B A B C O C K & B R O WN G l O B A l INve st m e N ts A n n u al 2008 R ep Annual Report o rt

Transcription

1 2008 Annual Report

2 Contents 1 Board of Directors Letter 2 At a Glance 4 Board of Directors 6 Managing Director s Letter 7 The Manager 10 Portfolio Composition 12 Operating Lease Assets 16 Loan Portfolio and Securitisation Assets 24 Alternative Assets 26 Corporate Governance 30 Operating and Financial Review 35 Financial Report 82 Additional SGX-ST Listing Manual Disclosures 86 Shareholder Information 88 Glossary 89 Corporate Information Unless otherwise stated, all currency amounts in this report are denominated in Singapore Dollars. This report may include information forecasting or projecting future outcomes. Such outcomes may be affected by a wide range of influences outside of BBGI s control. In respect of such forward looking information, no representation or warranty is made by or on behalf of BBGI, BBGIM or the Babcock & Brown Group that any projection, forecast, forward looking statement, assumption or estimate contained in this report should or will be achieved. Certain pictures used in this report are not of BBGI s underlying assets and economic exposures and have been included for illustrative purposes only.

3 Board of Directors Letter Dear Shareholders, We are pleased to present to you the Annual Report of Babcock & Brown Global Investments Limited ( BBGI or the Company ) for the year ended 31 December 2008 ( FY2008 ). FY2008 was a year of extreme volatility with the global macroeconomic environment continuing to deteriorate. The performance of the Company for FY2008 was significantly impacted by the weak economic backdrop and this has been reflected in the results for the year. The Company ended the year with a net asset value of 40 Singapore cents per Share after recording a number of impairment expenses as well as unrealised foreign exchange losses as a result of the weakening base currencies against the United States Dollar. In light of the adverse macroeconomic backdrop, one of the main priorities as a Board during 2008 was capital management, focusing on: close monitoring of the portfolio of assets to ensure they continued to be well managed; and identifying strategic divestments to release capital and repay corporate debt. In addition to the capital management initiatives, a considerable focus of the Board was on stability of the management of the Company and the portfolio of assets given the financial difficulties of the Babcock & Brown Group. The Company made the difficult decision of not declaring a distribution in respect of the second half of 2008 and diverting Cash Economic Income to further reduce leverage. This decision followed the earlier moves by the Company to reduce debt levels. It is now expected that the Company s corporate debt facility will be fully repaid by October 2009, after which time we are expecting to return to paying distributions to our Shareholders. The Company appointed a strategic adviser on 3 October 2008 for the purpose of undertaking a review of the Company s assets and businesses, and making recommendations on the Company s strategic options. Following consideration of the results of the strategic advisers review, the Company announced that it would continue to de lever, return to paying regular distributions following repayment of the Company s corporate debt facility and take steps to de-link from the Babcock & Brown Group. It is expected that a recommendation will be presented to Shareholders shortly on the way in which the Company believes this de-linkage should occur. We would like to thank Shareholders for their continued support in our Company. Despite the weakening global outlook, the Board and management team remain focused on the year ahead. Yours faithfully BBGI Annual Report 2008 BOARD OF DIRECTORS LETTER Board of Directors Babcock & Brown Global Investments Limited 1

4 At a Glance Early steps to renew the corporate debt facility with substantially reduced leverage net Asset Value of 40 Singapore cents per Share at 31 December 2008 Divestments during the year: exit from AGSO Loan Guarantee resulted in the release of A$50.0 million to BBGI exit from Paradox loan the loan of US$15.0 million was repaid in full together with all accrued interest Increase in investment in European railcar portfolio the BBGI Group invested a further 1.2 million in Babcock & Brown Rail Investments Limited in satisfaction of a previous funding commitment Declared and paid 2008 interim dividend of 5.20 cents per Share in respect of the period from 1 January 2008 to 30 June 2008 (no dividend declared for 2H08 as a result of the decision to further reduce leverage) Appointment of a strategic adviser to assist in determining the way forward for the Company 2

5 INVESTMENT OBJECTIVE BBGI offers investors ready access to assets within three main asset classes: operating lease assets, loan portfolio and securitisation assets and alternative assets. BBGI s portfolio of assets and economic exposures includes an investment in a listed entity operating in the aviation industry; an investment in commercial aircraft subject to lease; freight rolling stock operating in North America and passenger train fleets, locomotives and freight wagons operating in Europe, all subject to lease; a diversified portfolio of loans, equity notes and net interest margin notes in securitisations secured against residential and commercial property located in Australia and the United Kingdom; investments in European collateralised loan obligation vehicles and loans secured by inventory and receivables; and alternative assets which includes a single obligor loan financing and music copyright. STRATEGY BBGI s strategy is to actively manage the portfolio of assets within its three target asset classes and to provide investors with an attractive yield and a competitive rate of return by paying regular dividends and achieving capital growth. The active management includes strategic investments and divestments of assets and capital management. BBGI implements the following strategies in working to achieve its investment objective: Active Portfolio Management Strategy; Financing and Risk Management Strategy; and Acquisition Growth Strategy. Active Portfolio Management Strategy Babcock & Brown Global Investments Management Pty Limited ( BBGIM or the Manager ) has been engaged to actively manage, monitor and shape the portfolio of assets and economic exposures. This includes but is not limited to acquiring new assets, selling assets whether by trade sale or to a newly formed fund and considering the financial resources available to BBGI, the capital structure of BBGI s assets and suggesting alternative methods of financing those assets to deliver Shareholder value. BBGI expects to, and has in fact, disposed of assets where it assesses that the Shareholder value has been optimised or where the economic cycle or market conditions may no longer justify a continued investment in the asset, asset class or industry. Financing and Risk Management Strategy BBGI has aimed to create value for Shareholders by establishing the optimal capital structures for assets and economic exposures on an individual asset basis and in terms of the financial resources available to and the overall capital structure of BBGI. The portfolio has been created so that there is diversity across asset class, geography, industry, currency and investment maturity, both to manage risk in economic cycles and to manage reinvestment risk. Acquisition Growth Strategy Depending on market outlook and the financial resources available to BBGI, if opportunities arise, BBGI may prudently acquire new assets across the target asset sectors. In evaluating investment opportunities, it seeks assets that provide attractive returns adjusted for the risk associated with the investment and which enhance the overall portfolio owned by BBGI. MANAGEMENT BBGI is managed by BBGIM which is a wholly owned member of the Babcock & Brown Group. BBGIM is licensed by the Australian Securities and Investments Commission as an Australian Financial Services Licensee to provide certain financial services including giving financial product advice and dealing in investments. For further information regarding the Manager, please refer to the section The Manager. BBGI Annual Report 2008 at a glance 3

