Babcock & Brown Limited

PRE-RELEASE VERSION
Babcock & Brown Limited

The difference between
Infrastructure Assets and
Infrastructure Funds
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This case study was written by Pierre Hillion, the de Picciotto Chaired Professor of Alternative Investments, Professor
of Finance, and Jean Wee, Research Associate, both at INSEAD. It is intended to be used as a basis for class
discussion rather than to illustrate either effective or ineffective handling of the specific investment situation.
Copyright 2011 INSEAD
This pre-release version may be used for teaching purposes but it has not yet received an official case number by the European
Case Clearing House. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or
medium whatsoever without the permission of the copyright owner.
This document is authorized for use only in Project Finance, P5 NovDec 2012 24 Oct to 12 Dec 2012 by Professor Pierre Hillion.
Copying, printing and posting without INSEAD's permission is copyright infringement.
PRE-RELEASE VERSION
Introduction
In the mid-2000s, as yields fell and equity markets reached lofty levels, infrastructure as an
asset class became attractive to investors like pension funds and retail investors seeking steady
long-term returns. The classic infrastructure asset was either a monopoly or oligopoly with
predictable and secure long-term cash flow. Such cash flows derived from these long-lived,
high-value physical assets through providing basic, everyday service that enjoyed consistent,
inelastic demand with high barriers to entry and little risk of obsolescence. Investors, attracted
by the characteristics of infrastructure assets, had sought to gain exposure by investing in
publicly traded infrastructure funds that promised exposure to steadily increasing returns
coupled with liquidity. However, there were important differences between the two.
Background The Infrastructure Industry

Global Need for Infrastructure
Aging structures, the rapid pace of technological change, the increase in population, the
emergence of mitigation and adaptation responses to climate changes, urbanisation, the rapid
growth of emerging countries like China all these spelled a global need for the expansion of
infrastructure to meet the demands of modern day living. While infrastructure in OECD
countries was being challenged by ageing populations and the ageing of their existing
infrastructure, developing countries such as those in the Middle East, Central and Eastern
Europe (CEE) and Brazil, Russia, India, and China (BRIC) were facing a need for all types of
hard infrastructure (such as toll roads, rail and airports) and soft infrastructure (such as
schools and hospitals) to facilitate economic expansion and accommodate lifestyle demands
of their growing middle classes. Ranging from rail, power plants, water treatment plants to
energy-related investments, more than US$71 trillion in infrastructure investment was
estimated to be needed worldwide over the next 25 years, according to Organisation for
Economic Cooperation (OECD) estimates, with an average annual world infrastructure
requirement up to 2030 of about US$2 trillion, consuming at least 3.5 per cent of global gross
domestic product each year through 2030.
The Rise of the Infrastructure Fund
Previously financed by governments now increasingly hampered by fiscal deficits and budget
cuts, this demand for infrastructure coincided with the private sectors increasing appetite for
infrastructure assets. The Global Real Estate Centre of Ernst & Young estimated that private
sources could account for 10 per cent to 15 per cent (US$240bn to US$360bn) of the capital
needed annually for infrastructure projects worldwide, drawn to the asset class by its stable
and relatively high level of returns on the assets, the investment opportunities when those
assets were pooled, the availability of cheap debt (at the time), and the need for diversification
from increasingly correlated traditional financial markets like the stock and bond markets.
With the rising attention from investors came the rise of infrastructure funds. The market for
infrastructure equity funds expanded exponentially between 2003 and 2008. In 2006, more
than US$20 billion of equity capital was raised, up from less than US$5 billion in 2004,
followed by another big year in 2007, when about US$35 billion was raised, slowing to
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US$30 billion in 2008 as a result of the global credit crunch (US$70 billion was sought)1. The
world's 20 largest funds had nearly $130bn under management, 77 per cent of it raised over
2006-2007, with about 63 per cent from new entrants, according to McKinsey & Company.
Appendix 1 shows a list of the pioneering infrastructure funds.
The externally managed listed infrastructure fund, which was pioneered in Australia by the
Macquarie Group, was a financial product innovation that came about during a time when
infrastructure asset values were on the rise. The model was simple: buy infrastructure assets,
finance them largely with debt, and sell the assets to investors in a public listing through taxeffective trusts, with long-term management contracts in place to earn fee income. Listed
infrastructure funds generally had the following key attributes2:
Multiple entities (companies and trusts) were listed as a stapled security;
Management of the infrastructure fund was contracted out to an external manager,

typically a wholly owned subsidiary of the firm that established the fund;
The manager charged a range of fees - a base fee, which was often a percentage of the
infrastructure fund's market capitalisation adjusted for debt at the fund level and cash,
and a performance fee, which was often 15% or 20% of the amount by which the fund
outperformed a benchmark index;
The fund would typically engage other parts of the external manager's organisation for
financial advisory work such as debt arranging and other services (these fees were
usually subject to the review of directors independent of the manager);
The fund acquired assets in a variety ways, purchasing them directly from third-party
owners, from its manager's parent or sometimes from other entities managed by the
manager;
In many instances, distributions paid to security holders were not fully covered by
operating cash flow; and
There tended to be obstacles to the removal of the external manager. These obstacles
fell into three broad categories: special shares, long-term contracts and contingent fees.
Several infrastructure funds issued special classes of shares to the external manager,
giving it the right to appoint a majority of the directors otherwise elected by security
holders. Some funds favoured long-term contracts which usually featured 25-year
management contracts. These agreements could only be terminated in a narrow range
of circumstances without triggering an obligation to pay out the remainder of the
contract. Some of the newer funds also incorporated contingent fees - fees that would
start to be paid should the manager be removed.
Appendix 2 shows the structure of some Australia-listed infrastructure funds.
1
2
Infrastructure Still on Track, Proceed with Caution, Mercer, 30 Jun 2009

Infrastructure Funds: Managing, Financing and Accounting In Whose Interests, RiskMetrics Group,
April 2008
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Risks of the Model3
The sustainable and growing long-term cash flows of infrastructure assets mean
that infrastructure assets can typically support more debt than other businesses,
which can increase returns to shareholders. This indicates the importance of
financial structuring and capital optimization in enhancing shareholder returns to
owners of infrastructure assets.
Macquarie Infrastructure Company4
As with all derivatives in that the funds derived from the assets the infrastructure fund
model carried significant risks as a result of the financial engineering that went into its
construction. In April 2008, the RiskMetrics Group, the spun-off offshoot of JP Morgan that
came up with the now industry-standard value-at-risk (VAR) measurement of portfolio risk,
published a critique entitled Infrastructure Funds: Managing, Financing and Accounting In
Whose Interests, which raised investment-related concerns involving sustainability of the
model, the danger of overpaying for assets, fee structures that delivered high fees and
provided an incentive to increase fund size, and accounting and governance issues. Appendix
3 gives a list of the issues raised.
Had the post-2001 liquidity-rich environment remained indefinitely so, infrastructure funds
would have continued to produce rich returns for their investors, as well as the fund managers.
Macquarie Bank, pioneer in the field of infrastructure funds, was dubbed the Millionaires
Factory for the bonuses it paid its employees out of the earnings from its infrastructure fund
business5. However, things turned pear-shaped after 2007.
Subprime Crisis and the Effect on Leveraged Investments
As with many other financial crises, the global financial crisis started off with the bursting of
a real estate bubble, after housing prices in the US peaked in approximately 2005-2006. Low
interest rates, an increase in loan incentives such as easy initial terms and a trend of rising
housing prices had encouraged borrowers to assume difficult mortgages in the belief they
would be able to quickly refinance at more favourable terms. However, once interest rates
began to rise and housing prices started to drop moderately in 20062007 in many parts of the
US, refinancing became more difficult. As easy initial terms expired, home prices failed to go
up as anticipated and adjustable rate mortgages (ARM) interest rates reset higher, defaults in
the less credit-worthy subprime mortgage category started to climb. Foreclosures accelerated
in the US in late 2006 and triggered a global financial crisis through 2007 and 2008, due to
securitization practices that had enabled toxic subprime mortgages to be passed on globally
to international banks, other financial institutions like hedge funds and asset management
firms, and even to retail customers through structured products. Through securitization,
instead of banks originating a loan to the borrower/homeowner and retaining the credit
(default) risk, banks essentially sold the mortgages and distributed credit risk to investors
through mortgage-backed securities (MBS) and collateralized debt obligations (CDOs).
3
4
5
This section is drawn mainly from Infrastructure Funds: Managing, Financing and Accounting In Whose
Interests, RiskMetrics Group, April 2008
Introduction to Infrastructure, Macquarie Infrastructure Company website, downloaded 25 Sep 2009
Source: The Making of the Millionaires Factory, The Guardian, 16 Aug 2005.
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With growing risk aversion, credit spreads increased sharply and even low-risk tranches of
MBS with no exposure to the subprime sector were affected. Investors became more cautious
in investing in these assets and liquidity in these markets, particularly in more complex
products like CDOs, was reduced significantly. Financial institutions were forced to write
down MBS positions and account for losses in their balance sheets. With their own balance
sheets taking a hit, these financial institutions began pulling back credit and reducing lending
to other sectors of the economy. The credit crunch spread beyond housing and disrupted
global financial markets as investors were forced to re-evaluate the risks they were taking.
Institutional investors shifted money away from money market funds that held risky corporate
debt to funds that invested primarily in ultra safe government-issued securities like treasury
bills and bonds. The extreme risk aversion led to even sound companies being hard-pressed to
fund their capital needs in the markets, with spreads widening dramatically, and maturities
shortening as illiquidity in the mortgage market spread to asset-backed commercial paper,
which became partially shut. Confidence was so shaken that even the inter-bank money
market was affected, as banks began to view each other with suspicion. Meanwhile stock
markets all over the world started to significantly lose value. Appendix 4 shows the sequence
of events detailing the subprime debacle. The resultant environment led financial institutions
which operated with high financial leverage being unable to serve their required capital
charges or to refinance themselves.
Infrastructure Fund Babcock & Brown

