B&B in intensive care

A 28% ONE-DAY slump in Babcock & Brown shares has prompted banks providing finance of $2.8 billion to the investment company to call a meeting for Monday to decide whether they need to review its viability.

The shares dived $2.62 to $6.90, slicing Babcock's capitalisation by $850 million to $2.3 billion. Short selling by hedge funds was thought to have contributed to trading volume that was almost four times the norm for B&B.

With investor fears that Babcock may be the next high-profile sharemarket casualty, the Australian Securities Exchange has stepped up its monitoring of the company.

Under an agreement signed with Babcock's 25 banks, creditors have the right to request a review if the its value falls below $2.5 billion for more than four months.

As analysts questioned whether Babcock's business model was broken, the spotlight turned to Macquarie Bank, the architect of the so-called "Macquarie model" emulated by Babcock, whereby the company creates and manages separately listed investment funds.

Macquarie shares tumbled 6%, or $3.01, to $50.69. When asked if it had concerns for the long-term viability of its model and the success of its business, a Macquarie spokeswoman said, "we're not commenting on that".

Shares in Babcock have fallen 75% this year as investors steer away from heavily debt laden companies. Barclays Group last night rejected reports that it was one of the leading hedge funds to dump Babcock stock.

"While Barclays Group (not Barclays Global Investors) advised its shareholding in Babcock & Brown fell below 5%, it has been one of the smaller sellers. In fact, its shareholding has dipped from 5.13% of Babcock & Brown's capital three weeks ago to a present holding of 4.94%," it said in a statement.

Babcock and its satellites Babcock & Brown Power and Babcock & Brown Infrastructure all hit record lows during trade. BBI shares slid 13.5¢, or 14%, to 85.5¢ while BBP fell 40.5¢, or 31%, to 90¢ after resuming trade following a two-day trading halt.

BBP moved to assure investors that there was no problem with the $2.7 billion debt facility it announced last week, saying it was scheduled to be completed early next week. It said it did not expect the disruption experienced by the Varanus Island gas explosion in Western Australia to have a material impact on earnings.

Babcock chief executive Phil Green went into damage control last night, issuing a statement saying that the fall in Babcock's value below the $2.5 trigger level did not necessarily mean a review would be undertaken.

"Our lenders are more focused on fundamentals than the daily share price movements," he said.

A spokeswoman for Babcock said later that it was briefing the banks involved in the refinancing and they would use the information provided to "determine what market behaviour might be at play if any."

The Australian Securities and Investments Commission refused to comment on whether it also would investigate.

Sean Fenton, a portfolio manager at Tribeca Investment Partners, said the recent financial collapses of companies such as Allco Finance Group were fresh in the minds of rattled investors.

"While Babcock might not be in the exactly same position as Allco, MFS and the like, it has certainly lost investor confidence," he said. "I don't think it is necessarily terminal but it isn't good."

Mr Fenton said he disagreed with the views of some market commentators that the nosedive in the share price was due to short selling, saying the Babcock model needed to be looked at.

"They have a listed fund model that isn't working for them because they have had so much gearing in those vehicles, excessive debt and refinancing," he said.

"Yes the market is spooked. It is probably a fair suspicion that there may be hedge funds out there that want to trigger a review but that it is really hard to prove.

"At the end of the day they do have a lot of assets, which will help them."

Fat Prophets' head of Australasian research, Greg Canavan, said the credit crunch could claim another high-profile victim.

"I think it's a bad sign for that part of the market that relied on easy credit conditions - it's virtually saying those days are over," he said. "I think the large falls have probably triggered quite a few margin calls, which is a trigger for the further selling, and when you've got a lot of concern over a company's debt situation - and its satellites' debt situation - you're just not going to get any buyers in there, and that puts further pressure (on the price). The big risk is that something like a Babcock (going under) is going to flow through to the banks, who are going to have another round of bad debt provisions that are going to come through."