Lead Manager

Lead Manager

IMPORTANT INFORMATION 

THIS PROSPECTUS 

The Offer contained in this Prospectus is an invitation to apply 

for Shares in Babcock & Brown Limited.This Prospectus is a 

replacement prospectus dated 20 September 2004 and was lodged 

with the Australian Securities & Investments Commission (ASIC) 

on that date. It replaces the prospectus dated and lodged with ASIC 

on 9 September 2004 (Prospectus Date). ASIC and Australian Stock 

Exchange Limited (ASX) take no responsibility for the contents of 

this Prospectus. 

No person is authorised to provide any information or to make 

any representation in connection with the Offer described in this 

Prospectus which is not contained in this Prospectus. Any 

information or representation not in this Prospectus may not be 

relied on as having been authorised by the Issuer in connection 

with the Offer. No Shares will be sold or issued on the basis of this 

Prospectus later than 13 months after the Prospectus Date. Babcock 

& Brown will apply to ASX for listing and quotation of the Shares 

on ASX within seven days after the Prospectus Date. 

THIS IS NOT INVESTMENT ADVICE – YOU SHOULD 

SEEK YOUR OWN FINANCIAL ADVICE 

The Offer does not take into account the investment objectives, 

financial situation and particular needs of any investor. It is important 

that you read the entire Prospectus before making any decision to 

invest in the Shares. In particular, in considering the prospects of 

Babcock & Brown, it is important that you consider the risk factors 

that could affect the financial performance of the Group.You should 

carefully consider these factors in light of your particular investment 

objectives, financial circumstances and investment needs (including 

financial and taxation issues) and seek professional advice from your 

accountant, financial advisor, stockbroker, lawyer or other professional 

advisor before deciding whether to invest. Some of the risk factors that 

should be considered by prospective investors are set out in Section 7. 

ELECTRONIC PROSPECTUS 

This Prospectus will, at some stage during the Exposure Period, be 

available in electronic form at www.babcockbrown.com.The Offer 

constituted by this Prospectus in electronic form is available only to 

residents in Australia. Persons who access the electronic version of 

this Prospectus should ensure that they download and read the entire 

Prospectus. A hard copy of this Prospectus is available free of charge 

to any person in Australia by telephoning the Babcock & Brown 

Share Offer Information Line on 1800 883 072 during the period 

of the Offer. 

The Corporations Act prohibits any person from passing the 

Application Form on to another person unless it is attached to a 

hard copy of this Prospectus or the complete and unaltered 

electronic version of this Prospectus. 

FOREIGN JURISDICTIONS 

The distribution of this Prospectus (including an electronic copy) in 

jurisdictions outside Australia may be restricted by law. Persons who 

come into possession of it should seek advice on and observe any 

such restrictions. Any failure to comply with such restrictions may 

constitute a violation of applicable securities laws. 

This Prospectus does not constitute an offer in any jurisdiction in 

which, or to any person to whom, it would not be lawful to make 

such an offer. No action has been taken to register or qualify this 

Prospectus or to otherwise permit a public offering of Shares outside 

Australia. In particular, this Prospectus has not been registered under 

the United States Securities Act of 1933 (Securities Act), and Shares 

may not be offered or sold in the United States or to, or for the 

account or benefit of, a U.S. person (as defined in Regulation S of 

the Securities Act). Shares may be offered in a jurisdiction outside 

Australia where such an offer is made in accordance with the laws in 

that jurisdiction. If you are located in jurisdictions outside Australia 

you should refer to Section 2.16. 

FINANCIAL INFORMATION 

All financial amounts contained in this Prospectus are expressed 

in Australian currency unless otherwise stated. Any discrepancies 

between totals and sums of components in tables contained in this 

Prospectus are due to rounding. 

PRIVACY 

The Application Form accompanying this Prospectus requires you 

to provide information that may be personal information for the 

purposes of the Privacy Act 1988 (Cth) (as amended).The Issuer 

(and the Registry on its behalf) may collect, hold and use that 

personal information in order to assess your Application, service 

your needs as an investor, provide facilities and services that you 

request and to carry out appropriate administration.Tax and 

company law also requires some of the information to be collected 

in connection with your Application. If you do not provide the 

information requested, your Application may not be able to be 

processed efficiently, or at all. 