They pushed the model to the limitThe incentives were not aligned with
investors because the incentive of the model was to keep adding assets with more
leverage and generate more fees.
Ian Macoun, MD, Pinnacle Investment Management6
Babcock & Brown Limited (BBL) was an investment firm listed on the Australian Stock
Exchange (ASX), dubbed the mini-Macquarie as its modus operandi was similar to the
Macquarie Group. BBL bought or developed infrastructure assets and spun them out into a
series of satellite infrastructure funds, which included Babcock & Brown Power (BBP),
Babcock & Brown Infrastructure (BBI), Babcock & Brown Wind Partners (BBW) and private
equity vehicle Babcock & Brown Capital, amongst others. Appendix 5 gives details on the
company and some of its satellite funds. The satellite funds such as BBP, BBI and BBW were
set up as a stapled security structure, consisting of multiple entities (e.g. a company and a
trust) stapled together such that investors could only trade them as a bundle; the component
securities could not be traded separately. This structure aimed to be the most tax-efficient way
to maximize the flow of distribution to security holders. Trust structures allowed distributions
from cash flow which were not constrained by accounting profits or retained earnings, and tax
efficiency was maximised as all income into the trust could be distributed without paying tax
at the trust level - tax on the distributions were paid at the individual level, which could be
efficient for certain investors depending on their taxation status. A typical structure would
consist of a company (or more) stapled with a trust, which would own the assets, with a
Babcock subsidiary as a Responsible Entity to operate the whole scheme and another Babcock
subsidiary as a Manager of the assets. Sometimes a Bermuda-based company would also be
6
Downsizing Down Under: Can Australias Specialist Funds Survive?, Institutional Investor, Sep 2008
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stapled to the structure, to keep non-Australian assets (for example BBWs US wind farms)
outside the Australian tax net for non-Australian investors (both withholding tax and capital
gains). Appendix 6 shows an example of the structure for BBP, Appendix 7 shows the
management fee structure for the satellite funds versus their peers, Appendix 8 shows other
fees7, and Appendix 9 shows relevant fund information.
BBL derived revenue through six main sources: 1) base fees; 2) performance fees; 3)
advisory fees; 4) development profits and interest on development loans; 5) principal
investment income and realised gains on assets held for sale, investment properties, and
investments in funds; and 6) third party advisory mandates. From its IPO in 2004, BBLs
assets under management surged from just A$11 billion in December 2004 to A$74 billion by
December 2007. Fees drove this rapid expansion BBL, earned a base fee as a percentage of
assets plus debt, creating a huge incentive to push deals. For 2007 alone, BBL earned A$217
million in base fees, A$340 in advisory fees, A$51 million in performance fees, and A$461
million from deal transactions8. However, the whole operation ran on fumes of debt on
average BBL funded about 80% of each purchase with loans.
The Winners Curse Too Much of a Good Thing

One of the flaws highlighted in the RiskMetrics report on the infrastructure fund model was
the pursuit of the next deal by the fund managers.
Managing infrastructure investments is often more about making sure they dont
go wrong, rather than trying to make some fantastic multiple out of them. And if
you buy them for the wrong price at the wrong point in the cycle, there is no way
back. Its not like private equity, where changes in a sectors rating or a trade
buyer play may help you out of a hole
Henderson Equity Partners9
In August 2007, Alinta Limited (Alinta) shareholders voted to sell the company, the biggest
power and gas transmission line owner in Australia, to a consortium comprising of BBL and
Singapore Power (SP). The consortium engaged in a fierce bidding war against rival
Macquarie Group (MQ), where they had to raise the bid price from the initial A$7.4 billion
bid (at A$15 a share) to A$7.7 billion (at A$16.06 per share)10. MQ originally bid against the
consortium at A$15.45, and raised the offer to A$15.80. Independent expert Grant Samuel
hired by the Alinta board valued the company at A$15.74-A$16.07 per share. The assets of
Alinta were divided up amongst SP and the three Babcock listed funds BBP, BBI and BBW.
BBP took over Alinta's power generation plants, along with Alinta's 67 percent share in
7
8
9
10
Includes related party fees, which consists of all fees paid for advisory work under separate management
agreements via subsidiaries and for custody, as well as fees such as loan facility and other bank fees.
Distributions paid and interest rate swaps were excluded. Where fees were paid by a partly owned
subsidiary or associate of the parent entity, the share of the fees that equated to the disclosed economic
interest in the partly owned subsidiary or associate was included in the total fee number..
How the credit crunch caught, Asiamoney, Sep 2008
Infrastructure: A Growing Real Return Asset Class, JP Morgan Asset Management, CFA Institute
Conference Proceedings Quarterly, Sep 2007
Shareholders of Alinta approve US$6.4 billion (A$7.7 billion) sale, Bloomberg, 16 Aug 07
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AlintaAGL, Western Australias largest gas retailer, for A$2.6 billion11, while BBI acquired
Alinta's energy transmission and distribution assets, and its maintenance business, for about
A$2.56 billion dollars which included A$1.1 billion worth of limited recourse debt. BBW was
allocated Alinta's Wattle Point wind farm in South Australia. The rest went to SP. BBP and
BBL paid for their purchases with equity issue and debt - BBP took on A$2.1 billion worth of
bridge financing, while BBL funded its portion with a A$518 million corporate level bridge
facility (besides assuming the A$1.1 billion asset level debt). BBW originally had to fork out
stock and A$9.5 million in cash for the Wattle Point wind farm12, but the farm was sold to
Energy Infrastructure Trust for $225 million. BBW pocketed A$211 million out of the
proceeds, with the difference returned to Alinta shareholders13.
The Beginning of the End

