Under pressure from its creditors, troubled Australian investment group Babcock & Brown Ltd has agreed on a debt restructuring deal and a revised business plan which will force it to sell all its assets to repay debt, wiping out shareholders. However, this may not be enough to save it from being delisted by the stock exchange.

The group said on Friday that it will restructure existing debt facilities on a "pay if you can" basis, and plans to sell more assets over two to three years to raise cash. But it warned investors that under the plan, there would be no value left for its equity holders and no or negligible value for holders of its subordinated notes.

Babcock said it would not be able to resume paying interest on the subordinated notes, or to pay dividends on its shares. Under the terms of the notes, the company faces delisting if its shares remain suspended for 20 consecutive business days, it said, adding it was still considering its position regarding noteholders. Trading in Babcock's shares has been suspended since 8 January.

Chief executive officer Michael Larkin will lead the sale process and hand the proceeds to banks over the next two to three years. Under the new plan, the company will repay a short term facility of A$150 million by 30 September. It will also repay A$200 million of other debt by 31 December, A$250 million by 30 June 2010, A$250 million by 31 December 31 2010 and A$344 million by April 2011.

The remaining balance of approximately A$2.12 billion on the other corporate debt facilities will be repayable nine years and six months after the restructure date, or mid 2018, but only to the extent of realization of assets, it said. It has also restarted a redundancy programme which started in the second half of 2008.

Babcock's holdings "across all asset classes" will be sold, with all proceeds over the amount needed to continue operating the business used to reduce debt, the company said. The group, whose liabilities exceeded its assets at the end of last year, has been talking to banks about its plans to repay an additional short-term A$150 million lifeline granted in December.

Unsustainable business model
Babcock, an owner of property, ports and power stations around the world, becomes the biggest Australian casualty of the global credit crisis, topping a list that includes Allco Finance Group Ltd and Centro Properties Group. Like Centro, Babcock averted liquidation because falling asset prices and scarce buyers makes this an unattractive option for its lenders.

In November, Babcock put about half its assets up for sale, announced job cuts to bring staff levels down to 600 in 2010 from 1450, and outlined plans to focus entirely on its infrastructure business.

Once a $6.5 billion company, Babcock has seen its market value crumble to around $79 million after the global credit crunch sparked a crisis of confidence in business model, which relies heavily on debt for funding. It has debts of some A$3 billion ($2 billion), originally maturing by 2011. All of Australia's four major banks are lenders to Babcock, with Westpac Banking Corp.

Founded in 1977 by Jim Babcock, the company sold shares at A$5 apiece in an initial public offering in October 2004. The stock surged as Babcock, copying a business model pioneered by Macquarie Group Ltd, reaped fees from managing its 11 listed investment funds amid a five-year stock market boom. That unravelled as the global credit crisis pushed up debt costs and cut asset prices.

Jim Babcock stepped down as chairman in August and Phil Green quit as chief executive officer after the company posted a 24 per cent drop in half-year profit. New CEO Larkin then embarked on a programme of selling assets, firing workers and loosening ties to affiliate investment funds in an attempt to appease creditors.
"The business model was all about turnover of assets during a time of cheap credit, and quite a high amount of leverage," said Brett Le Mesurier, an analyst at Wilson HTM in Sydney. "The stock prospered in good times, but Babcock found out the good times don't always last."

"At least they got a result ... two to three years is enough time to provide a reasonable chance for assets to be sold in a manner which isn't totally value destructive," said Angus Gluskie, managing director and portfolio manager at White Funds Management.

According to Tim Morris, an analyst at Sydney-based investment advisory Wise-Owl.com, "There was too much greed and arrogance and not enough transparency. The core of the problem arose when they started repackaging assets, and the only people making money was themselves. When you start burning people, it's only a matter of time before the fire catches up with you."