The information may also be disclosed to members of the Group 

and to their agents and service providers on the basis that they deal 

with such information in accordance with Babcock & Brown’s 

privacy policy. If you become a Shareholder, your information may 

also be used or disclosed from time to time to inform you about 

the Group’s products or services that the Group thinks may be of 

interest to you. If you do not want your personal information to be 

used for this purpose, you should contact: the Babcock & Brown 

Group by telephoning +61 2 8280 7183 or writing to the Group 

through ASX Perpetual Registrars Limited at: Locked Bag A14, 

Sydney South NSW 1235. 

Under the Privacy Act 1988 (Cth), you may request access to your 

personal information held by (or on behalf of) the Group or the 

Share Registrar.You can request access to your personal information 

by telephoning +61 2 8280 7183 or writing to the Group through 

ASX Perpetual Registrars Limited at: Locked Bag A14, Sydney 

South NSW 1235. 

You can obtain a copy of the Group’s privacy policy electronically at 

www.babcockbrown.com. 

EXPOSURE PERIOD 

The Corporations Act prohibits the Group from processing 

Applications during the Exposure Period.The purpose of the 

Exposure Period is to enable this Prospectus to be examined by 

market participants prior to the raising of funds. Any Applications 

received during the Exposure Period will not be processed until 

after the expiry of the Exposure Period. No preference will be 

conferred on any Applications received during the Exposure Period. 

This Prospectus will be made available at some stage during the 

Exposure Period at www.babcockbrown.com.

BABCOCK & BROWN PROSPECTUS 

TABLE OF CONTENTS 

SECTION 1 Summary of key information 17 

SECTION 2 Details of the Offer 25 

SECTION 3 Business Overview 35 

SECTION 4 Board, management and corporate governance 89 

SECTION 5 Financial information 103 

SECTION 6 Independent Accountants’ Reports 131 

SECTION 7 Risk factors 139 

SECTION 8 Additional information 147 

SECTION 9 Definitions and glossary 165 

APPENDIX A Pro-forma consolidated financial statements 171 

1

IMPORTANT DATES 

Event Date (2004) 1 

Prospectus Date 

Broker Firm Offer opens 

Foundation Offer Closing Date 

Institutional Offer opens 

Institutional Offer closes 

Broker Firm Offer Closing Date 

Allocations announced 

Thursday 9 September 


Tuesday 28 September 

Wednesday 29 September 


Friday 1 October 


Expected commencement of trading on ASX 2 

(conditional and deferred settlement basis) 

Institutional Offer settlement and last day of conditional trading 2 

Commencement of trading on deferred basis only 2 

Expected despatch of shareholder statements 2 

Wednesday 6 October 


Monday 11 October 


Expected commencement of trading on ASX 

on normal settlement basis 2 

Thursday 14 October 

NOTES 

1. Babcock & Brown, in conjunction with the Lead Manager, reserves the right to vary the dates and times of the Offer, including to close the Offer early or 

accept late Applications, either generally or in particular cases, without notifying any recipient of this Prospectus or any Applicants. Investors are encouraged 

to submit their Applications as soon as possible. All times refer to Sydney time. 

2. Subject to ASX granting listing. 

2


KEY OFFER STATISTICS 

Offer Price 

Number of Shares to be issued under the Offer 

Total gross proceeds from the Offer 

Equity capitalisation - including BBIPL 2 

Market capitalisation - excluding BBIPL 3 

$5.00 per Share 

110 million 

$550 million 

$1,625 million 

$1,137 million 

NOTES 

1. BBIPL is a subsidiary of the Group through which US Executive Stakeholders hold their interest in the Group. Shares in Babcock & Brown and BBIPL will 

have materially equivalent economic rights. See Section 8.4 for further details. 

2. Based on the Offer Price multiplied by the total number of Shares on issue in Babcock & Brown and BBIPL following the Offer. 

