How Babcock kept its rating

When Babcock & Brown chief executive Michael Larkin finished his first press conference yesterday he rushed out of the room to update ratings agency Standard & Poor's about the company's sudden change in direction.

Following that phone call from Larkin, S&P reaffirmed the BB credit rating with stable outlook for Babcock & Brown International Pty Ltd (BBPIL) which carries the group's $2.8 billion corporate facility.

Larkin's briefing for S&P contained few surprises for the ratings agency because as chief financial officer he had kept them in the loop about the prospect of management changes and plans for significant debt reduction.

The agency had been kept informed about Babcock & Brown's change of direction and about how serious the company was about reducing its debt and keeping its bankers happy.

In hindsight, the $2.8 billion refinancing of Babcock & Brown's corporate facility in July can now be seen for what it really was: a bridging loan to get the company through a period of asset sales.

Larkin wants to keep the banking syndicate on side and in order to do that he has to sell about $2 billion of assets in the headstock and ensure that Babcock & Brown Power (BBP) sells enough assets to repay a $380 million loan from Babcock & Brown.

He also has the much harder task of restoring confidence in the various listed funds and avoid a contagion effect from the collapse in their share prices.

BBP, which has sold three assets this year but still has about $3.2 billion in net debt, is likely to proceed with further asset sales before the end of the year. There is speculation the Redbank power station will be sold.

S&P made it clear in its latest BBPIL press release that the BBPIL credit rating may be lowered if the exposure to BBP is not reduced as expected. Another threat to the rating would be the failure of the headstock to sell wind assets as expected.

A lower credit rating would mean a higher cost of funds for Babcock & Brown, but that is a moot point as the group is in shrinkage mode.

One view of Babcock & Brown's ability to pay its debt is the performance of its $414 million in subordinated notes listed on the ASX. They have a face value of $100 but are trading at $38 which gives a yield of 26 per cent. Another $179 million are trading on the New Zealand Stock Exchange at $NZ55.