Lenders and Shareholders
In early 2008, all had seemed well at BBL. BBLs February profit guidance for FY08 was
A$750 million, 17% higher than the year before of A$643 million. Although effects of the
subprime crisis were beginning to hit the markets, the company had managed, in March 2008,
to expand its corporate debt from A$2.35 billion to A$2.8 billion, and to extend the facility for
a further year to 2011. The syndication of the facility had also expanded from 20 to 25 banks,
and included the support of the four major Australian trading banks. The corporate debt
facility, which was borrowed under BBIPL, however, had a market capitalization review
threshold of $2.5 billion. In conjunction with the extension of the corporate debt facility, BBL
also managed to raise $220 million through the placement of 16.12 million shares, at a fixed
price of $13.65 per share, to long term existing shareholders of BBL and its managed funds.
BBLs satellite fund, BBW, had also announced, in February 2008, strategic initiatives to
realise profits from its European wind assets purchased cheaply under the framework
agreements with Gamesa and Plambeck earlier. But in late May 2008, shares in BBL slumped
from A$16 to A$9.50 in just three weeks.
11 Alinta and AGL Energy (AGL) had executed a scheme of arrangement in 2006, redistributing their combined
assets amongst themselves A set of assets was placed into a joint venture AlintaAGL, 67% owned by Alinta
and 33% by AGL. BBPs acquisition of Alintas 67% interest in AlintaAGL triggered a put/call condition
where BBP had to offer AGL the opportunity to buy BBPs interest at a price nominated by BBP. AGL
could either acquire this 67% interest at that price (A$1.06 billion) or sell its 33% interest to BBP at the
equivalent price (A$522 million). In the event, AGL decided to put AlintaAGL to BBP at A$522 million.
12 The farm was subject to a put option arrangement between Alinta and AGL Energy, in which Alinta had the
option to sell the project to Sydney-based AGL before 24 Apr 07 for A$211 million (US$174.2 million). BBW
could direct Alinta to exercise that option.
13 Alinta completes sale of Wattle Point Wind Farm, Ralph Wragg Australian Business News, 23 April 2007
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The market is questioning the survival of anything with a lot of debt What is
particular of Babcock is they rely on deal-flow happening. Deal-flow is drying up.
You cant get financing for transactions; they earned transaction fees, debt
arranging fees etc. There was a huge money train that the business relied upon.
Hugh Giddy, MD Cannae Capital Partners14
The rout started on 23 May 08. After months of assuring the market that the refinancing of its
A$3.1 billion15 debt was well-advanced, and originally targeted to complete by March 2008,
satellite fund BBP made an unexpected announcement on 22 May 08 that the original $3.1
billion refinance at the asset level had been scaled back by its 11-bank consortium to $2.7
billion (secured by power stations). As a result, a further $360m needed to be raised through
refinancing at the corporate level with an expanded consortium of banks, due by August 2008.
In addition, there was a A$275 million capital shortfall as a result of the need to bring a Tamar
Valley power station, acquired from Alinta, onto the BBP balance sheet; it was originally
supposed to be project-financed. The stock fell 59% in 3 days. BBL had to step in to offer to
stump up the missing A$360 million, while BBP scrambled to fund the additional capital
expenditure. The market began to worry how much BBL would have to pump into its debtridden funds on top of its own debts.
On 3 Jun 2008, BBP received another blow. An explosion at a Varanus Island gas plant,
which provided gas supplies to Alintas retail gas distribution business in Western Australia,
disrupted operations. While BBP assured the market that it did not affect its A$2.7 billion
refinancing which was still to be closed, the possibly large negative impact on earnings
weighed on the already troubled stock, and its parent BBL.
On 11 and 12 June, BBL shares were sold heavily - market observers believed that hedge
funds were shorting the stock to test BBLs A$2.5 billion market capitalization review
threshold16 - and the fall triggered a review of the A$2.8 billion debt facility that had only
been refinanced two months earlier. Other Babcock-related funds were also affected in the
sell-off. When BBP cancelled its 2H08 distribution, it was another nail in the coffin for the
Babcock stocks. BBP called in UBS for a strategic review and began selling assets in July.
Yet throughout the turmoil, BBL kept reiterating its profit guidance. Then on 11 August, just
10 days before the earnings release, BBL abruptly changed its tune. It announced that the
1H08 net profit would be 25% to 40% below the previous years and that the full-year net
profit would be unlikely to exceed FY07s A$643 million. BBP added fuel to the fire when it
announced, on 18 August, an A$410 million write-down to the Alinta assets and an A$42
million loss on the Tamar Valley power station which it had sold to the Tasmanian
government below cost. Furthermore, future distributions were now subordinated to BBP
paying off its debt. It confirmed the markets view that the Alinta assets were bought at the
top of the cycle. The Babcock stocks went into freefall. On 21 August, when BBL released its
earnings, its 1H08 net profit had fallen 30% to A$175 million. BBL stock crashed a further
36% on the back of the news.
14
15
16
Ibid.
A$2.1 billion from the Alinta purchase and about A$1 billion asset level debt
It was announced as part of a market update dated 27 Mar 08.
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Nonetheless, BBLs lenders were willing to give it a chance. After talks, BBLs lending
syndicate waived the right to review, and the Babcock & Brown group commenced on a series
of restructuring, starting with the replacement of Chief Executive Officer Phil Green with
Michael Larkin, the lay-off of 1000 staff, and the divestment of its real estate, leasing,
corporate and structured finance businesses, to focus on becoming a specialist infrastructure
investment business. This would incorporate fund management operations and stakes in core
listed and unlisted infrastructure funds as well as the groups PPP, wind, thermal and solar
projects development pipeline.
We intend to repay debt through the orderly sale of the non-core businesses and
assets and reduce our operating costs to create a sustainable base that matches
the focus of our ongoing infrastructure investment business
Babcock & Brown17
That was the plan, but the BBL stock price continued to free-fall. Said Martin Lawrence, an
analyst with the RiskMetrics Group,
[Stocks are falling in part because of the credit crisis], but I think you are also
seeing a governance discount almost an agency discount.18
By this time, the Babcock satellites were all selling off assets, and in the case of BBI and
BBP, at fire-sale prices19. At the end of August 2008, although BBP had managed, through
refinancing, asset sales and extension of its credit line to Mar 09, to meet the A$3.4 billion
funding need, it was being supported by A$403 million from BBL. By October, BBP was
putting itself up for sale.
The end game came in November 2008, when BBL announced it was consulting its banks
because of uncertainty over its loan covenants. Its shares were put on a trading halt on the
ASX as the company sought to strike a new deal with its bankers. In December, a A$150
million facility due 31 Dec 2009 was provided by its bankers to provide immediate cash flow
relief for impending interest payments, with a hefty margin of Bank Bill Swap Bid Rate
(BBSY) + 600 basis points, while BBL and its bankers discussed the capital restructure of the
Babcock & Brown group. In January 2009, with its shares still suspended, BBL stated that it
was in a substantial negative net asset position, with liabilities of at least A$1.5 billion.
Apart from its $3.1 billion of corporate debt, BBL had about $6.5 billion of debt secured
against its assets. This did not include the debt in various satellites such as Babcock & Brown
Infrastructure, which had A$8.6 billion of borrowings on its balance sheet, and Babcock &
Brown Power, which had more than A$3 billion. These debts also did not include other debts
that were attached to the power station and other infrastructure assets run by the two funds20.
Credit Suisse estimated that there was about A$46 billion worth of debt across the group,
17
18
19
20
The Fall of the House of Babcock, Project Finance International, 26 Nov 08

Digging Out Down Under B&B CEO Phil Green admits his firm structure needs review, Institutional
Investor, Jul/Aug 2008
Although BBW shares were also punished by the market for its association with the Babcock name, it was
in relatively better shape due to its lower debt load and better demand for its petroleum-free wind farms. In
fact, in Sep 08, it was proposing to buy back 10% of its shares, later increased to 30%.
Babcock to suspend shares as recue deal nutted out, The Sydney Morning Herald, 12 Jan 09
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three times the value of the company at its highest level21. Appendix 10 shows the debt
maturity profile of BBL as at mid-2008.
Following the 19 Nov 2008 trading halt announcement, S&P downgraded BBL to CCC+ from
BB-, citing increased risk of breached loan covenants leading to lenders demanding
accelerated repayment of debt. The ratings agency also highlighted the difficulties of pursuing
asset sales in the current market climate. On 21 Nov, S&P downgraded BBL to CC from
CCC+, and placed the borrower on credit watch with negative implications, after a dispute
arose between HypoVereinsbank/Unicredit (HVB) and BBL over access to BBLs A$100m
deposit with HVB. HVB, one of the 25 banks in the syndicate, had frozen access to the
deposit22, angering the rest of the syndicate involved in the restructuring23. CC was the lowest
rating that S&P would apply to a company that had not actually defaulted on any debt.
Bondholders
I thought the notes were safer than the shares and at that time they were
paying more than bank interest and I was happy with that. I think one of the
reasons why we went into them was that it was the second largest [investment]
bank after Macquarie. We thought it was as safe as could have been expected.
Retiree Bob Billett24
Back in the heydays in 2005 and 2006, BBL had no problems raising capital. Investors were
keen to place money with BBL at whatever the terms. Besides raising funds through issuance
of its own shares and listing satellite funds, in 2005 and 2006, BBL issued a series of
subordinated notes BBSN1 and BBSN2, with BBSN1 issued in Australia at $100 par raising a
total of A$416,223,400, and BBSN2 issued in New Zealand at NZ$1 par raising a total of
NZ$225,000,000. The net proceeds of the offerings were lent by BBL to BBIPL as BBIPL
Loans, and BBIPL used the proceeds of these loans to fund the investment and development
activities of the Babcock & Brown Group (Appendix 11 shows the arrangements). Assets
were placed under BBIPL, while payment of interest and repayment of the principal on the
BBIPL Loans were the expected primary source of funds for BBL to service the interest
payments and redemption of the notes.
The BBSN notes were unsecured, subordinated, cumulative and resettable. Appendix 12
shows some of the important terms of the notes. Under the terms of the notes, both BBL and
investors could opt for early exit under certain conditions. In particular, investors could
21
22
23
24
How the credit crunch caught, Asiamoney, Sep 2008