3. Indicative number due to possible adjustments between Executive Stakeholders as outlined in Section 2.4. 

FORECASTS AND VALUATION 1 

Year ended 31 December 2004 3 2005 

Net profit after tax (pre-goodwill amortisation and restructure costs) 2, 3 $101.2 million $154.7 million 

Earnings per Share (pre-goodwill amortisation and restructure costs) 2, 3, 4 41.7¢ 47.6¢ 

Assumed IPO capital deployed to 31 December 2005 

$338.4 million 

Assumed unutilised capital at year end (pre-leverage) 

$184.6 million 

Price earnings ratio – unadjusted 5 10.5x 

Price earnings ratio – adjusted for unutilised capital and deferred 

share-based remuneration 6 10.6x 

NOTES 

1. Forecasts are based on a number of estimates, assumptions and pro-forma adjustments that are subject to business, economic and competitive uncertainties and 

contingencies with respect to future business decisions, which are subject to change and in many cases outside the control of Babcock & Brown and the 

Directors.The Forecasts presented in this Prospectus may vary from actual financial results, and these variations may be material. Details of the Forecasts, the 

assumptions on which they are based and discussion and analysis of them together with associated risk factors are set out in Sections 5 and 7. 

2.With the exception of the tax charge for 2004 (see footnote 3), net profit after tax is calculated in accordance with AGAAP using the forecast exchange rates, 

as set out in Section 5.3.2.2 but excludes one-off restructure cost of $9.8 million pre-tax in 2004 and goodwill amortisation. 

3. Due to significant changes in the Group’s corporate and tax structure during 2004, no taxation charge has been forecast for 2004. In arriving at net profit after 

tax for 2004 in the table above, the forecast effective tax rate for 2005 of 29% has been applied to the forecast 2004 profit before tax, goodwill amortisation and 

restructuring costs to determine a tax charge for 2004 solely to facilitate an EPS calculation.The 2004 tax charge has not been reviewed by the Independent 

Accountant and does not form part of the Directors’ Forecasts in this Prospectus. 

4. Earnings per Share has been calculated in accordance with AASB1027 Earnings Per Share.The 2004 EPS is based on the 2004 net profit after tax calculated in 

accordance with footnotes 2 and 3 and the time weighted number of fully diluted shares assuming that all Shares held by the pre-IPO owners immediately 

prior to the IPO had been on issue for the entire year but allowing that the Shares to be issued as part of the IPO are only in existence (and only contribute 

to forecast profit before tax, goodwill amortisation and restructure costs) for the period 1 October 2004 to 31 December 2004 (242.5 million Shares).The 

2005 EPS is based on the 2005 forecast net profit after tax but before goodwill amortisation and the fully diluted number of Shares on issue immediately 

following the Offer (325 million Shares). 

5. Based on the Offer Price divided by Earnings Per Share (pre-goodwill amortisation and Restructure costs). 

6.As per note 5, however: 

• Unutilised capital of $185 million assumed to be outstanding as at 31 December 2005 and post-tax accrued interest on this unutilised capital of $7.9 million, 

have been excluded from price and earnings respectively. It should be noted that this capital does not contribute to the earnings of the Group other than in 

respect of this interest amount; and 

• Earnings have been reduced to eliminate the impact of the deferred recognition of share based remuneration. Australian companies are not currently required 

to recognise an expense for employee share-based payments. However, an expense will be recognised when Australian IFRS is introduced effective 1 January 

2005. Babcock & Brown proposes to introduce a share-based remuneration plan in 2005 (see Section 4.7) which will defer the recognition of a portion of the 

bonus pool expense to subsequent periods. For the purposes of this calculation, Babcock & Brown has assumed that the remuneration policy specified in this 

Prospectus had been in place for the historic period such that the impact of the release of bonus deferrals from previous periods is fully reflected in this 

adjusted multiple calculation. 

3

CHAIRMAN’S LETTER 

Dear Investor 

Babcock & Brown was formed in San Francisco in 1977.The Group’s initial area of focus was advising on and 

arranging structured asset-backed finance transactions. 

Today Babcock & Brown has grown into a global investment and advisory firm with 19 offices and over 440 staff 

located in Australia, the United States, Europe, Asia and Africa.The Group is forecasting total Net Revenue of 

approximately $424 million for 2004. 