6 Board of Directors The Board of Directors meets four times per annum, or more frequently as required, to review and monitor BBGI s financial condition and operations, and approve investments and divestments. The current Board of Directors comprises five Directors with one of the Directors nominated by the Babcock & Brown Group through the Manager. Four of the Directors are independent and do not have a material relationship with BBGI, or the Babcock & Brown Group, as that term is defined by the Singapore Code of Corporate Governance The Independent Directors are Tara Leonard Railton, Joel Peter Schaefer, Dilhan Pillay Sandrasegara and Lee Soon Kie. BBGI has no employees or executive officers. Julian Blackley ACTING CHAIRMAN CEO of the Manager, Australia Julian Blackley was appointed to the Board of Directors on 25 February Mr Blackley is also the CEO and Managing Director of the Manager of the Company. Mr Blackley is an Associate of The Institute of Chartered Accountants in Australia and holds a Bachelor of Business and Graduate Diplomas in Business and Accounting. Detailed information regarding the boards that Mr Blackley currently serves on, and has served on, is set out in the Principal Directorships section under Additional SGX ST Listing Manual Disclosure Requirements. Further information regarding Mr Blackley is set out in the The Manager section. Tara Leonard Railton Deputy Chairman Chartered Accountant, Bermuda Tara Leonard Railton was appointed to the Board of Directors on 25 October She has 20 years experience in the insurance market and extensive experience in corporate structuring and reorganisations which address changing regulatory environments. Her roles included president and chief executive officer and senior vice president and chief accounting officer of Centre Group Holdings Limited. Most recently, Ms Railton was chief financial officer of Arlington Tankers Limited, a NYSE listed shipping company. Ms Railton holds a Bachelor of Business Administration honours degree from Wilfrid Laurier University, Canada. Ms Railton is a Chartered Accountant and a Canadian citizen residing in Bermuda. Detailed information regarding the boards that Ms Railton currently serves on, and has served on, is set out in the Principal Directorships section under Additional SGX ST Listing Manual Disclosure Requirements. 4

7 Joel Peter Schaefer Director Director, President and CEO, Bermuda Joel Peter Schaefer was appointed to the Board of Directors on 25 October He is the president and chief executive officer of CAPITAL G Investments Ltd, a fund management entity based in Bermuda. He is chief investment officer of CAPITAL G Bank Ltd, also based in Bermuda. He is responsible for the management of CAPITAL G Investments Ltd and reports to the chairman and Board of Directors of CAPITAL G Ltd. His major responsibilities include development and management of the investment companies controlled by the CAPITAL G Group. Mr Schaefer is a chartered financial analyst. Mr Schaefer holds a Bachelor of Arts in Economics from Wesleyan University. He has held a number of senior positions with the Bank of Bermuda prior to joining the CAPITAL G Group. He is based in Bermuda. Detailed information regarding the boards that Mr Schaefer currently serves on, and has served on, is set out in the Principal Directorships section under Additional SGX ST Listing Manual Disclosure Requirements. Dilhan Pillay Sandrasegara Director Lawyer, Singapore Dilhan Pillay Sandrasegara was appointed to the Board of Directors on 25 October A lawyer, Mr Sandrasegara is the Managing Partner of Wong Partnership LLP. He has 20 years of experience in the legal industry. Mr Sandrasegara holds a Bachelor of Laws honours degree from the National University of Singapore and a Master of Laws degree from Cambridge University. He was admitted to the Singapore Bar in Detailed information regarding the boards that Mr Sandrasegara currently serves on, and has served on, is set out in the Principal Directorships section under Additional SGX ST Listing Manual Disclosure Requirements. Lee Soon Kie Director Group CEO, Singapore Lee Soon Kie was appointed to the Board of Directors on 25 October He is the Group Chief Executive Officer and an executive director of IFS Capital Limited, which is listed on SGX ST where he has overall responsibility for management of the group. He holds a B.A. from the National University of Singapore as well as a M.Sc. Computer Science (Dist.) from the University of Wales (Aberystwyth). Mr Lee has more than 20 years experience in the banking and finance sector and has worked at Schroders, ABN AMRO and PhillipCapital Group. Detailed information regarding the boards that Mr Lee currently serves on, and has served on, is set out in the Principal Directorships section under Additional SGX ST Listing Manual Disclosure Requirements. BBGI Annual Report 2008 Board of Directors 5