An Australian newspaper The Age on 21 Sep 09, The fall and fall of once-mighty Babcock & Brown,
reported that in mid-June 08, founder and Executive Chairman of BBL, Jim Babcock had already asked his
fellow directors to consider the groups solvency given its debts. The board then initiated Project Veyron
designed to pull in a major equity investor and to restructure the groups businesses. In August, Project
Veyron was expanded to sound out possible buyers for BBL, and in December, two proposals were put to
the banking syndicate. Plan A was to recapitalize the group reportedly through an equity injection by
British Equity firm Terra Firma to purchase 91% of BBIPL (not BBL) for A$2.5 billion; Plan B was to sell
all its assets. HVBs decision to hold on to the A$100 million deposit apparently destroyed confidence
among the groups banking counterparties which subsequently prompted Terra Firma to withdraw its offer.
The Fall of the House of Babcock, Project Finance International, 26 Nov 08
Little hope for investors as B&B value destroyed, The Australian, 26 Mar 09
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request for early repayment of principal at the occurrence of a Trigger Event namely, when
BBLs ordinary shares were suspended from trading on the ASX for a period of 20
consecutive business days. These payments, to be made by BBL, were guaranteed by BBIPL.
Yet, on 6 February 2009, when agreement was reached between BBL and the banks, which
involved BBLs debts being restructured and Babcock & Brown assets being sold off over a
two to three-year time frame, one consequence of the restructuring was that BBL shareholders
and holders of the BBSN notes were essentially left with nothing.
[BBL] reconfirmed its belief that, following the programme of asset sales and
allowing for the existing subordination arrangements, there would be no value for
equity holders and no or negligible value for holders of BBLs subordinated
notes no amounts can be paid on the notes while the corporate debt facilities
remain outstanding.
Letter from the Chairman of BBL to BBSN noteholders
The agreement with the banking syndicate provided for an A$150m short-term facility entered
into in Dec 2008, and existing A$2.8b and US$200m corporate facilities to continue, with
BBIPL as the borrower and the main operating vehicle, but with a restructuring including
changes to the repayment dates:
Table 1 Debt Restructuring
Repayment date
Amount
30 Sep 2009
A$150m senior bullet term loan plus accrued interest at BBSY + 600 basis
points
31 Dec 2009
A$200m
30 Jun 2010
A$250m
31 Dec 2010
A$250m
30 Apr 2011
A$344m + accrued interest at BBSY+350 basis points
Mid 2018
Remaining A$2.12b subject to restructuring fee of 2,000 basis points per

annum on the remaining balance of the facilities if and when they are repaid.
All interest payments and restructuring fee on a Pay as You Can basis.
Source: Project Finance International
The review events in the existing corporate debt facilities would cease to apply, and the
remaining financial covenant would be a debt coverage ratio requiring net assets (disregarding
certain debts - including the newly restructured facilities and the amount owing on the
subordinated notes) to exceed the amount outstanding under the senior bullet term loan and
the amounts due for repayment on or before 30 Apr 2011. Importantly, the banks imposed
limits on operating expenditure and BBL would not be able to make interest or principal
payments in respect of the subordinated notes while the corporate debt facilities remained
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outstanding25. Surplus cash proceeds realized from the asset disposal programme, over and
above the amount required to continue operating the business (through BBIPL), would be
applied to reduce the corporate debt facilities first.
With BBL shares having been in a trading halt, and then suspended for 20 days, that triggered
the existing clause in its arrangements with noteholders that they could claim repayment of
their investments. However, under the restructuring deal with the banks, there was no way
BBL could meet the interest payment coming due as well as the repayment demands.
To proceed with the restructuring, BBL proposed to restructure the BBSN notes and buy out
noteholders at a substantial discount i.e. one tenth of a cent for each dollar of face value. BBL
warned that if the restructure was not approved, then regrettably and in the absence of further
developments not currently contemplated, the directors of BBL would have no choice but to
place the company into administration26, where noteholders and shareholders would likely
get nothing. BBL asserted that the administration of BBL would not affect the solvency of
BBIPL, the primary operating company in the Babcock and Brown group and borrower of the
corporate debt, which would continue to operate and implement the revised business plan
including the asset sale programme.
In March 2009, noteholders, unhappy with getting virtually nothing, voted against the
restructuring and sent BBL into administration. In June, BBL was delisted from the ASX, and
in August, creditors put BBL into liquidation.
Postscript - Life after Babcock

By October 2008, BBL and its satellite funds were trying to distance themselves from one
another. In a bid to shore up the operational independence of BBI and BBP, and restore
investor confidence in the Babcock & Brown operating model, BBL had announced changes
to a range of governance and fee arrangements: the boards of BBI and BBP were adjusted to
comprise a majority of independent directors with an independent Chairman; the annual fees
paid to BBL would be restructured to include a security price threshold before incentive fees
accrued; both funds would have the right to obtain independent financial advice; control of
key management personnel would be directly under the ambit of the independent directors;
and staff incentives would be linked solely to the operating performance of the fund itself
(instead of BBL previously). The market, however, felt that the problems facing the funds had
grown beyond ensuring good governance.
After BBL went into administration, BBI remained in dire straits even after 18 months of
asset sales. In June 2009, it reported a net loss of A$997.1 million, due to asset impairment of
A$895.1 million. It had A$9 billion worth of debts with a A$300 million corporate debt
facility due February 2010. By September 2009, it was looking for a cornerstone investor to
shore up its finances, fearing that it would breach its debt covenants. In November 2009,
shareholders approved a A$1.8 billion recapitalization, with Canadas Brookfield Asset
Management Inc. taking on a 39.9% stake. Existing shareholders received a capital
distribution of 4 cents a security, and just 0%-0.1% of the recapitalized entity following a
25
26
The Fall of the House of Babcock & Brown, Project Finance International, 11 Feb 09
Notice of Meeting of Noteholders, Explanatory Memorandum and Offer Document, BBL, 13 Mar 09
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15,000-for-1 consolidation of the securities, if they did not participate in the equity raising.
With the recapitalization, BBI cut its ties with the Babcock group, internalized its
management (i.e. the management was hired by management company and not by BBL) and
changed its name back to Prime Infrastructure Holdings. Termination costs were limited to
outstanding management fees and associated costs. It continued to report losses, and in Dec
2010, Prime Infrastructure was taken over and merged with Brookfield Infrastructure Partners
LP for A$1.6 billion.
BBP was not in much better shape. At the end of June 2009, it had A$2.96 billion in
borrowings coming due within a year, including A$398 million in unsecured related party
loans still outstanding to the Babcock & Brown group; its market capitalization was only
A$55.2 million. It only managed to cut its ties with the Babcock group in December 2009,
when it struck a deal to pay the Babcock group A$444 million, to cut debt and end all
management agreements. It changed its name to Alinta Energy in January 2010. Nonetheless,
it was still burdened with a A$2.7 billion debt, which it had rolled over in December 2010 to
September 2012. After recording a A$465 million asset impairment and A$577 million net
loss in FY2010, in the midst of trying to find a buyer, BBP was finally rescued by a group of
lenders led by US private equity house TPG in a debt-for-equity swap. Earlier efforts to find a
buyer had led to bids that were insufficient to meet its debts.
In contrast, BBW recorded a profit of A$192.9 million at the end of June 2009, with no
impairment of assets and a cash balance of A$405 million after paying down debt. BBW was
the earliest of the Baby Babcocks to separate from BBL. As early as November 2008, BBW
had submitted a proposal to BBL to buy out the management rights and other associated
agreements relating to the fund, such as the exclusive financial advisory mandate, for a total
of A$44 million, with plans to internalize the management. Negotiations reached financial and
contractual close on 31 December 2008, and the company changed its name to Infigen Energy
in April 2009. It also terminated its framework agreements with Gamesa and Plambeck,
selling off its remaining European wind farms to concentrate on the growth markets of US and
Australia.
Appendix 13 shows the timeline of the events post BBL IPO.
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Case Questions and Presentation
1. In the light of the RiskMetrics report, evaluate the Babcock & Brown model, in terms of:
a. Corporate governance issues
b. Sustainability
c. Total fees paid
2. Discuss the reasons for BBLs downfall.
3. The classic infrastructure asset was either a monopoly or oligopoly with predictable and
secure long-term cash flow, derived from long-lived, high-value physical assets providing
basic, everyday service that enjoyed consistent, inelastic demand with high barriers to
entry and little risk of obsolescence. How is it that investors in infrastructure funds can
end up with virtually nothing? In particular, how is it that a fixed income instrument, with
guaranteed payments, like the BBSN notes, can be worth near-zero?
4. Explain why BBW, of the three Baby Babcocks, managed to emerge from the BBL fall
relatively unscathed.
Note: Datasets
In all the questions above, both qualitative and quantitative aspects should be addressed. The
quantitative analysis should be performed using the information contained in the datasets.
Appendix 14a-c gives a list of the details in the datasets Dataset 1 contains monthly data,
Dataset 2 daily data, while Dataset 3 contains financial statements of the peer group
companies.
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Appendix 1
The Pioneering Funds
The pioneering funds
Launch
date 1
Institution/fund
name
Fund(s) size
1994
Emerging Markets
Partnership Global
US$6bn across eleven Emerging markets, all sectors. Different funds

funds
target different regions.
1994
Hastings Fund
Management
US$4.3bn
Industries transportation & utilities; has funds that

are publicly traded
1997
Barclays Private
Equity
~US$1.94bn across
five funds
Greenfield and brownfield infrastructure; focus on

energy infrastructure
~1997
Macquarie
~US$22bn under
management across
multiple funds
Focus on transportation, water, telecom and utilities
1997
AMP Capital
Investors
A$3bn (~US$2.5bn)
across eight funds
Focus on utilities, transport and social infrastructure
2001
Galaxy Fund
175m (~US$231m)
Transportation; airports; regional focus on Europe
2002
Babcock & Brown

