Babcock & Brown (BNB) Technical Update

Submitted by Jim Thesiger on 13 June, 2008 - 13:26

Babcock & Brown (BNB) has a $25.00 share price target and a Neutral rating from Australian stockmarket analysts from Citi.

Babcock & Brown (BNB) Market cap review clause breached

Debt review trigger event has been breached:

BNB's market cap has fallen below $2.5b breaching the review clause on its senior debt facility. Given previous discussions with the company we understood that the market cap must stay below $2.5b for 120 consecutive days. Management today announced that this review clause is cured if its market cap exceeds $2.5b at the end of this 120 day period. Of importance bank approval is required for dividends.

Crisis of confidence and stop loss selling:

BNB's share price has suffered from a crisis of confidence following the BBP refinancing. Stop-loss selling & margin calls have been prevalent, while few investors have been prepared to buy given risks are beyond the company's control. Thus, we believe there is a high likelihood BNB's share price continues to fall.

What could BNB do?:

We believe BNB's Balance Sheet and liquidity position remain sound and we do not believe it is necessarily in the bank syndicate's best interest to force BNB's hand. Banks have recently supported/extended both AFG & CNP, while BNB's financial position is much stronger than either. We believe BNB could (1) ask the syndicate to waive the market cap clause (discussions are currently underway), (2) accelerate sell-down of assets such as its wind pipeline, (3) Corporate action (such as a MBO or break-up) can not be ruled out.

Moving from SOTP PT of $25 to a 0.9x NTA methodology of $6.80.

We have moved from an ongoing business valuation of $25 to a price target of $6.80 based on 0.9x NTA until this issue is clarified. Our rating is now Neutral.

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