Babcock & Brown de-gears to appease its bankers

A PROMISE to unwind gearing and undertake a full review of operations might be sufficient to let Babcock & Brown off the hook with its bankers.

It is now looking as if the beleaguered company might have done enough to prevent a formal review being called on its $2.8 billion corporate facility from its bankers.

A decision on whether the syndicate of 25 banks initiates a formal review, prompted after Babcock's market capitalisation fell through the facility's $2.5 billion value trigger, is expected within the next two weeks. But it is now looking more likely that this process could be expedited, with an announcement made possibly this week.

Expectations are building that Babcock will avoid a review, most likely because the banks have been reassured by Babcock that it is committed to a progressive de-gearing process and its plans to undertake an independent analysis of how its future growth strategy might be refined to take account of the current market conditions. The banks are also likely to keep a watching brief on the company.

Babcock's corporate gearing level is now sitting at about 50 per cent. That will be "progressively" de-geared, possibly to about 40 per cent.

Future deals are likely to have a greater emphasis on third party capital arrangements, such as the joint acquisition of British freight company Angel Trains last week. That means Babcock will rely less on its own balance sheet to fund future acquisitions.

It is understood that assets on the Babcock balance sheet -- predominantly wind farm assets and some infrastructure assets -- might also be sold.

Babcock is this week expected to appoint external investment banks to begin a strategic review. The review is expected to look at the positioning of the group and strategic alternatives but it is believed Babcock is unlikely to privatise any of its listed funds.

Some of the listed funds, such as Babcock & Brown Power, have also flagged their intention to de-gear, through asset sales.

A sale process is already under way for numerous wind farms -- mostly in Europe -- and power stations which could be worth $4 billion.

Last Monday, Babcock chief Phil Green and his senior lieutenants -- chief financial officer Michael Larkin and capital markets boss Trevor Loewensohn -- made a two-hour presentation to its bankers, which was "reasonably well" received.

The trio's key message was that Babcock was currently in much the same position as it had been less than two months ago, when the banks completed due diligence and signed off on the corporate facility.

Babcock's shares have taken a beating in the past couple of weeks and since the start of June have lost about half their value, amid concerns about the $46 billion in debt across Babcock's investment funds and doubts about its business model amid the global liquidity crisis.

Such is the unease around Babcock that one trader said on online trader forum HotCopper last week: "If the 'business model is flawed' we all should be shorting Macquarie."

Babcock & Brown stock closed 28c weaker on Friday at $6.42.