ALI MOORE: Last Wednesday Babcock and Brown issued a statement saying your exposeure to the subprime mortgage market in the US is insignificant. Since then, your shares have lost more ground, why do you think investors are selling?
PHIL GREEN: Look, I’m sure some of our investors are leveraged and perhaps for their own reasons in terms of their risk management they’ve sold. In terms of our fundamental business we’re not an investment bank as such, we don’t deal in securities, we don’t warehouse debt, we basically invest in hard assets such as real state, energy assets, wind farms and, you know, we buy these, we develop them. They’re cash flow producing hard assets but obviously we’re seen by the market as an investment bank and I suppose tarred with the same brush.
ALI MOORE: Well, let’s look at the broader picture, what does the repricing of risk mean for your business model?
PHIL GREEN: In terms of, you know, our core business obviously we lock in our risk margins over the life of assets so for the most part, and particularly for our existing funds, it doesn’t mean anything in terms of their current distribution capability or even future distribution capability on their current portfolios.
In terms of future acquisitions obviously it has to be taken into account in pricing those acquisitions. From our point of view in the assets that we’re dealing in, while we do believe there will be some adjustment, we don’t believe over the medium term-that that’s going to be significant. We don’t see ourselves, notwithstanding the market may perceive it as being a significant beneficiary of the recent higher leverage and light covenant-type transaction.
ALI MOORE: You say you don’t think there’s going to be a significant impact in the medium-term but isn’t the biggest risk that the deals slow down, assets are more expensive, you have to hold them on your balance sheet for longer and you’re not recycling your capital as fast as you have been doing?
PHIL GREEN: If you actually focus on what has delivered our earnings growth, it hasn’t been an increase in the profit made from recycling assets that we’ve bought in the market place. Our growth in earnings has come from increase in assets under management and the development of assets where we build those assets ourselves and then deliver them into our funds, our funds and asset management platform. We believe we’re very well positioned for a correction in the market in our core business activity.
ALI MOORE: So, do you think though there will be a slowdown in deals inevitably because of what’s happening in the US and the repricing of risk?
PHIL GREEN: Look, I think there will definitely be a slow down in the public to private arena of large public takeovers. But do I think governments will stop doing PPP projects, do I think the energy sector and the demand for electricity globally will slow significantly? I don’t think anybody believes, at this point in time, that the impact of sub-prime mortgages is going to have a significant impact on global growth. Yes, the market will slow down a bit, but we believe that we’re well positioned for that.
ALI MOORE: You’re selling the message here that you’re well placed to deal with any issues and that you’re not directly affected but this is going to change the way things have been done, isn’t it? Cost of capital is going to go up?
PHIL GREEN: It will change the availability of leverage to, back to the market that existed and has existed for us for most of our corporate life. The reality is we have not been the beneficiaries, we don’t borrow at nine times EBITDA. We don’t have any assets that are leveraged to that sort of level. Even six and seven is a stretch for us. So the world, I think, has changed, but the reality is that Babcock and Brown doesn’t operate in that space, notwithstanding the market perception.
ALI MOORE: How much further do you think the fallout from the sub-prime market has to run?
PHIL GREEN: I think the sub-prime market itself, I don’t think is the issue in terms of fallout. I think the only issue is the extent to which the structured securitisation market is thrown into disarray for a lengthy period of time so that the method by which banks have distributed debt dries up and accordingly we go back to for a period of time, a market where the bank’s own balance sheets are the basis for lending, for the lending criteria and their ability to take that debt on balance sheet and subsequently syndicate it in a more traditional way. If that is the situation, then clearly the volume of transactions that has occurred over the last three years is unsustainable.
ALI MOORE: You’d call that a credit crunch? Are we going to get one if we haven’t already got one?
PHIL GREEN: Well I think if you’re at the end of the market that has been borrowing at nine times EBITDA to ten times EBITDA I think you’re in a credit crunch. Whether that extends to traditional lending I think that will be very short lived. I think the market is still highly liquid, particularly in Australia.
I don’t see any evidence, we haven’t seen, and that includes deals that we’ve done in the last two weeks where debt’s been syndicated, where quality asset back cash flows have been securitised, where we don’t see, even in the term over the last couple of weeks that there’s an inability to place credit.
The big issue comes in terms of how much some of the Wall Street firms and some of the big international banks have on their balance sheet and to what extent that means that they’re prevented from doing more business over the next six to 12 months. But I certainly don’t see it extending beyond 6 to 12 months and in any event I doubt whether it will impact basic straight forward leverage into ordinary operating businesses.