Infrastructure Fund
A$6.3bn (~US$5.25bn)
Focus on energy distribution and transport; ASX

listed; Babcock & Brown also have a number of
other specialty funds for wind, power,
environmental investments and PPPs
Fund focus
1 Approximate launch dates are based on historical records available on fund websites. 2 Approximate
fund(s) sizes are \based on self-reported data available on fund websites. As at mid-2007
Source: The rise of infrastructure funds, Ryan J Orr, PhD, Executive Director, Collaboratory for Research on
Global Projects, Stanford University, 13 Jun 07
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Appendix 2
Structure of Australia-listed Infrastructure Funds
Structure of ASX-listed infrastructure funds
Entity
IPO
Alinta Infrastructure (AIH)
2005
Australian Infrastructure Fund (AIX)
1997
Babcock & Brown Capital Limited

(BCM)
Babcock & Brown Environment
Investments (BEI)
2005
2005
Management
Agreement
Special
Voting
Shares
Open-ended
No*
Open-ended
No**
25 years
No
26 years
No
25 years
Yes
26 years
No
25 years
No
Two trusts
10 years
N/A
Manager
Structure
Wholly-owned subsidiary of Alinta

Limited
Hastings Funds Management Limited
(wholly-owned subsidiary of Westpac)
Wholly-owned subsidiary of Babcock &
Brown Limited
Brown Limited
Brown Limited
Brown Limited
One Australian
company; two trusts
One Australian
company; one trust
One Australian
company
One Australian
company
One Australian
company;one trust
One Australian
company;one trust
One Australian
company; one
Bermudan company;
one trust
Babcock & Brown Infrastructure (BBI)
2002
Babcock & Brown Power (BBP)
2006
Babcock & Brown Wind Partners

(BBW)
2005

Brown Limited
Challenger Infrastructure Fund (CIF)
2005
Wholly-owned subsidiary of Challenger

Financial Services Group Limited
ConnectEast Group (CEU)
2004
Wholly-owned subsidiary of Macquarie
Two trusts
6 years
N/A
A company jointly owned (50-50) by

AMP Capital Investors and Macquarie
Hastings Funds Management Limited
(wholly-owned subsidiary of Westpac)
Two wholly-owned subsidiaries of
Macquarie
One Australian
company; two trusts
Open-ended
Yes, 100%
Three trusts
Open-ended
N/A
Open-ended
Yes, 75%
Open-ended
Yes, 75%
Open-ended
Yes, 75%
Open-ended
Yes, 75%
Open-ended
Yes, 75%
5 years
N/A
10 years
No
25 years
Yes, 50%
DUET (DUE)
2004
Hastings Diversified Utility Fund

(HDF)
2004
Macquarie Airports (MAP)
2002
Macquarie Capital Alliance Group

(MCQ)
2005
Macquarie Communications
Infrastructure Group (MCG)
2002
Macquarie Infrastructure Group

(MIG)
1996
Two wholly-owned subsidiaries of

Macquarie
Macquarie Media Group (MMG)
2005
Rivercity Motorway (RCY)
2006
SP AusNet Group (SPN)
2005
Spark Infrastructure Group (SKI)
2005
Wholly-owned subsidiary of ABN Amro

Australia + some management
involvement from Leighton Motorway
Investments and Bilfinger Berger BOT)
Wholly-owned subsidiary of Singapore
Power
One Bermudan
company; two trusts
One Australian
company; one
Bermudan company;
one trust
One Australian
company; one
Bermudan company;
one trust
One Bermudan
company; two trusts
One Australian
company; one
Bermudan company;
one trust
Two trusts
Two Australian
companies; one trust
Two Australian
A company jointly owned (50-50) by
companies; one
Cheung Kong Infrastructure and RREFF
Bahaman company; one
Infrastructure (part of Deutsche Bank)
trust
*Sponsor Alinta Limited had the right to appoint two directors to the board of six so long as it retained a 15%
holding in AlH
** There were two boards to consider: the board of the company in the stapled structure, and the board of the
responsible entity of the trust in the stapled structure Hastings Fund Management Limited. Security holders
voted only on the election of directors to the companys board; the board of Hastings Fund Management Limited
was appointed by its 100 per cent shareholder, Westpac. However, the board of the company had very limited
powers limited to refusing an investment proposal outside of the terms of the trust deed, on a reasonable fear of
bankruptcy. Key decisions were made by Hastings Fund Management Limited, the directors of which were not
elected by AIX security holders.
Source: Infrastructure Funds: Managing, Financing and Accounting In Whose Interests, RiskMetrics Group,
April 2008
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Appendix 3
Issues Raised on Infrastructure Funds
1.
Sustainability - The stapled-security structure adopted by many funds allowed the payment of
distributions out of capital. Many of the infrastructure funds paid distributions that were a substantial
portion, or even in excess, of operating cash flow, in many instances exceeding the reported net profit
for the year.
2.
High leverage - As part of their construct, infrastructure funds were highly leveraged. The structure of
debt financing adopted by the funds was also often aggressive, with the liberal use of interest-only
facilities and short-term refinancing. Often, when refinanced, the new facilities were larger than those
they replaced.
3.
Expensive assets - The growth in size of listed infrastructure funds had escalated asset prices for these
types of assets. Aside from the natural price inflation created by competition for assets, the externally
managed model also encouraged asset acquirers to calculate purchase prices based not only on
sustainable returns on capital as a strategic or trade buyer would, or even on the potential disposal
price but also on the level of fees able to be garnered over the (long) life of a management agreement,
possibly inflating asset prices even further. In addition the asset purchase/disposal provided an
opportunity for separate advisory, debt arranging and/or underwriting fees; hence it could give rise to
perverse incentives for external sponsors, i.e. to keep going after the next deal, whether or not it was
actually yield accretive.
4.
High fees - Fees derived from a wide range of management, advisory and financial services, that tended
to provide an incentive to increase a funds size. Over the years, there was a rising importance of fees
that were not performance-related and were within the control of the external manager, i.e. base fees,
usually related to assets under management; and related party fees like fees for advisory, underwriting
and debt arranging, usually related to deal.
5.
Accounting and Governance issues

a.
Infrastructure assets could be placed in an unlisted company held as a non-controlled

associate by the fund - under this structure, it was possible for the fund to report an increase
in profit through revaluing its holding in the unlisted company;.
b.
External manager had high level of board control through holding special shares, and was
difficult to remove due to the special shares, contingent fees, 25-year agreements etc;
c.
Insufficient independence of the listed fund from the sponsor, due to various management and
financial agreements in place between the fund and the sponsors various subsidiaries;
d.
Potential conflicts of interest in cases where sponsor/external manager sells assets from its own
balance sheet to the publicly listed fund price at which the fund buys the asset would be
disclosed, but the original price paid by the sponsor would commonly not be disclosed;
e.
Potential conflicts of interest due to one-way exclusivity arrangements where the fund was
bound by the exclusivity agreement but the external manager was not e.g. sponsor-owned
manager must be appointed as manager of each asset, but sponsor was under no obligation to
present all investment opportunities in a particular asset class to the relevant fund, or even not
to compete with the fund;
f.
Remuneration model for some of the funds aligned interests of the executives managing the
funds with the external manager rather than the fund itself;
g.
Potential conflicts of interest from the use of same audit firm as sponsor for some of the funds
e.g. funds managed externally by Macquarie were audited by PricewaterhouseCoopers, the
auditor of the Macquarie Group. The potential impact of losing Macquarie as a client could
create disincentives for the auditor to point out accounting issues related to the
sponsor/external manager in the listed funds.
Source: extracted from Infrastructure Funds: Managing, Financing and Accounting In Whose Interests,
RiskMetrics Group, April 2008
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Appendix 4
The Subprime Effects
Burst of US
Housing Bubble,
Increasing Mortgage
Delinquency
and Foreclosure
Inability to
refinance
mortgages
Inability to meet
interest payments
due to ARM
adjustments and
worsening
economy
Single Government
Actions
and Stock
Market Crashes
Single Government Actions

