Thursday, December 04, 2008

Financial Troubles at Babcock & Brown

What effect might Babcock & Brown's financial troubles have on Bluewater Wind's plans to build an offshore wind farm here in Delaware? Babcock & Brown, which you might call the grandparent company of Bluewater Wind, got a two month reprieve from its creditors today. Trading on its shares, which had been suspended pending an agreement, resumed. The firm climbed all the way up to 39 cents on the Australian Stock Exchange or ASX.
Bloomberg reports that
new short term financing has been tendered in anticipation of restructuring:
Babcock has been negotiating for months with its main bankers over some of the covenants attached to about A$3 billion ($1.94 billion) in debt maturing by 2011, but the situation became critical last month when a smaller creditor demanded repayment. Thursday's agreement included the suspension of all financial covenants under Babcock's two existing corporate facilities. It also included a A$150 million facility to meet Babcock's immediate funding needs, due for repayment on Dec. 31 next year. It will suspend dividends until the new facility is paid off. Babcock said it would work with its banks towards a long-term capital restructure, including a possible debt-for-equity swap.
By the way, I can't help but notice that B&B managed to secure this short term financing without a government bailout. But I digress.
Tuesday, I incorrectly said to Allan Loudell on WDEL that Bluewater Wind is owned by B&B Wind Partners, which is separately listed on the ASX, and is doing better that its corporate parent. I subsequently learned that B&B Wind is not expected to take possession of the Bluewater project until it becomes operational. The construction of the Delaware wind farm is being handled by
B&B Infrastructure, which is also separately listed on the ASX. Once the project is built, it would be transferred to B&B Wind, providing the corporate structure remains as it now stands, which is questionable.
B&B Infrastructure is not as strong as B&B Wind, and closed today at 9.8 cents on the ASX. But the company is still financing and building projects despite its own credit squeeze and
a recent downgrade from Moody's to B1/B2, which is still investment grade:
BBI has cash requirements in the next 3 months, without committed available facilities. These include $100 million debt due in February 2009 at the BBI corporate level. In addition, Moody's understands that an additional amount of $157 million BBI is payable in relation to the remaining minority interest in WestNet Rail ($66 million mezzanine debt at Babcock & Brown WA Rail Trust and $91 million in equity at BBI Rail Holdings Pty Ltd). These $157 million payments are not obligations at the BBI parent Corporate level.
The ratings are on review with direction uncertain. Moody's considers that BBI's fundamental financial profile - absent the current liquidity pressure - continues to perform, with ample interest service coverage, and the key driver for the current low ratings is the very challenging liquidity position. Accordingly, to the extent that BBI resolves these liquidity challenges, and establishes a sustainable liquidity platform, the ratings could be raised to mid/high Ba range.
As a construction company, B&B Infrastructure depends on credit to stay in business. The company has just completed a project in South Dakota and is building a 3,000 MW wind farm in Manitoba, Canada. B&B Wind Partners is in the process of untangling itself from B&B's complex set of relationships. B&B owns controlling shares in twelve separately listed funds. The parent provides financing and management services, for which it assesses management fees. B&B Wind has just executed a new agreement with B&B which substantially alters its governance and financing:
On 21 November 2008, agreement was reached with Babcock & Brown on a number of issues. The changes agreed specifically relate to:
• the composition of the BBW Boards, so that the Boards include an independent chairman, three independent Directors, one senior B&B executive and the CEO of BBW.
• The dedicated BBW staff are now employed by the Management Company
• A reduction in the base fee with additional performance hurdles required for the payment of any incentive fee
• Furthermore, BBW is no longer under the obligation to use Babcock & Brown’s financial advisory services for related party matters.
A further proposal would effectively sever the relationship and possibly lead to a name change:
The proposal seeks to terminate the Management Agreements and fully internalise the management function; as well as to acquire certain assets from Babcock & Brown.
B&B Wind’s actions could signal further changes in the B&B empire. The business model of high leverage, financial engineering and stiff management fees back to the parent company seems outdated in today's financial environment.
In the midst of these financial troubles, there is one asset that is not impaired: the power purchase agreement (PPA) between Bluewater and Delmarva Power. The PPA has an asset value independent of the holder of the contract. With a guaranteed revenue stream, someone will want to build the wind farm if B&B is unable to raise the capital.
I have not seen any sign that B&B’s financial woes have slowed down Bluewater Wind. Right now, Bluewater is working on the logistics of the project, which are formidable. Large components will need to be brought to Delaware, assembled and delivered to the site eleven miles from Delaware’s beaches. Bluewater has not yet reached the point at which it will need the heavy capital required to build the project.

The troubles with B&B are inherent in its own business model, and do not reflect the economic value of the wind power project here in Delaware. As for whether B&B’s financial problems affect Bluewater’s ability to build the wind farm, stay tuned.


Anonymous Anonymous said...

Excellent rundown. Thanks for digging into to this and providing links....

2:32 PM, December 04, 2008  
Blogger Delaware Watch said...

All this gives me the jitters about the project. Maybe a federal investment in the project will be in order.

12:41 AM, December 05, 2008  
Anonymous Anonymous said...

I'm thinking there will be no federal money left over after all the bailouts. We need to make this work commercially, so it grows on its own.

Perhaps renewable investment tax credits could help, but.. if built, as we proved last year, it is a real money maker for its investors.

4:37 AM, December 05, 2008  
Blogger Tom Noyes said...

Advocate for wind power might feel a little reluctant to point out troubles at the company backing the project. But Babcock & Brown's troubles have nothing to do with the economics of wind power.

B&B owns lots of productive assets that could be spun off if the company needs to lighten its balance sheet. Bluewater could end up being one of them.

The renewable energy production tax credit was renewed in the fall for a year. I don't have any doubt that it will be renewed once again, and for a longer term, in 2009.

7:55 AM, December 05, 2008  
Anonymous Anonymous said...

The deal should embrace a more regional approach, keep the manufacturing promise for DE jobs and expand for profit to throughout the Mid-Atlantic.
And there definately be federal backing to this project in one or another form. Just extending the tax credits will be a start and there is an obvious committment from Obama to assist just this kind of direction in alternative energy and sustainable energy sources.
It is frustrating to have an election breaking up the momentum of this effort in terms of Dover's decision-making.

10:23 AM, December 08, 2008  

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