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Babcock & Brown is dying as it lived: beyond its means. Few institutions embodied the “buy now, pay later” ethos quite like the Australian fund manager. For years it bought ports, property and power stations on credit, spun them off into heavily leveraged satellite funds, then booked big advisory and development fees, hoping that the assets would keep rising.
As debt markets dried up last autumn, so did its reasons for existing. Babcock tripped bank covenants on New Year’s eve; a week later it warned that its A$2.6bn in net assets would be wiped out by impairments. Subordinated debtholders in New Zealand, offered one-tenth of one cent in the dollar, would rather take the slim chance of recovering more through an administration. Deloitte, the corporate undertaker,took controlon Friday.
Babcock, founded in 1977, was forever in thrall to its lenders. While liquidity was free and easy, few seemed to care: total assets under management increased seven-fold between 2004 and 2007. But as the crunch became a crisis and the funds began to sag, the rate at which Babcock could offload these assets slowed. In April last year a presentation reconfirmed a full-year net profit forecast at least 15 per cent better than 2007. Only in the penultimate slide did investors see a long list of caveats on the wretched state of the markets.
This mascot of the bubble may also become a symbol of the aftermath. Many of the 25 banks in its syndicate of lead lenders have written down some A$3.9bn of Babcock loans to zero. While they were happy to pile in together when the going was good, they are now in opposition, fighting very hard for scraps. More messy workouts like this await. Meantime, what is left of Babcock – starved of funds to improve any of its assets – will leave a legacy in every unloved port or rusting pipeline. Si monumentum requiris, circumspice.
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