e.g. $ 700 bn Troubled Asset
Relief Program (TARP)
Equity Markets worldwide
suffer severely
Liquidity Issues stay unsolved
Selected Banks and Insurance
Companies in USA, Europe
and Asia in financial difficulties
Massive write-downs
for
banks and other
Investors
Correction of
associated risk
expectations on MBS
Rating downgrades
on MBS
Higher capital
charges
Drop of capital
levels of banks
and hampered
refinancing
Valuation uncertainty
spreads from subprime
to all MBS
High bank debt levels
Rising spreads and
increasing unwillingness
of investors to buy MBS
Loss of
Confidence
between
commercial
banks
Liquidity of
capital markets
severely cut
back
Market for MBS collapsed

Inter-bank lending dried up
further
Banks and Insurance
Companies in severe
refinancing problems
worldwide
Worldwide economic
slowdown
Spreads
continued to
increase
Bankruptcy of
Lehman Brothers
Failures of
banks and other
institutions
Banks, Insurance
Companies &
Hedge funds
Institutions, which
are dependent on
capital markets for
refinancing
Government
and Central
Bank
Intervention
Fannie Mae and

Freddie Mac
taken into
conservatorship
Northern Rock
(GB) partly
nationalized
Source: Adapted from Refinancing Real Estate Loans Lessons to be learned from the Subprime Crisis,
Professor Dr. Markus Rudolf, WHU Otto Beisheim School of Management, Professor Anthony Saunders,
Ph.D.: New York University, Stern School of Business, February 2009
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Appendix 5
Background of Babcock & Brown
The Mothership Babcock & Brown Limited (BBL)

Babcock & Brown was formed in San Francisco in 1977 by James Babcock and George Brown.
Initially, the companys area of focus was advising on and arranging structured asset-backed finance
transactions, which then broadened into operating leasing in1989, renewable energy development/asset
management in 1988 in the US and followed by Europe in 1994, public-private partnership (PPP)
developments in 1995, power generation development in 1997, international real estate operations in
1998, and specialist asset management operations in 2004. Over time, the Babcock & Browns
business model evolved from earning fee income as an adviser/arranger, to increasing usage of its own
capital either for principal investment or to secure assets for syndication and management on behalf of
third parties. The move towards a more capital-intensive business model led Babcock & Brown to list
on the Australian Stock Exchange (ASX) as BBL in 2004 in an initial public offering to raise A$550
million. Under the structure, BBL was the listed company on ASX, while its majority-owned
subsidiary Babcock & Brown International Pty Ltd (BBIPL) was the operating company owning the
various Babcock & Brown entities and assets. Staff ownership of BBL was high at 40% of outstanding
shares.
The Baby Babcocks

Babcock & Brown Power (BBP) - BBL had been an active participant in power generation since the
1990s, co-owning and developing power stations with other investors in Australia. In 2005, BBL
established BBP as a special purpose vehicle to own and manage its portfolio of base load,
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intermediate and peaking power generation plants located across Queensland, New South Wales,
Victoria, South and Western Australia, which were powered by a diversified fuel mix of coal, natural
gas and coal seam methane. BBP listed on the ASX on 11 December 2006, following an initial public
offering at A$2.50 per share. At the end of 2007, BBL held about 10% of BBPs shares. In Aug 2007,
the acquisition of some of Alinta assets doubled BBPs capitalization and raised its gearing
(debt/debt+equity) from 47% at listing to 95%.
Babcock & Brown Infrastructure (BBI) - Originally called Prime Infrastructure, with the Dalrymple
Bay Coal Terminal (DBCT) in Queensland, Australia, as its foundation asset, Prime Infrastructure was
acquired by a Babcock-led consortium in September 2001 and listed on the ASX in Jun 2002 at the
listing price of A$1.00 per share. It then diversified into electricity generation by acquiring gas-fired
and coal-fired power generators and wind farms in Australia, as well as energy distribution businesses
in New Zealand and Tasmania. On 1 July 2005, it was restructured and renamed BBI, and by 2006, it
had become a widely diversified infrastructure fund which invested in three asset classes: Energy
Distribution and Transmission, Transport Infrastructure and Power Generation, with assets located in 9
countries. At the end of 2007, BBL held about 8% of BBIs shares. The Alinta acquisition raised
BBIs capitalization from A$3.3 billion to A$3.7 billion, and raised its gearing from 67% to 76%.
Babcock & Brown Wind Partners (BBW) - BBW was an investment fund with a triple stapled
structure and an initial portfolio at the time of listing of 16 wind farms located in Australia, Europe and
the United States. It sold units of wholesale electricity generated by its farms, either into the local grid,
or to utility companies through long-term off-take agreements. It was originally called Global Wind
Partners, a joint venture between BBI and BBL and was listed on the ASX on 28 October 2005 at
$1.40 per share. The listing proceeds were used to expand the BBW portfolio through acquisitions in
US and Europe through the Babcock group pipeline, and through two separate Framework Agreements
with Spanish turbine supplier and developer Gamesa and German developer Plambeck. Under the
agreements, as long as the deals met certain criterion, the developers were obligated to provide the
deals to BBW, and BBW was obliged to take them. The prices were locked in at the time of the
agreements, which later became an advantage to BBW as the prices of wind farms in Europe climbed.
In May 2007, BBW refinanced its business, aggregating all debt across all regions, at project, asset and
corporate level, into a single EUR1.79 billion (A$3.6 billion) facility with a 15-year amortising term
(to 2022)27. At the end of 2007, BBL held about 12% of BBW.
Appendix 6
Example of Stapled Security Structure - BBP
Source: Babcock & Brown Power prospectus

27
Macquarie Research, 27 Feb 2009
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Appendix 7
Management Fees of Babcock Funds vs. Peers
Source: Deutsche Bank Company Research, 18 Jan 07.

NB: BBWs base fee should be based on Net Investment Value (NIV) as listed in its prospectus, not Adjusted
Market Cap. NIV = Adjusted market capitalization + debt + firm commitments of future investments cash
book value of any assets which are externally managed
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Appendix 8
Other Fees
BBP
BBI
BBW
Custodian fee
0.0125% of total assets of trust None
0.0125% of gross asset value of

trust
Responsible Entity
fee
A$550,000 per annum,

increased by annual changes in None
CPI
A$500,000 per annum, increased

by annual changes in CPI
Manager Expense
A$6.2m first year, A$6.6m

second year, A$7m third year.
Base amount subject to annual
CPI increases and periodic
increases approved by relevant
Board. In addition, Manager
entitled to be reimbursed for
various out of pocket expenses
A$7.9 million first year, adjusted

for CPI increases annually. In
addition, Manager entitled to be
reimbursed for various out of
pocket expenses
A$6m per annum, adjusted for

CPI increases annually. In
addition, Manager entitled to be
reimbursed for various out of
pocket expenses
Break fees
1/3 of the net value of any

break, termination or similar
fees received by BBP in
connection with a committed
investment, payable to the
Manager
None
1/3 of the net value of any break,

termination or similar fees
received by BBW in connection
with a committed investment,
payable to the Manager
Financial advisory
fees under the
Exclusive Financial
Advisory Agreement
Market terms
Market terms
Market terms
Manager origination
and disposal fees
under the
Management
Agreement
Minimum fee of approx. 1.5% of

investment value* of asset,
which can increase to approx
Not specified
4.6% depending on size and
complexity of transaction
Terms of agreement provided that

once a minimum fee for a service
provided under the agreement
was set it could not be
subsequently decreased.
Minimum fee of 1.5% of
investment value of the target for
acquisitions
Asset management
fees
Base fees of 0.8% per annum of

the power asset's net
investment value** is payable to
Babcock and Brown Power
Asset Management Pty Ltd
None
(BBPAM), if the Management
Agreement is terminated or
Base fees and Incentive fees
are no longer payable under the
Management Agreement
Wind farm asset management or

support services fees at prevailing
commercial rates, not expected to
exceed A$1.8m per annum in
aggregate across the initial
portfolio
European
Framework Assets
incentive fees
None
Amount of fee depends on the

level of return for BBW
None
*investment value = capital invested plus the proportion of debt financing for the investment
**net invesetment value (NIV) = market capitalisation plus debt plus firm commitments of future investments less cash less book
value of externally managed assets
Source: BBP and BBW prospectuses, BBI annual reports, RiskMetrics
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Appendix 9
Other Relevant Fund Details
BBP
BBI
BBW
Management Agreements
25 years. Fund had limited rights to

terminate the Management
Agreements. Agreements would
continue even if there was a change of 25 years. Fund had limited rights to
control of fund, or if Responsible Entity terminate the Management
was removed and a new responsible Agreements.
entity appointed. Fees under
agreement would continue to be
payable

terminate the Management
Agreements. Termination of
Management Agreements not due to
material breach would result in
termination payments linked to the
unexpired length of the agreement
and the fees payable under the
agreement.
Asset Management
Agreements
(contingent fees)
25 years agreement between