8 Managing Director s Letter BBGI appointed BBGIM as its sole and exclusive Manager on 12 December The Manager was incorporated in Australia under the Corporations Act 2001 on 20 March Its registered office and principal place of business is at Level 23, The Chifley Tower, 2 Chifley Square, Sydney, New South Wales 2000, Australia. The Manager is a subsidiary of the Babcock & Brown Group. The Manager is licensed by the Australian Securities and Investments Commission as an Australian Financial Services Licensee to provide financial services, including giving financial product advice and dealing in investments. Dear fellow Shareholders, 2008 was a year of significant turmoil in the global debt and equity markets. Despite widespread government intervention, early indications are that 2009 will continue to be difficult, as what is now considered by many, to be the worst economic crisis since the Great Depression continues to work its way through real economies. The focus of the Manager during 2008 was on consolidation, concentrating on active management of the investments in the portfolio and de risking the Company, particularly in light of what was shaping up to be a very difficult year ahead. In early 2008, the decision was made to begin reducing the level of debt in the Company to minimise refinancing risk and eliminate the potential for forced asset sales in a rapidly deteriorating environment. In the first half of 2008 the Manager worked with the Babcock & Brown Group to exit the Company s investments in the AGSO Loan Guarantee and the subordinated loan to Paradox Capital LLC. The principal proceeds from these divestments were used to reduce the Company s corporate debt facility from US$116.6 million to A$38 million in June In September 2008 the Company paid an interim dividend of 5.2 Singapore cents per Share. The Company has, however, since resolved to divert all available cash flow, after maintaining prudent reserves, to further reduce leverage. In light of this decision, a distribution in respect of the half year period ended 31 December 2008 was not declared. The Company is expecting that its corporate debt facility will now be fully repaid during the second half of Despite Cash Economic Income continuing to be positive, the performance of the portfolio of investments has been significantly impacted by the challenging economic environment with a number of asset impairments being recorded over the course of the year, resulting in the accounting net asset value falling to 40 Singapore cents per Share at 31 December Many commentators are united in their view that the global macroeconomic outlook in 2009 is particularly bleak with few signs of a meaningful recovery in the short term. The decision to de lever the corporate debt facility has positioned the Company relatively well for the continued market turbulence which is expected in 2009 and potentially beyond. As Manager of BBGI, we are closely monitoring the market environment and will continue to actively manage the portfolio of underlying investments and recommend measures to further stabilise the Company. In conclusion, I would like to thank the BBGI Board for its support and continued dedication as the management team works to manage the Company and its portfolio of assets in a challenging economic and market backdrop. Yours faithfully Julian Blackley Managing Director Babcock & Brown Global Investments Management Pty Limited 6

9 The Manager BOARD OF DIRECTORS OF BBGIM The Board of Directors of the Manager is responsible for the oversight of the management of the Manager. The current Directors of the Manager and the information relating to each are set out below: Julian Blackley DIRECTOR Julian Blackley was appointed to the Board of the Manager on 6 June Prior to joining Babcock & Brown, Mr Blackley spent approximately nine years with PricewaterhouseCoopers in Sydney and New York. During his time with PricewaterhouseCoopers, Mr Blackley worked primarily in the banking and capital markets team within the financial services division, specialising in accounting for structured finance transactions and providing accounting advice to a broad range of domestic and international banks and finance companies. Philip Mackey Director Philip Mackey was appointed to the Board of the Manager on 10 July He is the Chief Operating Officer, Specialised Funds for the Babcock & Brown Group. Mr Mackey holds a Bachelor of Business and a Graduate Diploma in Company Secretarial Practice. He is a Fellow of Chartered Secretaries Australia, an Associate of The Institute of Chartered Accountants in Australia and is a Member of the Australian Institute of Company Directors. Mr Mackey has over 28 years experience in the commercial and professional services sectors encompassing company secretarial, corporate governance, compliance, risk management, treasury, audit and accounting activities. Prior to joining the Babcock & Brown Group, Mr Mackey was Company Secretary at Australand, an Australian listed property developer and investor and previously held a number of senior executive roles at AMP Limited. Adrian Kidd Director Adrian Kidd was appointed to the Board of the Manager on 20 March He is the Chief Investment Officer of the Manager. Mr Kidd holds a Masters of Commerce and Bachelor of Science (Statistics) and is a Fellow of the Institute of Actuaries of Australia. Prior to joining Babcock & Brown, Mr Kidd worked at Tillinghast Towers Perrin as a senior actuarial analyst in the financial modelling group, specialising in model development. Mr Kidd was the project manager on the development of various pricing and hedging models for insurance risk and other financial services transactions. BBGI Annual Report 2008 The Manager 7

