Exit Babcock(3)

Even if its satellite entities carry on, Babcock’s going into administration signals the firm’s official demise as a major force in infrastructure finance, writes Cezary Podkul.

Babcock & Brown’s decision to appoint voluntary administrators for its business didn’t change anything – but it confirmed much to the markets.

For competitors curious about the future of the once-mighty infrastructure financier, the main event was last month, when Babcock reached a restructuring agreement with its banking syndicate.

Its 25 lenders realised that Babcock was worth more to them alive than dead, so they put its main operating entity, Babcock & Brown International Pty Ltd (BBIPL), on life support while it sells its assets to pay back the A$3.2 billion (€1.6 billion; $2.1 billion) it owes them over the next several years.

Cezary Podkul

This avoided a fire sale, but it also meant that Babcock as we once knew it – the aggressive Aussie player that binged on debt and was able to compete head-to-head with the biggest names in the industry (perhaps the Bear Stearns of Australia?) – was no more. Instead, it had become, as one Australian commentator put it, “a boring asset disposal company”.

The administration doesn’t change that. Since BBIPL is on life support from the banks, the administrators can’t do much to interfere with the sale process agreed to last month. So Babcock will inevitably keep some employees on retainer to carry on disposing assets and to maximise sale proceeds.

The administration does, however, confirm to Babcock’s shareholders and subordinated bondholders that their investments are worthless. In that sense, the administration is in many ways the proverbial nail-in-the-coffin for the firm.

The outlook isn’t as dreary for its satellite funds – a collection of publicly traded affiliates housing infrastructure and other assets. Flawed as it was, Babcock’s structure provided its satellites an escape hatch in case the mother ship should ever go under.

Typically, the firm had three ties with its listed entities: an equity stake of 8 to 10 percent in their shares, long-term management and advisory agreements, and some level of debt between the two.

Babcock is free to sell its equity stake as it sees fit to repay its senior lenders. The management agreements can be sold back to the satellites to raise cash. And the satellites can do their own asset sales to pay back their loans to Babcock. Once all three are accomplished, the satellites are completely free of any affiliation with Babcock.

This is all easier said than done, but the processes are already well under way at many of the funds.

Another, more symbolic step will inevitably follow: the name change – and with it – the last reminders of a bygone era.