VZCZCXRO1920
RR RUEHPT
DE RUEHBY #0623/01 1700654
ZNR UUUUU ZZH
R 180654Z JUN 08
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 9737
INFO RUEHKO/AMEMBASSY TOKYO 3089
RUEHDN/AMCONSUL SYDNEY 3558
RUEHPT/AMCONSUL PERTH 3637
RUEHBN/AMCONSUL MELBOURNE 5359
RUEHBS/USEU BRUSSELS
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 CANBERRA 000623 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON AS
SUBJECT: BABCOCK & BROWN'S SHAREPRICE MELTDOWN 
 
 
¶1.  (U) Summary: Australian investment bank Babcock & Brown 
(B&B) lost over half its share value in the week of June 9 
over concerns it could not manage its debt load.  B&B stock 
has been recovering this week.  The Australian Securities 
Exchange has said there is no sign of market manipulation; 
regulators have been quiet.  B&B is a large operator in North 
America and Europe as well as in Australia, in particular in 
infrastructure andenergy. End summary. 
 
¶2.  (SBU) Babcock & Brown (B&B) is Australia's second-largest 
merchant (investment) bank with an emphasis on infrastructure 
funds and significant investments in the United States and 
Europe in addition to Australia.  Its operations in North 
America are significant - in 2007 35% of B&B's global 
revenues of A$2 billion (A$1 = US$0.94 approximately) came 
from North America, and about a third of its A$56 billion 
worth of managed assets are in North America, including major 
ethanol and wind energy projects and the consortium to build 
and operate the Miami Access Tunnel in Florida.  It also has 
real estate and transport projects in North America. 
 
¶3.  (SBU) B&B followed in the footsteps of its larger 
Australian rival Macquarie Bank in buying infrastructure 
assets and then spinning them off into separate companies 
that hired B&B for long-term management contracts.  Babcock 
made money from charging a transaction fee for the original 
purchase as well as the sale, as well as handling the bond 
issuances in addition to the management fees.  In addition, 
B&B was then able to list a number of these companies on the 
Australian Stock Exchange.  This model generated significant 
revenue streams, making B&B very profitable and allowing 
rapid expansion - Babcock and its related companies hold 
assets around the world estimated as being worth between 
$60-80 billion.  However, B&B depended on very significant 
leverage, first to do the deals themselves and then to 
operate its companies.  This has made it very vulnerable to 
higher funding costs, particularly as B&B is viewed by the 
markets as being opaque about its operations and exposure to 
higher funding costs. 
 
¶4. (U) Like many financial institutions, B&B had felt 
downward pressure on its share price since October 2007, 
thanks to global financial conditions.  But the pressure on 
B&B grew extreme during the short Australian trading week 
last week.  Amid concerns that B&B's debts, including a new 
A$2.8 billion loan closed in April, were growing too great to 
manage, B&B share prices fell from A$11.16 to A$5.25 last 
week.  The rout picked up later in the week after analysts 
pointed out that a drop below A$7.50 would reduce B&B's 
market capitalization below A$2.5 billion, which would allow 
creditors to call for a review of the April A$2.8 billion 
loan.  To date, no such call for a review has been made. 
 
¶5. (U) Business reporting and media analysis also indicates a 
lack of confidence in B&B management.  This week, B&B has 
announced plans to appoint independent chairman to the boards 
of its four Australian-listed satellite funds that don't 
already have such positions.  So far this week, B&B has 
recovered some lost ground; as of mid-afternoon Wednesday 
June 18, its share price was up to A$6.86. 
 
¶6. (SBU) The question of market manipulation has been 
mentioned in at least one media report about the B&B rout and 
has been suggested by some of our contacts.  The Australian 
Qhas been suggested by some of our contacts.  The Australian 
Securities Exchange has said it is closely monitoring trading 
in B&B, but noted it saw no indication of any manipulation. 
The Australian Securities and Investment Commission has made 
no public comment.  One experienced economic journalist told 
us he was convinced this was a case of manipulation.  A 
longtime contact who is a trader at a major investment bank 
expressed similar sentiments, though stressing that he had no 
proof.  He speculated that hedge funds had targeted B&B 
because of its size (big enough to make a raid worthwhile but 
small enough to minimize the chances of getting burned) and 
very legitimate questions about its funding model. 
 
¶7. (SBU) A trader with a bank in Melbourne told Embassy that 
the questions in financial circles were centered on where all 
the sold B&B stock came from.  He said there was talk that 
the B&B slump was driven by speculative short-selling by 
hedge funds, and that the improvement in B&B's share price 
this week could be short-sellers buying stocks in order to 
meet their contracts rather than a fundamental judgment in 
B&B's viability as a good place to invest.  He also noted 
that Fidelity's recent decision to drop its holdings in B&B 
 
CANBERRA 00000623  002 OF 002 
 
 
from 7.5% to 5% would also have increased downward pressure 
on B&B's share value.  Another financial journalist expressed 
doubt about reports of manipulation, saying that some of the 
complaints sound like sour grapes from people who were burned 
by the rapid fall in the share price.  However, this contact 
commented that he has been surprised by the extent and the 
persistence of rumors that B&B's share price collapse 
reflected some kind of manipulation. 
 
MCCALLUM