10 The Manager PRINCIPAL OFFICERS OF BBGIM The principal officers of the Manager are responsible for the day to day management of BBGI. They are: Julian Blackley CEO AND CFO Mr Blackley joined Babcock & Brown in June 2006 as Chief Financial Officer ( CFO ) of BBGIM and played a lead role in the successful IPO of BBGI in December In early 2008 Mr Blackley assumed the responsibility of Chief Executive Officer ( CEO ) and Managing Director of BBGIM as well as joining the Board of Directors of BBGIM while continuing to fulfil the role of CFO. As CEO and Managing Director of the Manager, Mr Blackley has overall responsibility for the management of the Manager. His primary responsibility in this role is to carry out the strategic plans and policies as established by BBGI s Board of Directors. Mr Blackley ensures that the terms of the Management Agreements are complied with and all responsibilities diligently and thoroughly performed. Mr Blackley is responsible for ensuring information is available as needed to allow compliance with BBGI s corporate governance regime. Mr Blackley receives all recommendations that go to BBGI s Board of Directors and is responsible for ensuring implementation of all decisions of BBGI s Board of Directors. As CFO of the Manager, Mr Blackley oversees all aspects of financial accounting and reporting, financial risk management, including compliance with BBGI s funding and hedging strategy, budgeting and forecasting, and managing compliance with financial covenants and external financial regulatory requirements. Adrian Kidd CIO Adrian Kidd is the Chief Investment Officer ( CIO ) of the Manager. Mr Kidd joined Babcock & Brown in 2006 and in late 2007 joined BBGIM as CIO of the Manager. As Chief Investment Officer of the Manager, Mr Kidd is responsible for the management of the Company s portfolio of assets across all three asset classes including asset valuation and performance forecasting, oversight of asset performance reporting and assessing acquisition and divestment opportunities by working with industry experts as appropriate to optimise shareholder returns from transactions. He also assists the Managing Director of the Manager in realising the broader strategic objectives of BBGI. Sophie Hlubucek Financial Controller Sophie Hlubucek is the Financial Controller ( FC ) of the Manager. Prior to joining Babcock & Brown, Ms Hlubucek was employed by the Lend Lease Group for approximately six years. During this time Ms Hlubucek worked in the Australian and United Kingdom ( UK ) offices. Ms Hlubucek holds a Bachelor of Commerce (Accounting and Commercial Law) and Bachelor of Arts (English Literature) and is a member of CPA Australia. As FC of the Manager, Ms Hlubucek manages the various financial reporting and compliance responsibilities across the Company and its subsidiaries including the completion of quarterly, half yearly and annual consolidated accounts for the SGX ST, management of the budgeting and forecasting processes and the various funding and treasury arrangements in place across the Group and compliance with debt facilities, jurisdictional reporting requirements and accounting regulations. Ms Hlubucek also works with the CEO and CIO on the strategic focus of the Company with a particular emphasis on finance. MANAGEMENT AGREEMENTS On 12 December 2006, BBGI entered into two Management Agreements with the Manager (together Management Agreements ). The two Management Agreements are substantially the same except that one relates to activities that BBGIM will conduct through the offshore banking unit of the Babcock & Brown Group and the other relates to all other activities it will undertake as Manager. The terms of the agreements ensure that there is no duplication of fees. In discharging its duties under the Management Agreements, the Manager will use resources of the Babcock & Brown Group. These resources will include non exclusive use of personnel employed by the Babcock & Brown Group, who will be seconded to the Manager from time to time as and when their services are required. Such seconded employees will provide such services in the name of and for the Manager. The Management Agreements will continue until terminated in accordance with their terms, or until the Manager either resigns or is removed in accordance with the Management Agreements. 8

11 FEES PAID TO THE MANAGER AND ITS ASSOCIATES Under the terms of the Management Agreements, BBGI will compensate the Manager for managing the investments of BBGI through the Base Fee and Incentive Fee. The Base Fee is payable for each quarter ending on 31 March, 30 June, 30 September and 31 December of each year. The Incentive Fee is payable half yearly for each half year ending on 30 June and 31 December but no payment was payable before 31 December Any changes to the fee structure under the Management Agreements will be subject to the approval of BBGI s Shareholders by resolution in general meeting, and for the purposes of such approval, the Manager and any member of the Babcock & Brown Group will abstain from voting on the relevant resolution. Base Fee The Base Fee is calculated as follows: where the Net Investment Value ( NIV ) of BBGI is less than or equal to $1.5 billion, 1.0% per annum of the NIV; and where the NIV is greater than $1.5 billion, 1.0% per annum of the NIV up to and including $1.5 billion and 1.5% on the NIV in excess of $1.5 billion. The Base Fee in respect of the year ended 31 December 2008 was $2.76 million. Fees for the six months ended 30 June 2008 of $1.91 million were paid in the form of 3,222,126 Shares in BBGI during the year. The fees for the quarter ended 30 September 2008 of $0.51 million were paid in cash. The Manager has requested that BBGI pay the base management fee of $0.34 million for the quarter ended 31 December 2008 in cash. Other Fees Other fees paid and payable to the Manager and its associates are disclosed in Note 32 of the financial statements included within this report. These fees are in relation to new acquisitions, divestments, structuring, equity raising, debt raising fees and other fees payable to the Manager or its associates. BBGI Annual Report 2008 The Manager Incentive Fee The Incentive Fee payable to the Manager is calculated as an amount equal to 20.0% of any excess return of the Shares over the benchmark return of 8.0% per annum for the half year after recovering any deficit from the prior two years which has been carried forward, calculated in accordance with the Management Agreements. The Manager agreed to waive any Incentive Fee that would be payable to the extent that the return to Shareholders calculated for the period from Listing to 31 December 2007 does not exceed 9.0% per annum. No Incentive Fees have been paid to the Manager in relation to the period ended 31 December Rather, a deficit of $128,952,849 has been carried forward as at 31 December This deficit will be taken into account in determining whether an Incentive Fee will be payable under the Management Agreements in the subsequent period. 9

12 Portfolio Composition BREAKDOWN BY ASSET CLASS AND INVESTMENT* BREAKDOWN BY CURRENCY* OPERATING LEASE ASSETS 6% Investment in Babcock & Brown Air Limited 8% Babcock & Brown Aircraft Lessor No. 2 14% Investment in Babcock & Brown Rail North America LLC 0% Investment in Babcock & Brown Rail Investment Limited LOAN PORTFOLIO AND SECURITISATION ASSETS 4% Ancora Pepper Securitisation No. 2 Investment 7% Ancora Pepper Securitisation No. 3 Investment 0% Mortgages plc Securitisation Investment 1% Avoca CLO VI plc 9% Avoca CLO VII plc 23% Ancora Seiza Warehouse Note Investment 4% Ancora Provident Cashflow Limited 6% Ancora Seiza Augustus Series ALTERNATIVE ASSETS 2% Paramount Mezzanine Loan Note 16% Music Copyright Assets 44% AUD 8% GBP 10% EUR 38% USD BREAKDOWN BY ASSET CLASS* * As at 31 December 2008 by Carrying Value 28% Operating Lease Assets 54% Loan Portfolio and Securitisation Assets 18% Alternative Assets 10