Babcock & Brown’s business model has evolved over time. In addition to earning fee income as an advisor and 

arranger, Babcock & Brown has increasingly begun to derive meaningful revenues from the deployment of its own 

capital, either for principal investment or to secure assets for syndication and management on behalf of third parties. 

This model, which was pioneered in our Australian office, has been accelerated on a firm-wide basis since early 

2000 when HVB, one of the largest private-sector banks in Germany, acquired a 20% interest in Babcock & 

Brown, materially increasing the capital available to the Group. As part of that implementation, since 1 January 

2000, in aggregate, capital deployed in Babcock & Brown’s principal investments has returned an average pre-tax 

IRR of in excess of 30% net of fees. For our part, in addition to enjoying these same returns on our own capital, 

Babcock & Brown has also earned significant fee income from the advisory, arrangement and investment 

management roles associated with these activities. 

Overall, Babcock & Brown’s primary focus is on developing expertise, relationships and vehicles that allow it to 

generate increasing streams of highly reliable recurring income over varying periods of time.To accelerate the 

implementation of this strategy, Babcock & Brown is seeking to further expand its capital base and increase its 

investment-related activities.This expansion is a reflection of the fact that the opportunities available to the 

Group materially exceed its available capital. 

In order to acquire the additional capital, Babcock & Brown has decided to undertake an initial public offering to 

raise $550 million.The IPO represents a natural progression for our business, providing us with access to public 

debt and equity markets and a corporate structure which is more compatible with the long-term value creation 

arising from our investment management activities.The net proceeds of the IPO will contribute to the expansion 

of the Group for the benefit of all Shareholders. None of the Executive Stakeholders or HVB are selling into the 

Offer. However, HVB has indicated that it will consider a request from Babcock & Brown to reduce its holding. 

The Board of Babcock & Brown may make such a request if it is of the view that such a reduction will increase 

liquidity in the Shares or otherwise be in the best interests of Babcock & Brown and its Shareholders (such as by 

providing an appropriate potential investment opportunity in the future for one or more additional strategic 

investors). 

As part of the IPO, commitments have been received from a range of our long-term co-investors to subscribe for 

approximately $200 million worth of Shares.The price paid for Shares issued to these cornerstone investors will 

be the same as that paid by other investors. Details of the Foundation Offer as well as the Broker Firm and 

Institutional Offers are set out in this Prospectus. 

We are very excited about the outlook for Babcock & Brown, and look forward to welcoming you as a 

Shareholder. 

Yours sincerely 

Jim Babcock 

Executive Chairman 

4


5


7


9


11


13


15

SECTION 1 

SUMMARY OF KEY INFORMATION 

1.1 OVERVIEW OF THE GROUP 

• Babcock & Brown is a global investment and advisory firm with longstanding capabilities in structured 

finance and the creation, syndication and management of asset and cash flow-based investments 

• Formed in 1977 as an arranger of US leveraged leases, Babcock & Brown has expanded its activities into 

areas in which its structured finance skills can provide the Group with a competitive advantage 

• Babcock & Brown has transitioned from being a pure advisor and arranger to become a principal in many 

of the transactions in which it is involved, increasingly deploying its own capital to secure assets for 

syndication to, and management on behalf of, third-party investors.This activity accelerated after HVB 

acquired 20% of Babcock & Brown in 2000, substantially increasing the capital available to the Group 

• Babcock & Brown employs over 440 staff located in 19 offices spanning Australia, the United States, Europe, 

Asia and Africa 

• Babcock & Brown currently is owned 20% by HVB and 80% by its Executive Stakeholders none of whom 

will be selling any Shares into the Offer.The net proceeds of the Offer will be invested in the expansion of 

the Group 

1.2 INVESTMENT HIGHLIGHTS 

• Strong investment track record 

– Since 1 January 2000, in aggregate, capital deployed in Babcock & Brown’s principal investments has 

returned an average pre-tax IRR in excess of 30% net of fees 

– Returns on Babcock & Brown’s own capital are significantly higher due to advisory and arranger’s fees as 

well as ongoing management fees 

– Offer Proceeds will enable Babcock & Brown to expand its principal investment related activities 

