B&B: Australia’s 2nd largest investment bank is bankrupt

The goings on down under are not getting that much play in the press outside of Oz. But, Babcock & Brown, Australia’s second-largest investment bank has just gone under.

The corporate undertakers were finally called in on Babcock & Brown yesterday after noteholders in New Zealand voted against a proposal that would have stripped back their debt’s privileges and offered little in return.

But the real shock may still be about to hit. The administrators, Deloittes’ David Lombe and Simon Cathro, have, in effect, taken over a corporate shell while the assets of the group remain out of reach in a Babcock subsidiary, Babcock & Brown International Pty Ltd.

Babcock’s only real connection to BBIPL is its 99.7 per cent shareholding, now worthless, and the $600 million from Babcock noteholders which was lent to BBIPL.

The loan is also, in effect, worthless because it is “subordinated” to the $3.2 billion debt from BBIPL’s banks, which is already swamping its deflating asset values.

Mr Lombe said yesterday that the listed Babcock company now in administration had “very few assets and a small amount of cash”. He said the administrators would be looking into what rights Babcock had in terms of recoverable assets. “That will involve a substantial investigation,” he said.

Babcock’s board and management released a statement to the market yesterday saying they “deeply regret the loss of subordinated note and shareholder value that has occurred and acknowledge the financial hardship this has caused”.

The board said it was disappointed the restructure of the notes was not achieved and stuck by its claim that that would have produced a better result “for all investors in the company’s securities”.

The outcome for noteholders should not be a surprise as they were warned of the meagre prospects should Babcock collapse.

This comes as a surprise to no one in Australia as the newspapers there have chronicled the problems at B&B for months now. The real question now is Macquarie.

As evidence mounts that Australia is not going to escape this global recession, more and more problems are popping up in Australian finance and lending, particularly in the residential property sector. Macquarie would be well-advised to raise capital sooner than later. These are developments to watch.

Sources
Investors send B&B to corporate graveyard – Sydney Morning Herald
Banks will take control of B&B – Sydney Morning Herald
Macquarie reassures on capital strength – FT Alphaville
Macquarie Group comments on market speculation – Macquarie website
Babcock & Brown – FT Lex