13 Operating Lease Assets Operating Lease Assets are assets which are subject to a lease to a third party user, where the lessee has possession of the asset and pays rent to the lessor of the asset for the right to use the asset. These assets have the potential for both predictable and stable cash flows and capital appreciation. Loan Portfolio and Securitisation Assets Loan Portfolio Assets refer to groups of multi obligor loans within various asset sectors. Typically, such loans are secured but often with full recourse to the borrower with the amount of any individual loan small in the context of the overall loan portfolio. They are typically assets which the originators of such loans could securitise in the capital markets. Such assets are considered attractive by BBGI because the multi obligor nature of the loan diversifies risk and allows BBGI to optimise the capital structure of the loan books which will enhance the returns from such assets, whilst remaining within the risk parameters for BBGI s investments. Securitisation Assets typically refer to groups of loans which have already been pooled and from which a capital structure that creates different debt securities, with different risk profiles and hence different returns, has been created. BBGI has invested in the lower rated, unrated and equity notes in such securitisations, where it believes the risks can be understood and are commensurate with the offered reward. Alternative Assets Alternative Assets are regarded as those which have not yet become mainstream, but which show relative value opportunities and where exposure can be managed. The assets comprising the Alternative Assets class will vary over time and to some extent will overlap with the Operating Lease Assets and Loan Portfolio and Securitisation Assets. The assets have inherent potential for attractive returns and, in the medium term, the potential to broaden investor community acceptability of the assets and, in doing so, enabling BBGI to realise value for its Shareholders from the ownership of the assets. BBGI Annual Report 2008 Portfolio Composition 11

14 Operating Lease Assets INVESTMENT IN BABCOCK & BROWN AIR LIMITED Investment Description BBGI acquired 1,051,010 Shares or a 3.1% stake in Babcock & Brown Air Limited ( B&B Air ) which was listed on the New York Stock Exchange at an initial public offering ( IPO ) on 27 September The Shares in B&B Air were acquired when the portfolio of aircraft owned by JET i Group, in which BBGI was a foundation investor, was sold to B&B Air. B&B Air is an aircraft lessor whose main business is to acquire commercial jet aircraft and lease them under long term contracts to a diverse group of airlines throughout the world. B&B Air currently has a fleet of 62 aircraft which it leases under multi year operating leases to 35 airlines in 19 countries. B&B Air s fleet of aircraft is relatively modern with an average age of approximately 6.4 years with a weighted average lease term of 5.4 years. As at 31 December 2008, BBGI s Carrying Value was US$7.1 million. Cash Economic Income BBGI received Cash Economic Income of US$1.43 million in respect of its investment in B&B Air relating to the year ended 31 December Asset Overview Since B&B Air s IPO, its portfolio of aircraft has expanded with the acquisition of 17 aircraft and the sale of two aircraft at premiums to book value resulting in a fleet of 62 aircraft. As at 31 December, the details of B&B Air s portfolio were as follows: Number of aircraft 62 Type of aircraft 57 narrow body passenger aircraft; 4 wide body passenger aircraft; and 1 freighter Average Age 6.4 years Aircraft by manufacturer Boeing Airbus B737 (19) A320 (17) B747 (1) A319 (10) B757 (12) A330 (1) B767 (1) B777 (1) B&B Air has adopted a policy of paying regular quarterly cash dividends with a quarterly dividend of US$0.20 per Share being declared for the fourth quarter of 2008 and paid on 20 February Outlook The short to medium term outlook for the aviation sector is likely to be challenging with softening demand resulting in downward pressure on lease rates and aircraft values. In light of the impact of the global economic climate on lessees, ongoing distress in the world financial markets and a lack of visibility about future aircraft demand and lease rates, B&B Air reduced its distribution in the fourth quarter of 2008 from US$0.50 per Share to US$0.20 per Share to strengthen the balance sheet by increasing retained cash. Pleasingly, B&B Air has no unfunded capital commitments and has no refinancing requirements until

15 Babcock & Brown AIRCRAFT LESSOR NO. 2 Investment Description BBGI owns two Boeing aircraft on lease to Thomsonfly Limited, a wholly owned subsidiary of TUI Travel plc, which is listed on the London Stock Exchange. The aircraft were purchased for US$15.1 million each including all acquisition costs, and were financed through a combination of equity and debt. As at 31 December 2008, BBGI s Carrying Value was US$27.6 million (including debt of US$17.6 million). Cash Economic Income BBGI received Cash Economic Income of US$1.29 million in respect of its ownership in the aircraft relating to the year ended 31 December Asset Overview As at 31 December 2008, the details of the two aircraft are as follows: Aircraft Purchase price of aircraft US$14.7 million each 1 Manufacturer Boeing Manufacturer date 1993 Lease maturity date 30 April 2013 Monthly rentals for each aircraft US$160,000 1 Excluding acquisition costs of approximately US$430,000 for each aircraft. Outlook The lease to Thomsonfly Limited continues to perform in line with expectations. Both aircraft are on fixed lease rentals with fixed debt costs through to April Current AVITAS valuations support the current carrying value, however, the market for the Boeing s has weakened over recent months as a result of a number of earlier vintage s being marketed for release and the deterioration in general market conditions. BBGI Annual Report 2008 Operating Lease Assets 13

