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Expert reviews Babcock and Brown crisis -

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ASHLEY HALL: Confidence in investment bank Babcock and Brown has fallen further today, and so has
its share price with a rush of investors selling their shares.

Yesterday, large institutional hedge funds started selling the stock because of escalating fears
the bank may have trouble paying debts.

Babcock and Brown borrows money from other banks to invest in assets.

When those assets don't do well, the bank needs to find money elsewhere to repay its debts.

Analysts say technically the company could fold, but it's unlikely.

Brigid Glanville has been speaking to private client advisor Bill Bishop from ABN Amro Morgans
about this morning's tumble.

BILL BISHOP: Its price has been affected by the fact that the market worries it hasn't been able to
satellite Babcock and Brown Power. It has not been able to refinance all of its $2.7 billion debt.

The hedge funds attacked the stock. Their idea is to drive the price down and then they will buy
cheaply, but how far they are going to drive it down, who knows.

BRIGID GLANVILLE: So at the moment, down 50 per cent - when does it get to the point where the
stock is so low, that it can't cover any of its debts?

BILL BISHOP: Well, it is not there yet but a critical level was $7.50 a share which was reached
yesterday. That level is what's called a "trigger point" for its lenders, in other words some of
the major banks in Australia and overseas. Banks are legally able to conduct a review of their
lendings to Babcock and Brown because clearly the market capitalisation at $7.50 a share falls to
$2.5 billion and clearly at the present price of $4.88 a share, it is well underneath that critical
point.

BRIGID GLANVILLE: Why all of sudden, it;s trouble? Is this because of some of it's shares that
Babcock, its companies that Babcock and Brown have bought into like the gas in WA and the problems
it has had there?

BILL BISHOP: The gas in WA, indeed. It is their facility. The main problem Babcock and Brown Power
is their lack of liquidity, rather. The gas explosion is meaning some supply constraints, but it is
not as serious as their financial position.

Really, what happens when a company gets absolutely barbecued in its share price, the share price
many people will have what is called a margin loan for Babcock and Brown shares and when you get a
margin call, you have to sell the shares. The margin lenders will be ringing all their clients and
telling them to sell because they have breached their own covenants. The selling pressure comes on
and it feeds on itself.

You have to sell the shares and because you sell the shares, you are a forced seller, you drive the
price down.

BRIGID GLANVILLE: So are the hedge funds worried that there are lots of margin loans out on Babcock
and Brown?

BILL BISHOP: Sure, well they are enjoying that. The hedge funds will have ascertained that there
are probably significant margin loans.

BRIGID GLANVILLE: Can you explain to us how the model of Babcock and Brown. A lot of people say it
is a "mini Macquarie Bank", explain how it is the structure of this company that it allows itself
to get in this situation?

BILL BISHOP: How the model works is this. Borrow lots of money to buy an asset like a power station
for example. A power station makes money. The power station produces income, and that turns into
dividends for Babcock and Brown shareholders but it is not that simple.

Not always do these assets produce enough income to pay the advertised dividend so companies like
Babcock and Brown pay all or part of some of their dividends out of capital.

That, of course, produces some pressures on the company. Once it gets difficult to pay out the
money, it probably means the company is short of money and then the market smells blood in the
water and people start to sell their shares and they see people selling shares, and they sell
shares.

BRIGID GLANVILLE: The company said in a statement that reaching the review limit of $7.50 a share
does not mean it would have to repay or speed up repayments of its debt. Are the fundamentals, do
you believe of Babcock and Brown, in good shape?

BILL BISHOP: That is the $64,000 question Brigid. It doesn't mean the review is absolutely
compulsory but think of it this way, there are two ways to repay the debt. You have either got to
borrow more money and that is getting dearer and dearer and dearer with the credit crunch or you
have to sell assets.

You are selling assets in very specific things like power stations. It is much harder to sell when
you know it's a forced seller.

BRIGID GLANVILLE: Ultimately, what is going to happen to Babcock and Brown? Could it go under?

BILL BISHOP: Technically, it could go under, but it is not going to do anybody any good to let it
go under. The banks will endeavour to extend enough credit to at least allow an orderly disposal of
Babcock and Brown's assets.

Babcock and Brown won't want to sell too many of their assets because that it going to have a
deleterious affect on their business.

Technically, it could go under, but it is to be hoped that it doesn't go under but at the moment
you have a loss of confidence in the company and its profitability and its share price, and in
markets, confidence is everything.

ASHLEY HALL: Bill Bishop from ABN Amro Morgans, speaking with Brigid Glanville.

And just after midday Eastern Standard Time, Babcock's share price was down 22 per cent to $5.37.