Swiss investment banking giant UBS has long been the preferred adviser to Babcock & Brown and they have pocketed well over $50 million in fees from the teetering house of cards over the past few years, with plenty more to come.

However, that doesn’t mean UBS analysts should be cheerleaders for the stock in the post-Enron environment. Unfortunately, this little piece of UBS research from March 28 after the $220 million placement at $13.65-a-share raises plenty of questions:

Builds a billion dollar war chest

Debt refinancing and extension very encouraging in this environment. BNB has announced a significant strengthening of its balance sheet. This includes:

  1. expansion of the Corporate Debt Facility from $2.35b to $2.8b, with five additional banks in the syndicate (total 25) and an extension to April 2011. Spreads only marginally higher at 150bp (prior 130bp).
  2. A further $400m in non-recourse debt has been raised against European wind farms from Euro banks.

$220m in additional shareholders funds raised

In addition, BNB has raised $220m via a placement of 16.1m shares at $13.65 (4.5% of shares on issue). This placement, undertaken after the completion of the debt refinancing, is intended to reduce gearing that could result from the drawdown of the facility and improve balance sheet strength & liquidity in this environment.

Balance Sheet now significantly stronger than it was before

Despite a myriad of views as to why this capital was raised, we believe that the only relevant factor is that it now has been completed. As a result BNB’s balance sheet is in a much stronger position than it was yesterday.

Valuation — Maintain Buy. Price Target $25 (from $30)

BNB is now well on its way to having a war chest of above $1.5 billion in cash and undrawn facilities by June. This could enable it to take advantage of cheap opportunities that are likely to arise in this environment.

In the lexicon of bad calls, this one is right up there. The big question for UBS analysts Jonathan Mott and Chris Williams, is where’s that $1.5 billion “warchest” gone? The relevant figure here is actually $50 billion-plus of group debt.

The Babcock implosion does represent the greatest destruction of Australian capital by a fund manager in history, so the witch hunt is on. Dean Paatsch from proxy adviser Risk Metrics laid into the ASX on The 7.30 Report last Thursday as follows:

With Babcock & Brown Power, in order to remove the manager, investors would have to pay 25 years worth of management fees to Babcock & Brown. And that’s a ridiculous scenario. In my view, the ASX should share some of the blame for not informing investors adequately about the full consequences of these management agreements. We’d like to see that changed.

The ASX has this morning released the notice of meeting for its September 24 annual meeting, which reveals I’m running for the board on a platform that all those management agreement disclosure waivers granted to Macquarie and Babcock be lifted. Full marks to the ASX for not censoring the platform. Now, let’s see who votes for it.

*Listen to this morning’s discussion with Deborah Cameron on 702 ABC Sydney about Rio, Dairy Farmers and teetering financial engineers.