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Babcock says impairments will have 'substantial' impact on balance sheet

The Australian infrastructure specialist believes that it will be in a negative net asset position as of 31 December 2008 as a result of impairment charges, which will come from non-core assets being marked-to-market prior to being sold.

Australian infrastructure specialist Babcock & Brown is forecasting that it will record a “substantial” negative net asset position on its books when it reports its full year 2008 results next month.

Babcock advised in a statement that the situation will arise on its books because it is reclassifying certain non-core assets on its balance sheet as assets available for sale. When marked as non-core, those assets do not have to be marked-to-market, but when labeled as available for sale, they do, resulting in asset impairment charges that negatively affect its asset position.

A negative net asset position occurs when a firm’s liabilities exceed its assets.

A person close to Babcock declined to estimate the amount of the impairment charges.

The assets that Babcock will reclassify as available for sale include its real estate and operating leasing divisions, which the firm previously announced it would eliminate as part of its strategy to focus solely on its infrastructure business. Other assets will include Babcock’s shareholdings in listed satellite funds it considers non-core, such as Babcock & Brown Wind Partners, and tangible assets on its balance sheet related to those funds.

As a result of the asset impairment charges related to these assets, Babcock advised its lenders prior to today’s announcement that it would be in breach of loan covenants as of 31 December 2008. It has worked to waive those covenants and has submitted a proposal to its syndicate of lenders that would swap Babcock debt for equity. A decision on that proposal is expected sometime next week.

A syndicate of 25 banks, including Germany’s HypoVereinsbank (HVB), are providers of Babcock’s three-year A$2.8 billion (€2.5 billion; $2 billion) loan facility which in June was re-negotiated to remove a market capitalisation clause as Babcock’s shares plummeted. Including the A$150 million lifeline the syndicate agreed to give to Babcock last month, the bank debt now exceeds $3.2 billion.

Its total assets as of 30 June 2008 stood at A$14.2 billion.

HVB had previously frozen a deposit Babcock held with the bank. It is unclear whether that deposit has been unfrozen, but the lifeline granted the firm exceeds the amount of the deposit and has thus made it a “non-issue” for the firm, the person said.

Babcock shares ended the day down 16 percent, closing on A$.325.