Babcock plunges further

Babcock & Brown, Australia's second-largest investment bank, extended yesterday's share plunge, falling as much as 32%. The stock has lost about $7 billion in value this year, about half of it this week.

Investors accelerated their sell-down of Sydney-based Babcock & Brown shares after its energy infrastructure fund Babcock & Brown Power said last week's explosion at Varanus Island gas field in West Australia would dent its earnings into next year.

The disclosure unleashed a torrent of sell orders on the stock, which dropped about 28% yesterday, falling below the $7.50 share price that may trigger a review by banks of the company's credit.

''Investors are concerned the debt review will be enforced,'' said Tim Morris of stock broker WiseOwl.com, which has had a 'sell' rating on the stock since November. Babcock & Brown will then have to seek permission to pay out dividends. ''The main concern is if it's enforced then dividend payments will come under threat.''

That $7.50 level was easily pierced yesterday, with shares ending the day at $6.90. The stock sank as low as $4.70 today, before rebounding to close at $5.25, still 24% lower for the day. Nearly a year ago to the day the stock was trading at an all-time high of $34.63.

The company's shares are down 80% this year, wiping off about $7 billion in value.

Bigger rival Macquarie Group, which operates a similar funding model, has also been hit by investor concerns about its prospects. The shares are off about 36% this year, slashing its market value by about $7.5 billion.

Macquarie shares today slumped as much as 7.8% to $46.75, and closed down 3%, or $1.52, at $49.17.

On the rails

Even as the company's shares took a hammering, Babcock & Brown is buying up assets.

The company said it would join AMP and Deutsche Bank to buy Angel Trains in the UK from Royal Bank of Scotland for about $7.5 billion, adding some 26,000 rail cars to its operations.

The purchase, made through the Babcock & Brown European Infrastructure Fund, already has its financing secured. The deal will leave Babcock with stakes in more than 4.4 billion pounds ($9.2 billion) in rail assets worldwide, the company said in a statement to the Australian Stock Exchange.

Downgrade warnings

Shares of Babcock & Brown tumbled further after a credit ratings agency put the debt of unit Babcock & Brown International on negative watch for a possible downgrade.



UBS and Merrill Lynch analysts also cut their recommendations for Babcock & Brown stock to 'neutral' from 'buy' in the wake of the sell-off that has forced the company into an emergency meeting with its creditors on Monday.

Ratings service Standard & Poor's placed debt of unit Babcock & Brown International debt on negative watch. The ratings agency moved its BBB/A-3 rating on Babcock & Brown International's debt to ''credit watch with negative implications'' citing the banks' review of parent Babcock & Brown's $2.8 billion of debt.

Losses mount

Other units also plummeted. Babcock & Brown Infrastructure lost as much as 27% to 62.5 cents and closed 12% lower at 75 cents.

Babcock & Brown Capital fell 14%, or 51 cents, to $3.05, while Babcock & Brown Japan gave up 8.1%, or 8 cents, to close at 90.5 cents.

Babcock & Brown Power lost as much as 40% to 54 cents, before paring the losses to close 21%, or 19 cents, lower at 71 cents. The shares sank 41% yesterday.

The unit is at the centre of the sell-off of Babcock companies after it was forced to turn to the Babcock & Brown parent to make up for a debt short-fall, and its operations were affected by disruptions to gas supplies in Western Australia.

Standard & Poor's credit analyst Sharad Jain said in a statement that Babcock & Brown's debt was likely to be downgraded further "by one or more notches" after a review by creditors.

Challenge to business model

Babcock & Brown's high-level of debt and costly fees paid to management have increased investor wariness of its listed fund business model.

Bank chief Phil Green defended the business model weeks ago at the annual meeting. The company had forecast $750 million in after-tax earnings in calendar year 2008, although media reports put its year-to-date losses at $330 million.

Investor worries about Babcock & Brown's business model were initially sparked by the credit crunch that began in the US last August, raising the cost of debt globally.

Modeled on the structures pioneered by Macquarie Group, Babcock & Brown's dozen listed funds took stakes in infrastructure and real estate projects around the world.

The model mostly relied on cheap debt to fund acquisitions of assets expected to increase in value. Earnings at the parent company and related funds benefited from fees paid between various units.


Since last August, lenders have demanded higher returns on their funds as their perceived risk of defaults has risen.

Banks have also taken a more conservative view of asset values, particularly as the likelihood of slower economic growth pares future returns.

Macquarie less worry

The questions dogging Babcock and Brown are also being asked of Macquarie Group, the pioneer of the externally managed fund model.

WiseOwl's Mr Morris said Macquarie, with a debt-to-equity level of about double Babcock's level, is a lot larger. That said, he is confident Macquarie's size is one reason it won't suffer the share rout now hitting Babcock.

''Macquarie's larger size will give them more clout when dealing with their lenders. They have a stronger market position if they run into any similar troubles.''

Central banks have become averse to huge write-downs at investment banks, as the US Federal Reserve proved when it orchestrated the orderly disposal of one-time Wall Street investment giant Bear Steans in March.

Mr Morris also said Macquarie businesses outside of investment banking would help it generate cash, such as its broking, mergers and acqusitions and corporate advisory divisions.