• Established advisory and arrangement business 

– Well established and highly regarded structured finance advisory and arrangement business 

– Longstanding relationships with a broad spectrum of institutional and other equity investors, lenders and 

operators in the sectors in which it is focused 

– Track record of innovative transactions 

• Growing principal and managed investments business 

– Babcock & Brown has increasingly used its own capital to secure and structure investment products and 

then to enhance and syndicate those products to third-party investors 

– Associated investment vehicles provide an ongoing source of recurring income 

• Diverse earnings streams 

– Diverse operations covering real estate, infrastructure and project finance, operating leasing, structured 

finance, and corporate principal investment and funds management, spanning a broad range of sectors and 

asset classes 

– Global platform provides exposure to many of the major economies of the world 

– Forecast Net Revenue is based on over 350 identified transactions over the Forecast Period, none of 

which are estimated to individually represent more than 5% of total Group revenues in either 2004 

or 2005 

18


REVENUE BREAKDOWN 2004F 

24% 

9% 

20% 

25% 

41% 

34% 

33% 

24% 

23% 

34% 

33% 

BY BUSINESS SEGMENT 

Real Estate 20% 

Infrastructure 24% 

Structured Finance 23% 

Operating Leasing 24% 

Corporate Principal Investment 9% 

BY REVENUE TYPE 

Advisory 41% 

Investment Management 34% 

Principal Investment 25% 

BY REGION 

Asia Pacific 33% 

US 33% 

Europe 34% 

• Global platform 

– Ability to identify acquisition, transaction and funding opportunities worldwide 

– Opportunity to leverage existing expertise and experience across jurisdictions, expanding successful 

products and structures into new markets 

– Demonstrated ability to leverage financing arbitrage between markets 

• Exposure to growing markets 

– Exposure to growing sectors of the global infrastructure market, such as windpower and Asian 

infrastructure 

– Exposure via the Operating Leasing division to the upturns in the global aircraft market and the 

US railcar markets 

– Growing corporate principal investment activities 

• Experienced, talented and highly motivated team 

– Team consists predominantly of experienced professionals with significant expertise in their respective fields 

– Very low staff turnover levels 

– The Executive Committee members have been with Babcock & Brown for an average period of 13 years 

• High level of employee ownership 

– Executive Stakeholders will have an Economic Interest in the Group of 54.2% following completion of 

the Offer, with voluntary escrow arrangements in place for all existing Executive Stakeholders ending 

progressively following release of the 2005-2007 annual results. Selected Executives have also entered into 

executive retention arrangements for the same period, including appropriate non-compete provisions (see 

Sections 4.7.8 and 4.7.9, respectively) 

– Other Executives who have little or no equity in the Group have been provided with an opportunity to 

acquire Shares through the establishment of the Employee Trusts (see Section 4.7.7) 

19

SECTION 1 


1.3 BUSINESS STRATEGY 

Babcock & Brown has focused on the origination and distribution of financial products with the following 

differentiating characteristics: 

• Niche markets across its global platform 

• Sourced or developed through proprietary networks or structures 

• Based predominantly on asset classes in which the Group has a strong expertise or which generate 

predictable long-term cash flow streams 

• Employing sophisticated structured financing techniques to optimise returns while managing risk 

Babcock & Brown has a unique blend of skills and experience which allows it to originate attractive 

products across a number of sectors and jurisdictions: 

• Using its global platform and structuring skills to originate opportunities 

• Assessing and pricing risk 

• Dealing with structural complexity to mitigate legal and financial risk 

• Making and implementing investment decisions in a timely and focused manner 

Babcock & Brown will continue to seek and undertake advisory and arrangement assignments 

that provide: 

• Good margins at low capital risk 

• Transaction flow that maintains and enhances the Group’s expertise in its targeted areas 

• An introduction to new areas of opportunity 

• Additional leverage to principal and investment management activities 

The increased capital base following the Offer should allow Babcock & Brown to substantially expand its 

principal investment-related activities. Opportunities have been identified for capital deployment totalling 

$460 million (including corporate debt repayment) during the Forecast Period, to be funded from existing cash, 

the IPO proceeds and Group cash flows. 