Babcock and Brown Power Asset
Management Pty Ltd (BBPAM) and
each power station. Agreement would
continue even if there was a change of
NA
control of fund, or if Responsible Entity
was removed and a new responsible
entity appointed. Fees payable to
BBPAM if Management Agreement
terminated
NA
Exclusive Financial
Advisory Agreement

terminate agreement
10 years. Fund had limited rights to 10 years. Fund had limited rights to
terminate agreement
terminate agreement
One-way exclusivity
Exclusive management and financial

advisory agreements with external
manager but funds had no right of first
refusal on investments
Exclusive management and

financial advisory agreements with
external manager but funds had no
right of first refusal on investments
Board not independent
No outright majority of independent

directors
No outright majority of independent No outright majority of independent

directors
directors
Chairman not independent
Chairman was a BBL executive
Remuneration of key
employees
Long-term incentive program linked to Long-term incentive program linked Long-term incentive program linked
BBL, not BBP
to BBL, not BBI
to BBL, not BBW
Related party transactions
Only independent non-executive

directors make decisions for related
party deals. Any fees paid to B&B
group required approval by
independent non-executive directors
Fees paid to related parties

required approval by independent
non-executive directors
Fees paid to related parties required

approval by independent nonexecutive directors
External Auditor
Different auditor from BBL
NA
External manager held two

convertible loan notes that at the
option of the independent
directors of the company converted
into special voting shares that
would give external manager the
right to appoint 75% of the
directors of the company
No
Special voting shares
Exclusive management and financial

advisory agreements with external
manager but funds had no right of
first refusal on investments
Source: BBP and BBW prospectuses, BBI annual reports, RiskMetrics
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Appendix 10
Debt Profile of BBL
Source: Babcock & Brown interim results report
Appendix 11
Arrangement of the Use of the Proceeds from BBSN1/BBSN2

Source: Babcock & Brown Notice of Meeting of Noteholders, Explanatory Memorandum and Offer Document,
13 Mar 09
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Appendix 12
Some Terms of the BBSN Notes

Source: Babcock & Brown BBSN presentation
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Appendix 13
Timeline
Event
Date Entity
2004
BBL
Listed on the ASX at A$5 a share
2005
BBL
Secured a corporate debt facility of up to A$820m, issued first series of public debt securities (BBSN). Shares
finished year at A$18, having touched nearly A$22
2006
BBL
Increased corporate debt facility to A$1b and then again to A$1.32b. Issued more BBSN notes in NZ and Australia.
Shares closed year at A$26
2007
Feb-08
Feb-08
Mar-08
Mar-08
May-08
BBL
BBL
BBW
BBL
BBW
BBL
Increased corporate debt facility to A$2.35b. Bought Alinta. Bull market sent share price to just over A$34, valuing
BBL at A$12b. Global financial crisis and debt concerns started share slide. Shares ended year at just under A$18
2008 profit guidance of A$750m
Announces strategic initiatives to unlock portfolio value through sales of European assets
Increased corporate debt facility from A$2.4b to A$2.8b. Share price under A$15
Successful syndication of EUR1.69b global corporate facility
Re-affirms 2008 profit guidance of A$750m
Shock announcement that BBP only managed to refinance A$2.7b of A$3.1b needed, with additional A$275m capex
funding shortfall. BBL offered to lend A$360 million. Varanus Island plant explosion affected gas supplies to Alinta's
customers, impact on BBP earnings
22-May-08
BBP
12-Jun-08
20-Jun-08
BBL
BBP
Jun-08
Jun-08
Jul-08
BBL
BBI
BBP
Board looks for equity investor to shore up company. Jim Babcock asks directors to consider group's solvency.
11-Aug-08
BBL
10 days before results, BBL gave earnings downgrade warning that A$750 profit guidance would not be met
18-Aug-08
BBP
Announced A$452 impairment charge to Alinta assets. Total drawn debt A$3.7b, market cap at A$181.6m. Debt
exposure to BBL A$380m. Future distributions subject to paying down A$3.7b in debt.
21-Aug-08
Aug-08
Aug-08
Sep-08
Sep-08
BBL
BBP
BBW
BBL
BBW
Oct-08
Oct-08
19-Nov-08
BBP
BBI
BBL
Nov-08
Dec-08
BBW
BBL
Dec-08
Jan-09
6-Feb-09
Mar-09
BBW
BBL
BBL
BBL
Apr-09
Jun-09
Jun-09
BBW
BBL
BBP
Shorting of BBL pushed market cap below A$2.5b threshold triggering bank review. BBL continued to reiterate profit
guidance of A$750m
Canceled 2H08 distribution and decided future distributions to be covered by operating cashflow
Capital management review which could include sale of assets or cut in distributions
UBS engaged for strategic review of BBP businesses
BBL announced that its first half profits collapsed 30%. Phil Green stepped down as CEO, replaced by Michael
Larkin. Jim Babcock stepped down as Chairman. Plans to shrink BBL
Fired CEO and CFO, and 2 directors appointed by BBL. Review of management agreement with BBL
Agreement to sell Spanish portfolio as part of strategic initiative to unlock portfolio profit at A$266m
Phil Green resigned as Board director and sold remaining shares.
Announced on-market share buyback up to 10% over 12-mth period
Looking for a buyer after UBS strategic review. Corporate governance changes to board and fees, and given right to
obtain independent financial advice
Corporate governance changes in composition of board and fees.
BBLpannounced
that it may have
breached
g
g
p loan covenants and put on ptrading halt
g
agreement with BBL, internalised management and acquired some wind assets from BBL. Shareholders approve
buyback of shares, increasing from 10% to 30%.
1 year A$150m facility extended by banks while banks and BBL discussed debt workout
Separated from BBL after paying A$44m to terminate management and exclusive financial management agreements
Announced it was in "substantial negative net asset position". Shares still suspended
Debt restructuring agreement reached. Offer to BBSN holders to buy them out
BBSN holders reject offer, BBL put in administration. Shares suspended at 32.5 cents
Changed name to Infigen Energy, buying back 30% of shares, selling off remaining European farms and
concentrating on growth market of US and Australia, terminated Gamesa and Plambeck framework agreements
BBL shares de-listed from ASX
A$2.96 billion in borrowings, market value A$55.2m
Announced internationalisation of management and separation from BBL. Posted full-year loss of A$997.1m due to
A$895.1m asset impairment. Made no mention of default risk on debt coming due in the discussion on capital
management
26-Aug-09
Aug-09
BBI
BBL
Oct-09
BBI
Despite asset sales over past 18 mths, likely to breach debt covenants. Debt of A$9b, with A$300m corporate debt
facility due Feb 2010. Looking for equity injection from cornerstone investor
Nov-09
BBI
Shareholders approved A$1.8b recapitalisation with cornerstone investor Brookfield Asset Management Inc to own
40%.
Dec-09
BBP
Deal to pay B&B International A$444m in debt and fees to clear debt and end all management agreements. Rolled
over A$2.7b worth of debts. Distributions likely to be in cash-lockup in the short term in order to meet debt repayment
Creditors vote for liquidation
Source: newspapers, analyst reports
25
10/2011-5844
PRE-RELEASE VERSION
Appendix 14a
Datasheet 1
Worksheet
ABBREV
BBL
BBI
BBP
BBW
CIF
HDF
MAP
MIG
SPN
SKI
ASX200
S&P500
MSCI_W
S&P_GI
MQ_GI
UBS_GUI
DJ_AeroDef
DJ_AutoParts
DJ_Banks
DJ_Bev
DJ_PharmBio
DJ_Media
DJ_ConMat
DJ_Chem
DJ_GenFin
DJ_EE
DJ_Electr
DJ_O&G
DJ_OilEqu
DJ_Ftel
DJ_FoodPro
DJ_F&D
DJ_Forest
DJ_GWU
DJ_HealthEq
DJ_HH
DJ_IndEng
DJ_IndTrans
DJ_GenInd
DJ_Retail
DJ_Nlife
DJ_Lins
DJ_Leisure
DJ_IndMetals
DJ_Mining
DJ_RE
DJ_Tech
DJ_Software
DJ_PersGood
DJ_Tobac
DJ_Mobile
DJ_Travel
Variable Name
Babcock & Brown Infrastructure (now Prime Infrastructure)
Babcock & Brown Power (now Alinta Energy)
Babcock & Brown Wind Partners (now Infigen Energy)
Challenger Infrastructure Fund
Macquarie Airports
Macquairie Infrastructure Group
SP Ausnet Group
Sparks Infrastructure Group
ASX 200 Index
S&P 500 Index
MSCI World
S&P Global Infrastructure Index
Macquarie Global Infrastructure Index
UBS Global Utilities & Infrastructure 50-50 Index
Dow Jones Aerospace & Defense Index
Dow Jones Automobiles & Parts Index
Dow Jones Banks Index
Dow Jones Beverages Index
Dow Jones Pharmaceutical & BioTech Index
Dow Jones Media Index
Dow Jones Construction Materials Index
Dow Jones Chemicals Index
Dow Jones General Financials Index
Dow Jones Electronics and Electrical Equipment Index
Dow Jones Electricity Index
Dow Jones Oil & Gas Producers Index
Dow Jones Oil Equipment, Services & Distribution Index
Dow Jones Fixed Line Telecoms Index
Dow Jones Food Producers Index
Dow Jones Food & Drug Retailers Index
Dow Jones Forestry & Paper Index
Dow Jones Gas, Water & Multi-Utilities Index
Dow Jones Health Equipment & Services Index
Dow Jones Household Goods Index
Dow Jones Industrial Engineering Index
Dow Jones Industrial Transportation Index
Dow Jones General Industrials Index
Dow Jones General Retailers Index
Dow Jones Non-Life Insurance Index
Dow Jones Life Insurance Index
Dow Jones Leisure Index
Dow Jones Industrial Metals Index
Dow Jones Mining Index
Dow Jones Real Estate Index
Dow Jones Tech Hardware & Equipment Index
Dow Jones Software and Computer
Dow Jones Personal Goods Index
Dow Jones Tobacco Index
Dow Jones Mobile Telecom Index
Dow Jones Travel & Leisure Index
Ccy
AUD
AUD
AUD
AUD
AUD
AUD
AUD
AUD
AUD
AUD
AUD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
Data starts
Oct-04
Oct-04
Dec-06
Oct-05
Aug-05
Dec-04
Oct-04
Oct-04
Dec-05
Dec-05
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Oct-04
Source
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bond Yields
AUS_3m
AUS_10Y
US_3m
US_10Y
Australian 3m interbank rates