16 Operating Lease Assets investment in babcock & brown rail north america llc Investment Description BBGI owns 41.5% of Babcock & Brown Rail North America LLC ( BBRNA ) which it purchased for US$53.9 million. BBRNA is the owner and lessor of freight car rolling stock which is leased for use in the North American markets. As at 31 December 2008, BBGI s Carrying Value was US$15.7 million inclusive of an impairment charge of US$27.7 million. Cash Economic Income BBGI received Cash Economic Income of US$2.36 million in respect of its ownership of BBRNA relating to the year ended 31 December BBGI is not expecting to receive any income in respect of its ownership of BBRNA for the year ended 31 December Asset Overview As at 31 December 2008, BBRNA owned freight cars on lease in North America with over 60 lessees and the details of BBRNA s portfolio were as follows: Total number of freight cars 13,490 Average age 6.6 years Lease utilisation rate 96% Main commodities carried Coal, grain, lumber, finished steel, paper, scrap steel and cement Main railcar types Open top hoppers 22% Flatcars 8% Gondolas 40% Boxcars 11% Covered hoppers 18% Intermodel 1% Credit quality of lessees Investment Grade 78% Outlook The current economic slowdown in the US economy is putting increased pressure on re leasing activity and rates. While the portfolio is currently 96% leased approximately 25% of the portfolio is expected to come off lease through The turnover in the portfolio combined with depressed leasing rates is expected to place pressure on debt covenants and as a result equity distributions have been suspended. Additionally, as previously announced, there is a requirement to collateralise an interest rate swap obligation in September The Manager, and the other members of BBRNA, will continue to work with the manager of BBRNA to address the September 2009 collateralisation requirement and the resumption of equity distributions. 14

17 investment in babcock & brown RAIL INVESTMENTs LIMITED Investment Description BBGI owns 35.0% of Babcock & Brown Rail Investments Limited ( BBRIL ) which it purchased for 5.6 million. As at 31 December 2008, BBGI s Carrying Value was written to a nil balance due to equity accounting requirements and the fact that the interest rate swaps on the debt in BBRIL do not meet hedge accounting requirements and as a result need to be fair valued through the Income Statement. BBRIL is the owner and lessor of a portfolio of passenger train fleets, locomotives and freight wagons, operating in mainland Europe including Germany, Belgium, Holland and Denmark. Cash Economic Income BBGI received Cash Economic Income of 0.49 million in respect of its ownership of BBRIL relating to the year ended 31 December Asset Overview As at 31 December 2008, BBRIL owned a portfolio of railcars on lease in Europe with over 10 lessees. The broad characteristics of the railcar portfolio were as follows: Total number of railcars 238 Average age 5.2 years Lease utilisation rate 100% Main rail equipment types (by value) Passenger DMU 15% Passenger EMU 20% Passenger coach 34% Freight locomotive 28% Freight wagon 3% Credit quality of lessees Investment grade 67% Outlook While economic activity in Europe is expected to continue moderating, the European rail leasing market is continuing to develop positively driven by concessions given to market participants, government funding constraints and growth in rail passenger volume. The portfolio is currently 100% leased with a weighted average lease term of 5.2 years and only 10% of the portfolio coming off lease throughout While lease rates are likely to soften in the short term as a result of the current financial crisis the long term fundamental market drivers for this portfolio remain largely unchanged. BBGI Annual Report 2008 Operating Lease Assets 15

18 Loan Portfolio and Securitisation Assets ANCORA PEPPER SECURITISATION NO. 2 INVESTMENT Investment Description BBGI has an investment in two classes of notes issued in the Pepper Residential Securities No. 5 Securitisation, with A$5.0 million in non rated notes and a further A$2.2 million in senior net interest margin ( Senior NIM ) notes. As at 31 December 2008, BBGI s Carrying Value was A$7.2 million, inclusive of a negative Mark to Market adjustment of A$0.1 million. Cash Economic Income BBGI received Cash Economic Income of A$1.45 million in respect of its investment in Ancora Pepper Securitisation No. 2 Investment relating to the year ended 31 December Asset Overview The notes in Pepper Residential Securities No. 5 are secured against a portfolio of registered first mortgages over Australian residential property. The underlying mortgage collateral was originated by Pepper Home Loans Pty Ltd, and is serviced by Pepper Australia Pty Ltd. As at 31 December 2008, the assets which secure the Pepper Securitisation No. 2 Investment were as follows: Number of loan obligors 612 Average loan size A$231,435 Weighted average loan to value ratio 69.76% Weighted average seasoning months Outlook Economic conditions in Australia are expected to continue to soften in light of deteriorating global macroeconomic conditions. Declines in property prices and a rising unemployment rate are likely to lead to an increase in arrears and ultimately an increase in mortgage defaults and losses. However, an increase in the weighted average interest margin on the pool of loans and the build up of reserve funds is expected to ensure that the notes continue to perform soundly. The Senior NIM note is amortising and is expected to be fully repaid during 2009 while the non rated note is repaid on the call date which is expected to occur in