The Forecasts assume that the Group will have excess cash of approximately $185 million as at 31 December 

2005.This excess cash is not required to support the activities of the Group. Management currently anticipates 

that the excess cash will be fully deployed into new investments during 2006. 

Going forward the Group should be able to recycle capital from the sale of existing investments and to obtain 

additional capital from corporate debt facilities. 

The following chart sets out the assumed deployment of capital by Business Group, excluding corporate debt 

repayment, for the Forecast Period. Actual amounts of capital deployed in each Business Group and the timing 

of this deployment will vary depending on the availability of suitable investments and the Group’s use of external 

funding sources. 

20


NEW CAPITAL DEPLOYED BY BUSINESS SEGMENT TO 31 DECEMBER 2005 

6% 

8% 

35% 

11% 

40% 

Structured Finance 8% 

Operating Leasing 11% 

Real Estate 40% 

Infrastructure and Project Finance 35% 

Corporate Principal Investment and Funds Management 6% 

1.4 DESCRIPTION OF THE OFFER 

Babcock & Brown is seeking to raise $550 million of additional capital by way of the Offer which will comprise: 

• The Foundation Offer open to Foundation Investors, principally comprising parties who have previously 

co-invested with Babcock & Brown. Commitments have already been received for in excess of $200 million 

worth of Shares under the Foundation Offer and minimum firm allocations have been made 

• The Broker Firm Offer open to Eligible Retail Investors who have received a firm allocation from their 

Broker. Commitments have already been received for $100 million worth of Shares under the Broker Firm 

Offer 

• The Institutional Offer which consists of an invitation to bid for Shares made to Eligible Institutional 

Investors in Australia, New Zealand and a number of other overseas jurisdictions pursuant to this Prospectus 

There will be no general public or formal employee Offer. Employees may participate through the Foundation 

Offer or Broker Firm Offer. 

All Shares issued under the Offer will be issued at the same Offer Price. 

Offer Proceeds 

The net proceeds raised in the Offer of $523 million are after the payment of the anticipated Offer expenses of 

$27 million. 

The net proceeds of the Offer will be invested in the ongoing business and expansion of the Group, across all 

Business Groups as referred to in Section 3. Further detail on the sources and uses of proceeds are contained in 

Section 2.3. 

21

SECTION 1 


1.5 KEY FINANCIAL INFORMATION 

The table below summarises the Restated Financial Information outlined in Section 5.2 and should be read in 

conjunction with, and qualified by, the more detailed financial disclosures in Section 5.3.The Restated Financial 

Information reflects certain adjustments from the AGAAP Financial Information, which has been reviewed by 

the Independent Accountants.The Restated Financial Information has not been reviewed by the Independent 

Accountants.These adjustments were made to more meaningfully reflect the underlying economic performance 

of Babcock & Brown over the historic and Forecast Period. Further details of the adjustments are provided in the 

footnotes to the table and in Section 5.2.1. 

Year to 31 December 1, 8 ($000) 2001A 2002A 2003A 2004F 2005F 

Net Revenue 2 326,347 347,835 391,482 424,109 523,365 

Other revenue (1,263) 600 1,073 

Total business revenue 325,083 348,435 392,555 424,109 523,365 

Net corporate interest income/(expense) 3 (2,780) (1,564) (1,200) 5,759 20,977 

Operating costs 4 (118,894) (148,361) (162,543) (159,845) (178,730) 

Operating profit before bonuses, 

restructuring costs, goodwill 

amortisation 5 and tax 203,410 198,510 228,812 270,023 365,612 

Bonus expense (pro-forma) 6 (101,705) (99,255) (114,406) (127,509) (150,700) 

Restructuring expenses (9,800) 

Operating profit before goodwill 

amortisation and tax 101,705 99,255 114,406 132,714 214,912 

Tax 7 (62,324) 

