model was always there on the sexy catwalk, cloaked in alure alone, wearing nothing of old-fashioned values, as these two commentary/reports reveal:

B&B in freefall as woes mount by Stuart Washington
Babcock & Brown bore the brunt of investor uncertainty yesterday about the $2.7 billion refinancing of Babcock & Brown Power, which is due to emerge from a trading halt today.

The increasing gap between Babcock & Brown's carrying value and the current market value puts pressure on the company's directors to write down the value of their investments if conditions do not improve. But this depends on whether they regard the assets as "impaired", or whether they think they will rebound.

Sources within Babcock & Brown said much of the unit price volatility was based on refinancing issues, not on asset quality, and there was confidence that asset sales from the funds would prove the value of the underlying assets.

The slump in infrastructure funds has occurred as investors shun highly-geared structures.

Babcock's thin lifeline by Michael West
A financial engineer, Babcock relies on market confidence to gear up, buy assets, revalue and repackage them, and spin them off.

The model is busted.

This fund model has already claimed the scalps of Centro, Allco, Rubicon and MFS, and now Babcock is perilously close to the edge.

What the whole party has done, however, is enrich a handful of top executives and their hangers-on at the expense of thousands of small investors who have collectively dusted billions.

Much of the executive pay was ripped out of capital, upfront, when the deals were struck rather than when the cash flow came through.

Their first concern is the structure and the debt in the mothership. Can the cash flows from underlying operations fund the repayment of the loans? It would appear to be line ball.

There is more than $50 billion in debt across the Babcock empire of listed and unlisted satellites.

The unlisted stuff remains the subject of conjecture.

The maze of guarantees and cross-guarantees, the loans between various vehicles, the management agreements and the legal minutiae of the entire structure will have to be evaluated.

Today, Babcock and Brown became a political issue. It will survive for some time at least and there will be trading opportunities for the savvy and the foolhardy. It could recover.

You can bet its financiers will pull out every stop to restructure and recapitalise, for this one is almost too big to fail.

Not only does Babcock control a host of essential services in energy and transport but both the mothership and its satellite stocks are owned by hundreds of thousands of small investors.

Many of these are elderly investors who acquired the stocks for the handsome yield.

Pity it was a manufactured yield in most cases, paid that is from capital rather than cash flow.

The small investors, and indeed the super funds themselves, were sucked in by the lure of a fancy yield of 7% or so: great value it appeared for investing in a solid infrastructure play.

Yet the reality was quite different. These were always high-risk propositions because of their sheer leverage. Some of the satellite yields are now up to 25%. These are either first-rate bargains or cum-writedowns.

When the present mayhem in the financial engineers is past and they are either dead or recapitalised and restructured the Macquarie-inspired infrastructure fund model, which allows distributions to be paid out of capital from a trust, will likely be deemed a policy disaster. The accountants, as is their wont, will duck for cover.

2 Comments:

Anonymous little john said...

ya know...
no one actually says poTAHto

18 June 2008 12:12:00 pm GMT+10  
Blogger Davo said...

it's a "spud" .. saves arguments.

22 June 2008 10:46:00 pm GMT+10  

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