19 ANCORA PEPPER SECURITISATION NO. 3 INVESTMENT Investment Description BBGI has an investment in two classes of notes issued in the Pepper Residential Securities No. 6 Securitisation, with A$8.1 million in non rated notes and a further A$4.1 million in senior net interest margin ( Senior NIM ) notes. As at 31 December 2008, BBGI s Carrying Value was A$12.1 million, inclusive of a negative Mark to Market adjustment of A$0.2 million. Cash Economic Income BBGI received Cash Economic Income of A$2.4 million in respect of its investment in Ancora Pepper Securitisation No. 3 relating to the year ended 31 December Asset Overview The notes in Pepper Residential Securities No. 6 are secured against a portfolio of registered first mortgages over Australian residential property. The underlying mortgage collateral was originated by Pepper Home Loans Pty Ltd, and is serviced by Pepper Australia Pty Ltd. As at 31 December 2008, the assets which secure the Pepper Securitisation No. 3 Investment were as follows: Number of loan obligors 1,283 Average loan size A$262,146 Weighted average loan to value ratio 69.76% Weighted average seasoning months Outlook Economic conditions in Australia are expected to continue to soften in light of deteriorating global macroeconomic conditions. Declines in property prices and a rising unemployment rate are likely to lead to an increase in arrears and ultimately an increase in mortgage defaults and losses. However, an increase in the weighted average interest margin on the pool of loans and the build up of reserve funds is expected to ensure that the notes continue to perform soundly. The Senior NIM note is amortising and is expected to be fully repaid during 2009 while the non rated note is repaid on the call date which is expected to occur in BBGI Annual Report 2008 LOAN PORTFOLIO AND SECURITISATION ASSETS 17

20 Loan Portfolio and Securitisation Assets ANCORA SEIZA AUGUSTUS SERIES TRUST Investment Description BBGI has an investment in two classes of notes issued by Seiza Augustus Series Trust, with A$10.3 million in non rated notes and a further A$4.1 million in junior net interest margin ( Junior NIM ) notes. As at 31 December 2008, BBGI s Carrying Value was A$10.4 million, inclusive of an impairment charge of A$5.0 million. Cash Economic Income BBGI received Cash Economic Income of A$1.7 million in respect of its investment in Ancora Seiza Augustus Series Trust relating to the year ended 31 December Asset Overview The notes in the Seiza Augustus Series Trust are secured against a portfolio of registered first mortgages over Australian residential and commercial property. The underlying mortgage collateral was originated by Seiza Mortgage Company Pty Limited and is serviced by Pepper Australia Pty Ltd. As at 31 December 2008, the assets which secure the Seiza Augustus Series Trust were as follows: Number of loan obligors 361 Average loan size A$561,546 Weighted average loan to value ratio 76.14% Weighted average seasoning months Outlook Economic conditions in Australia are expected to continue to soften in light of deteriorating global macroeconomic conditions. Declines in property prices and a rising unemployment rate are likely to lead to an increase in arrears and ultimately an increase in mortgage defaults and losses. However, an increase in the weighted average interest margin on the pool of loans is expected to provide support to the non rated note. Due to increased losses, no further cash flow is expected to be received from the Junior NIM notes. The non rated note will not begin to amortise until the more senior notes in the capital structure are fully repaid. 18

21 ANCORA SEIZA WAREHOUSE NOTE INVESTMENT Investment Description BBGI has an investment in three classes of notes issued by Seiza Trust with A$10.2 million in Class F notes, A$20.9 million in Class G notes and a further A$10.6 million in the senior net interest margin ( Senior NIM ) notes. As at 31 December 2008, BBGI s Carrying Value was A$41.7 million inclusive of a negative Mark to Market adjustment of A$0.2 million. Cash Economic Income BBGI received Cash Economic Income of A$6.6 million in respect of its investment in Ancora Seiza Trust relating to the year ended 31 December Asset Overview Seiza Trust is a warehouse facility arranged by Royal Bank of Scotland to purchase residential and commercial mortgages originated by Seiza Mortgage Company Pty Limited. The notes in Seiza Trust are secured against a portfolio of registered first mortgages over Australian residential and commercial property. The underlying mortgage collateral is serviced by Pepper Australia Pty Ltd. As at 31 December 2008, the assets which secure the Seiza Trust were as follows: Number of loan obligors 1,587 Average loan size A$473,271 Weighted average loan to value ratio 82.34% Weighted average seasoning months Outlook Economic conditions in Australia are expected to continue to soften in light of deteriorating global macroeconomic conditions. Declines in property prices and a rising unemployment rate are likely to lead to an increase in arrears and ultimately an increase in mortgage defaults and losses. However, an increase in the weighted average interest margin on the pool of loans is expected to ensure that the notes continue to perform soundly. The Senior NIM note is expected to continue to amortise while the Class F notes and Class G notes will not begin to amortise until the more senior notes in the capital structure are fully repaid. BBGI Annual Report 2008 LOAN PORTFOLIO AND SECURITISATION ASSETS 19

22 Loan Portfolio and Securitisation Assets AVOCA VI CLO PLC INVESTMENT Investment Description BBGI has an investment of 4.0 million in subordinated Class M notes issued by Avoca VI CLO plc. As at 31 December 2008, BBGI s Carrying Value was 0.5 million, inclusive of an impairment charge of 3.5 million. Cash Economic Income BBGI received Cash Economic Income of 0.4 million in respect of its investment in Avoca VI CLO plc relating to the year ended 31 December Asset Overview Avoca VI CLO plc is a European collateralised loan obligation vehicle which is managed by Avoca Capital Holdings ( Avoca ). BBGI s investment is secured by European senior secured, second lien and mezzanine loans. As at 31 December 2008, the assets which secure Avoca VI CLO plc were as follows: Number of obligors 70 Average loan size 7.2 million Loan type majority senior secured (82%) Outlook Market conditions for European leveraged loans have worsened. Trading prices for senior secured loans have fallen to historical lows due to continued forced selling and declining credit fundamentals as a result of the global financial crisis. Defaults in the market are expected to rise significantly over the next 12 to 18 months and recoveries are expected to be lower due to high leverage, extremely difficult capital markets and a lack of liquidity generally. There is a heightened risk that interest payments to the Class M notes may be suspended in the short to mid term due to potential ratings downgrades in the underlying portfolio. 20