Net Profit After Tax 

(before goodwill amortisation) 152,588 

NOTES 

1.The Historical Financial Information for 2001-2003 was initially prepared in US dollars.This information and Forecast Financial Information for 2004 and 2005 

are translated at constant exchange rates based on the rates assumed for the 2004 Forecasts.The assumed rates are set out in detail in Section 5.3.2.2. In particular 

the $:US$ rate used in the conversion process is $0.722. Prior to the Offer, the Group managed its activities with US dollars as its benchmark currency. Historical 

Financial Information has been prepared from statements prepared in US dollars.The use of constant exchange rates, whilst not consistent with Australian GAAP, 

has been adopted in the table above and in the Business Overviews in Section 3 of this Prospectus, as Babcock & Brown believes that this basis provides a more 

meaningful insight into the activities and financial performance of Babcock & Brown given the prior practice of managing its activities using the US dollar as its 

benchmark currency. 

2. Net Revenue comprises gross revenues calculated in accordance with AGAAP less cost of sales, expenses directly related to transactions plus net contribution 

from equity accounted and consolidated non-strategic investments. 

3. Net corporate interest income includes interest income on cash and cash-equivalent balances held by the Group and interest expense on corporate debt 

facilities.This includes approximately three months in 2004 and 12 months in 2005 of net interest earned on unused capital raised via the Offer. 

4. Operating costs comprise total expenses calculated in accordance with AGAAP but exclude cost of sales, expenses directly related to transactions, expenses of 

consolidated but non-strategic investments, bonuses and restructure costs. 

5. Details of the treatment of goodwill under AGAAP in the forecast period are set out in Section 5.3.2.1, footnote 3. 

6.The pro-forma bonus expense for 2001-2003 has been calculated as 50% of operating profit before bonuses, restructuring costs, goodwill amortisation and tax. 

Consistent with Babcock & Brown’s intentions, the forecast bonus for 2004 assumes that the full amount of the bonus pool, calculated in accordance with the 

remuneration policy outlined in Section 4.7.2 (including the adjustments to the bonus pool in these years in relation to interest income on uninvested Offer 

Proceeds) will be paid in cash or cash equivalents.Therefore the full amount of the forecast bonus pool is expensed during 2004.In 2005 based on constant 

exchange rates, the total bonus pool is forecast to be $174.5 million consistent with the stated remuneration policy. However, of this amount $23.8 million 

based on constant exchange rates is expected to be treated as Bonus Deferral Rights (see Section 4.7.5). As the Bonus Deferral Rights relate to equity 

transactions there is no requirement under AGAAP to recognise an expense for this amount.The forecast AGAAP 2005 bonus expense based on constant 

exchange rates is therefore $150.7 million. In addition, consistent with current AGAAP, no amount has been forecast as an expense in the pro-forma Forecasts 

in respect of Shares and options allocated to the Employee Trusts (see Section 4.7.7) in either 2004 or 2005. 

7. Due to significant changes in the Group’s corporate and tax structure during 2004, no taxation charge has been forecast for 2004. 

8.The Restated Financial Information is presented on a consolidated basis for the entire Group. It should be noted that the pre-IPO US Executive Stakeholders 

hold their interest at the BBIPL level and those interests will be treated as outside equity interests in Babcock & Brown’s consolidated financial statements 

(see Section 2.5). 

22


This Prospectus contains Forecasts that have been prepared using due care and analysis and are based on best 

estimate assumptions.While these assumptions were considered appropriate and reasonable at the time of 

preparing the Forecasts, Applicants should appreciate that many factors which may affect the actual financial 

performance of Babcock & Brown are outside the control of the Directors or may not be capable of being 

foreseen or accurately predicted. Accordingly, actual results may vary materially from the Forecasts. Applicants are 

advised to review the discussion on the basis of preparation of the forecasts in Section 5.3.2, the assumptions used 

in preparing the Forecasts in Section 5.3.2.2 and the risk factors outlined in Section 7. Ernst & Young Transaction 

Advisory Services Limited has also reviewed the Forecasts contained in Section 5.3.2.1 and its report is contained 

in Section 6. 

