Tip of the Babcock iceberg

The New Zealanders today had the honour of putting the publicly listed Babcock & Brown out of its misery, but it will make no difference to the banks that effectively control what is left of the former infrastructure high flyer.

The banks have security over all the assets of the unlisted Babcock & Brown International Pty Ltd (BBIPL), which was the operating company through which all activities were undertaken and financed.

The listed Babcock & Brown Ltd controls 99.78 per cent of BBIPL, but under a subordinated guarantee it is excluded from any right to the assets of BBIPL as long as BBIPL owes money to the banks.

BBIPL is in the midst of an asset sale program that will go on for years in order to repay at least $1.1 billion in debt to 25 banks. Repayment of a further $2 billion has been deferred until 2018.

Australia's banks have already written down their collective $800 million exposure to BBIPL so today's appointment of Deloitte's as voluntary administrators will have no impact on their loan loss provisions.

The 4,500 New Zealander holders of Babcock & Brown today faced a choice between accepting $18,000 for the $180 million face value of their subordinated notes or voting against the restructuring and effectively putting Babcock & Brown under.

It seems appropriate that a former shooting star of the Australian leveraged finance world should crash to earth over the horizon.

The rejection of the noteholder restructuring plan caused the Babcock dominoes to start falling.

Rejection of the restructuring meant that as of Monday Babcock & Brown would be liable to pay penalty interest on the New Zealand notes. Payment of penalty interest would have been a breach of the subordinated guarantee with BBIPL.

The prospect of a breach of the BBIPL guarantee tipped another domino over in the boardroom of Babcock & Brown where directors Elizabeth Nosworthy, Michael Larkin, Pat Handley and Ian Martin immediately called in the administrators.

That tipped over another domino, which was the cancellation of this afternoon's meeting of Australian holders of subordinated notes with a face value of $415 million.

That meeting was cancelled, which removed any opportunity for the 3,500 Australian noteholders to cast their votes and have one last grilling of Babcock & Brown directors.

The meeting was scheduled for 4.30pm today.

Proxy voting numbers released to the ASX today revealed that a majority of Australian noteholders had been rational and supported the restructuring proposal. But a 75 per cent majority of those voting was required, so the proposal to get 0.01 cents in the dollar would have been defeated.

Deloitte partners David Lombe and Simon Cathro have got the insolvency world's short straw. Unlike their rivals at McGrathNicol and Ferrier Hodgson, who have settled in for large and lucrative multi-year administrations and receiverships, the Deloitte partners have inherited a dog without a bone.

They are in charge of a company with barely enough assets to pay for the statutory two creditors meetings.

It is believed Babcock & Brown has less than $2 million in cash in the bank. Its only other assets are some small shareholdings in some Babcock satellite vehicles.

Lombe and Cathro will probably seek legal advice to determine the validity of the subordinated guarantee between Babcock & Brown and BBIPL.

The administrators have eight days before they must hold a meeting to report to creditors on the findings of their preliminary investigations.

A second creditors meeting will have to be held 20 business days after the first one but given the complexity of the issues involved that meeting is likely to be postponed.

Meanwhile, the remaining staff of BBIPL, who used to hand out business cards saying they were from Babcock & Brown, will continue working for the banks on six levels of Chifley Tower in Sydney.