Monday, February 09, 2009

Babcock & Brown Will Be Broken up

The creditors of Bluewater Wind's grandparent company, Babcock & Brown, have decided the firm is worth less than the sum of its pieces, which means Bluewater could be up for sale.
The news did not come as a surprise. A month ago, I wrote this headline:
Babcock & Brown Could Be Broken Up
As the News Journal reports today, Babcock & Brown (BNB), which owns B&B Infrastructure (BBI), which in turn owns Bluewater Wind, is being broken up by its creditors.
As I have written before, the fault is with BNB's excessive leverage, not with its assets:
BNB did not collapse because its assets are no longer productive, though some like ports and aircraft leases have seen their revenues drop. (Its energy assets are still pumping out as much electricity as before the firm’s stock plunged.) The firm collapsed because of its over-leveraged business model. BNB is structured like a leveraged buyout, only without the buyout. The firm’s structure worked when capital was cheap and plentiful, but collapsed when the era of easy money came to an end.
As for what I thought might happen:
It’s clear that BNB’s once formidable empire will be broken up, which means that Bluewater Wind may well have a new parent company sometime this year. The original plan was for BBI to own Bluewater during the construction of the offshore wind power project, which would be handed over to BBW after the wind farm became operational. As I have said before, Babcock & Brown is in trouble because of its business model, and not because of any trouble with the wind power project here in Delaware. The power purchase agreement with its guaranteed revenue stream is itself an asset, and will still be attractive to investors once it is separated from the BNB mess.
I will be going on the air with Allan Loudell of WDEL today at 12:15 to discuss what this means for Bluewater Wind and Delaware.


Anonymous Anonymous said...

While the guaranteed revenue stream is an attractive feature of the Bluewater project, during these worsening economic times obtaining financing for a large alternative energy project will be exceedingly difficult. With energy prices stagnating due to currently weak demand, I fear that investor interest in wind, solar, and other alternative energy projects will also be weak.

Things look pretty shaky right now, and if we are indeed entering a prolonged depression, then I think it's highly that the plug is going to be pulled on all proposed offshore wind projects in the US, until (or if) the economy turns around.

Sadly, it's beginning to look like Delmarva wasted a huge amount of effort in trying to kill the Bluewater project, as it is likely to die a slow natural death all on its own. Now if some of that bailout money could be diverted to wind projects, it might be a whole different ball game. Time will soon tell.

9:49 AM, February 09, 2009  
Anonymous Anonymous said...

The firm collapsed because of its over-leveraged business model. BNB is structured like a leveraged buyout, only without the buyout.
I wonder what Alan Levine's pocketbook would have looked like should the timing of his hyped-, hiked- leverage of Happy Harry's had been delayed.
Just sayin'
Maybe pharma retail is on more firm ground than other corporate battlefields.

9:58 AM, February 09, 2009  
Blogger Tom Noyes said...

Sagging energy prices can be attributed to the recession, not to any long term trends. The long term outlook still points to Bluewater's revenue stream as a good deal for investors.

The good news is that Bluewater has some time to pull in new financing.

Walgreens, which bought Happy Harry's, seems to have a more conventional financial structure and balance sheet compared to Babcock & Brown.

8:40 AM, February 10, 2009  
Anonymous Anonymous said...

Tom -

I too have no doubt that, over the long term, energy prices have nowhere to go but up. However, investors and financial types in general can be a very fickle lot, and have a tendency to drop the latest 'next great thing' the instant some bad news takes the bloom off it. I think that is what's happening right now across the board with energy, both fossil fuel and renewables.

Unfortunately, we are all going to pay a price for this short-sightedness. Former energy secretary Jame Schlessinger once said something to the effect that US energy policy oscillates between complacency and panic. So true. We now appear to be entering the complacency mode, with panic sure to follow once the economy comes back and demand again starts to rise. Then everyone will again be clamoring to invest in energy.

9:39 AM, February 10, 2009  

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