Babcock Shares Freefall on Debt Worries

Shares in Australian investment firm Babcock & Brown plunged by a quarter Friday, taking losses to over 50 percent in two days, as concerns mounted about the company's debt and ability to raise funds.

The fall followed a tumble on Thursday that took the company's market capitalization below a level set by its lenders that would trigger a review its debt covenants, sparking concern Babcock may be the latest Australian victim of the global credit crunch.

While Babcock has said that reaching the review limit does not mean it would have to repay or speed up repayment of its around A$2.8 billion (US$2.6 billion) in debt, analysts said investors will be concerned about the future of the company.

"Babcock's business model depends on ready access to finance and if you are one of their banking syndicates now you certainly are not going to be thinking of advancing of any more money," said Tom Elliott, a fund manager with MM&E Capital. "For a finance house, suddenly all avenues of funding have largely been chopped off, which is bad for their business," he added.

Under its business model, Babcock buys infrastructure assets, such as ports and power plants, and bundles them into listed and unlisted funds to earn management fees. The model, also used by Macquarie Group, is heavily dependent on debt financing.

Babcock, whose initial public offer was sold at A$5.00 per share in October 2004, manages about A$72 billion in infrastructure and real estate assets across the world. In June 2007, Babcock was valued at A$11.6 billion, when the stock hit a life-high of A$34.78.

Its lenders had recently extended a A$2.8 billion facility in March to April 2011, but reserved a right to review the facility if the company's market capitalization fell below A$2.5 billion, or A$7.50 per share.

That level was reached on Thursday, triggering the review. If the market capitalization remains below A$2.5 billion at the end of the four-month review period, it's possible Babcock & Brown would have to repay the loan within 90 days.

Over the past few months, investors have sold shares in Allco Finance Group, Centro Properties Group and child care operator A.B.C. Learning Centres as they struggled to refinance their debts due to the credit crisis.

Shares in Babcock & Brown fell A$1.65, or 23.9 percent, to close at A$5.25. Macquarie shares fell 3 percent to A$49.17.

Babcock's share price collapse came as it announced a $7 billion deal to buy UK train leasing firm Angel Trains, as part of a consortium including Deutsche Bank, from Royal Bank of Scotland.

Angel Trains has more than 40 percent of the railway rolling stock leasing market in Britain and more than 5,300 vehicles across Europe. It was formed in 1994 from the privatization of British Rail.

The UK business is viewed as generating stable cashflow, and has attracted interest from banks and infrastructure investors.