23 AVOCA VII CLO PLC INVESTMENT Investment Description BBGI has an investment in two classes of notes issued by Avoca VII CLO plc with 7.0 million in Class F notes and 7.8 million in Class G notes. As at 31 December 2008, BBGI s Carrying Value was 8.2 million, inclusive of an impairment charge of 6.7 million. Cash Economic Income BBGI received Cash Economic Income of 1.6 million in respect of its investment in Avoca VII CLO plc relating to the year ended 31 December Asset Overview Avoca VII CLO plc is a European collateralised loan obligation vehicle which is managed by Avoca Capital Holdings ( Avoca ). BBGI s investment is secured by European senior secured, second lien and mezzanine loans. As at 31 December 2008, the assets which secure the Avoca VII CLO plc were as follows: Number of obligors 73 Average loan size 9.5 million Loan type majority senior secured (85%) Outlook Market conditions for European leveraged loans have worsened. Trading prices for senior secured loans have fallen to historical lows due to continued forced selling and declining credit fundamentals as a result of the global financial crisis. Defaults in the market are expected to rise significantly over the next 12 to 18 months and recoveries are expected to be lower due to high leverage, extremely difficult capital markets and a lack of liquidity generally. There is a heightened risk that interest payments to the Class M notes may be suspended in the short to mid term due to potential ratings downgrades in the underlying portfolio. BBGI Annual Report 2008 LOAN PORTFOLIO AND SECURITISATION ASSETS 21

24 Loan Portfolio and Securitisation Assets MORTGAGES PLC SECURITISATION INVESTMENT Investment Description BBGI owns 50.0% of two classes of certificates issued by Newgate Funding plc ( Mortgages plc ) Series MERCS and Series Residuals. Series MERCS entitle BBGI to the prepayment penalties paid by borrowers when they repay loans early. Prepayment penalties are not passed through the payment waterfalls but are passed directly to Series MERCS noteholders. The Series Residuals entitle BBGI to the residual amount remaining following payments on all higher rated notes in the securitisation. As at 31 December 2008, BBGI s Carrying Value was 0.1 million, inclusive of an impairment charge of 9.3 million. Cash Economic Income BBGI received Cash Economic Income of 0.6 million in respect of its investment in Mortgages plc relating to the year ended 31 December Asset Overview Mortgages plc is a securitisation vehicle which holds non conforming mortgages originated by a wholly owned subsidiary of Merrill Lynch International which is based in the United Kingdom. BBGI s investment in the notes is secured against a portfolio of registered first mortgages over UK residential property. As at 31 December 2008, the assets which secure the Series MERCS and Series Residuals were as follows: Number of loan obligors 4,287 Average loan size 106,127 Weighted average loan to value ratio 80.33% Weighted average seasoning months Outlook The UK economy has deteriorated considerably over the past 12 months as a result of the global financial crisis. Rising unemployment levels and sharply falling house prices have led to rapidly increasing arrears and higher mortgage default and loss rates which are not expected to improve over the short to mid term. As a result no cash flow is expected to be received under the Series Residuals and only minimal cash flow is expected to be received under the Series MERCS. 22

25 ANCORA PROVIDENT CASHFLOW LIMITED Investment Description BBGI has an investment of up to A$9.0 million in a facility to Provident Cashflow Limited ( PCL ) which makes loans to its customers, typically small to medium enterprises for the purpose of purchasing inventory. As at 31 December 2008, BBGI s Carrying Value was A$6.2 million. Cash Economic Income BBGI received Cash Economic Income of A$1.7 million in respect of its investment in Ancora Provident Cashflow Limited relating to the year ended 31 December Asset Overview The terms of the loans which secure BBGI s investment must have the following characteristics: Supported by a A$5.0 million first loss insurance policy provided by a AA rated insurer ( Insurer ); Term: 30 to 120 days, with the capacity for a 60 day extension subject to Insurer approval; Repayment: principal and interest due in full at maturity; Amount: A$0.4 million to A$3.0 million but any loan in excess of A$2.0 million requires Ancora s approval; Recourse: full recourse to the borrower and, where it is a company, there must be at least a second ranking charge over the company s assets and a director s guarantee unless otherwise approved; and Concentration: not more than 15.0% of the total loans under the facility can be in any one industry. BBGI has been granted security over the underlying customer receivables, a 10.0% cash deposit provided to PCL by the borrowers, a fixed and floating charge over the assets of PCL, and certain indemnity obligations of the principals of PCL. In addition, PCL has agreed to repurchase any loan receivable in arrears for more than 90 days where the insurer has not settled the loan, and there is in fact capacity remaining under the insurance policy. As at 31 December 2008, the assets which secure the investment were as follows: Number of loan obligors 24 Average loan size A$255,767 Average term of loans 97 days Outlook Economic conditions in Australia are expected to continue to soften in light of deteriorating global macroeconomic conditions. To reduce the risk of increasing arrears and losses, the underlying portfolio has been defensively positioned away from cyclical sectors. The repositioning of the portfolio combined with the support of the first loss insurance policy is expected to ensure that the facility continues to perform soundly. BBGI Annual Report 2008 LOAN PORTFOLIO AND SECURITISATION ASSETS 23