Australian 10 yr government bond
3 month US$ interbank rate
10 year US Treasury Yield
AUD
AUD
USD
USD
Oct-04
Oct-04
Oct-04
Oct-04
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Currencies
AUDUSD
USD per AUD
AUD
Oct-04
Bloomberg
Stock Prices
& Indices
26
Industry
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Index
Index
Index
Infrastructure
Infrastructure
Infrastructure
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Index
Co./Trust
Company
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Listed
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
10/2011-5844
PRE-RELEASE VERSION
Appendix 14b
Datasheet 2
Worksheet ABBREV
Stock Indices ASX200
S&P500
MSCI_W
S&P_GI
MQ_GI
UBS_GUI
Variable Name
ASX 200 Index
S&P 500 Index
MSCI World
S&P Global Infrastructure Index
Macquarie Global Infrastructure Index
UBS Global Utilities & Infrastructure 50-50 Index
Stock Prices BBL

BBI
BBP
BBW
CIF
HDF
MAP
MIG
SPN
SKI
CCY
AUD
USD
USD
USD
USD
USD
Data starts
6-Oct-04
6-Oct-04
6-Oct-04
6-Oct-04
6-Oct-04
6-Oct-04
Source
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Industry
Index
Index
Index
Infrastructure
Infrastructure
Infrastructure
Co./Trust
Listed

AUD
Babcock & Brown Infrastructure (now Prime Infrast AUD
Babcock & Brown Power (now Alinta Energy)
AUD
Babcock & Brown Wind Partners (now Infigen EnerAUD
Challenger Infrastructure Fund
AUD
AUD
Macquarie Airports
AUD
Macquairie Infrastructure Group
AUD
SP Ausnet Group
AUD
Sparks Infrastructure Group
AUD
6-Oct-04
6-Oct-04
8-Dec-06
27-Oct-05
18-Aug-05
10-Dec-04
6-Oct-04
6-Oct-04
13-Dec-05
15-Dec-05
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Infrastructure
Company
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Stapled Security
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Bond Yields
AUS_3m
AUS_10Y
US_3m
US_10Y
Australian 3m interbank rates

Australian 10 yr government bond
US 3 mth interbank rates
US 10 yr Treasury
AUD
AUD
USD
USD
6-Oct-04
6-Oct-04
6-Oct-04
6-Oct-04
Bloomberg
Bloomberg
Bloomberg
Bloomberg
Currencies
AUDUSD
USD per AUD
AUD
6-Oct-04
Bloomberg
Appendix 14c
Datasheet 3
Worksheet
Data
Period
Source
BBL
BBI
BBP
BBW
CIF
HDF
MAP
MIG
SPN
SKI
Balance Sheet, Income Statement, Cash Flow Statement

2004-2007
2005-2009
2005-2009
2005-2009
2006-2009
2004-2008 (2009 annual report not ready)
2004-2008 (management internalized in 2009)
2005-2009
2005-2009
2006-2008 (2009 annual report not ready)
ThomsonOne
ThomsonOne
ThomsonOne
ThomsonOne
ThomsonOne
ThomsonOne
ThomsonOne
ThomsonOne
ThomsonOne
ThomsonOne
27
10/2011-5844

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PRE-RELEASE VERSION

Background The Infrastructure Industry

Copyright 2011 INSEAD

Multiple entities (companies and trusts) were listed as a stapled security;

Management of the infrastructure fund was contracted out to an external manager,

Appendix 2 shows the structure of some Australia-listed infrastructure funds.

Infrastructure Still on Track, Proceed with Caution, Mercer, 30 Jun 2009

Copyright 2011 INSEAD

Copyright 2011 INSEAD

Infrastructure Fund Babcock & Brown

Copyright 2011 INSEAD

The Winners Curse Too Much of a Good Thing

Copyright 2011 INSEAD

The Beginning of the End

Copyright 2011 INSEAD

The Fall of the House of Babcock, Project Finance International, 26 Nov 08

Copyright 2011 INSEAD

How the credit crunch caught, Asiamoney, Sep 2008

Copyright 2011 INSEAD

A$344m + accrued interest at BBSY+350 basis points

Remaining A$2.12b subject to restructuring fee of 2,000 basis points per

Source: Project Finance International

Copyright 2011 INSEAD

Postscript - Life after Babcock

Copyright 2011 INSEAD

Copyright 2011 INSEAD

Copyright 2011 INSEAD

US$6bn across eleven Emerging markets, all sectors. Different funds

Industries transportation & utilities; has funds that

Greenfield and brownfield infrastructure; focus on

Focus on transportation, water, telecom and utilities

Focus on utilities, transport and social infrastructure

Transportation; airports; regional focus on Europe

Babcock & Brown

Focus on energy distribution and transport; ASX

Copyright 2011 INSEAD

Alinta Infrastructure (AIH)

Australian Infrastructure Fund (AIX)

Babcock & Brown Capital Limited

Wholly-owned subsidiary of Alinta

Babcock & Brown Infrastructure (BBI)

Babcock & Brown Power (BBP)

Babcock & Brown Wind Partners

Wholly-owned subsidiary of Babcock &

Challenger Infrastructure Fund (CIF)

Wholly-owned subsidiary of Challenger

ConnectEast Group (CEU)

Wholly-owned subsidiary of Macquarie

A company jointly owned (50-50) by

Hastings Diversified Utility Fund

Macquarie Airports (MAP)

Macquarie Capital Alliance Group

Wholly-owned subsidiary of Macquarie

Wholly-owned subsidiary of Macquarie

Macquarie Infrastructure Group

Two wholly-owned subsidiaries of

Macquarie Media Group (MMG)

Wholly-owned subsidiary of Macquarie

Rivercity Motorway (RCY)

SP AusNet Group (SPN)

Spark Infrastructure Group (SKI)