1.6 HOW TO APPLY 

An Application under the Broker Firm Offer can only be made by completing and lodging a General Application 

Form attached to, or accompanying, this Prospectus or a paper copy of the General Application Form 

accompanying the electronic version of this Prospectus available at www.babcockbrown.com. Broker Firm 

Applications should be returned, with Application Money, to the Broker from whom you received a firm 

allocation in line with their instructions. 

An Application under the Foundation Offer can only be made by completing and lodging a personalised 

Foundation Offer Application Form attached to, or accompanying, this Prospectus. Foundation Offer Application 

Forms should be returned to the Share Registry, or as otherwise instructed, along with Application Money. 

Details of how to apply are included with the relevant Application Form(s). Applications for Shares under the 

Offers must be received by no later than 5.00pm Sydney time on the respective Offer Closing Date. 

Babcock & Brown in consultation with the Lead Manager reserves the right to reject any Application or to 

allocate any Applicant a lesser number of Shares than that applied for. Babcock & Brown has the right, in 

consultation with the Lead Manager, to nominate the Applicants to whom the Shares will be allocated. Except in 

relation to the Foundation Offer, there is no assurance that Applicants will be allocated the amount they apply 

for, or indeed, any Shares. 

1.7 DIVIDEND POLICY 

The Directors anticipate that the first interim dividend of 8.75 cents per Share (fully franked) will be paid in 

September 2005.That interim dividend will be in respect of the period from 1 January 2005 to 30 June 2005. 

This represents an annualised dividend yield of approximately 3.5% based on the Offer Price and a pay-out ratio 

of approximately 42%. 

The Directors believe that a pay-out ratio of approximately 40-50% is appropriate at this particular point in time 

and will seek to maintain a pay-out ratio broadly in line with this until circumstances change.The Directors will 

endeavour to pay fully-franked dividends. 

However, no guarantee can be given about the payment of dividends, level of franking, or pay-out ratio for any 

future period as these matters depend upon the future profits of Babcock & Brown, time of realisation of 

investments, and the future financial and taxation position of the Group. 

1.8 ALLOCATION OF 2004 EARNINGS BETWEEN PRE AND 

POST-IPO SHAREHOLDERS 

In view of the change in ownership of the Group which will be brought about by the IPO, it is necessary to 

apportion the earnings for 2004 between the pre-IPO owners and the post-IPO owners.Whilst the change in 

ownership may not in fact occur until early October 2004, the Board has decided to recognise the change as at 

30 September 2004 to coincide with the quarter end closest to the expected IPO date. 

To provide certainty for post-IPO owners, the Group will use its best endeavours to ensure a minimum after tax 

earnings of $14,485,735 for the period from 1 October 2004 to 31 December 2004.The detail of this allocation 

is set out in Section 5.3.2.4. 

23

SECTION 1 


1.9 RISK FACTORS 

As with any investment in the stock market, an investment in Babcock & Brown has a number of risks.The price 

of the Shares may fall as well as rise. A number of key risk factors that prospective Applicants should be aware of 

are described in Section 7. Some are more general risks, while others are risks specific to an investment in 

Babcock & Brown. 

Before deciding to apply for Shares, prospective Applicants should read the entire Prospectus and, in particular, 

should consider the assumptions underlying the Forecasts and the risk factors that could affect the future financial 

performance of an investment in Babcock & Brown. 

1.10 QUESTIONS/FURTHER INFORMATION 

For enquiries in relation to this Prospectus including how to complete the Application Form or how to acquire 

additional copies of this Prospectus, Applicants can contact the Babcock & Brown Share Offer Information Line 

on 1800 883 072, or visit Babcock & Brown’s website at www.babcockbrown.com.The Babcock & Brown Share 

Offer Information Line will be open from 8.30am until 5.30pm Sydney time Monday to Friday until completion 

of the Offer. 

Broker Firm Applicants with queries regarding their Application or how many Shares they have received should 

direct those enquiries to the Broker through which they received their allocation (see the Corporate Directory 

for contact details). 

Babcock & Brown will send a paper copy of the Prospectus free of charge to any person in Australia who 

requests a copy in the period up to and including the Broker Firm Offer Closing Date. 

24

SECTION 2 

DETAILS OF THE OFFER 

IMPORTANT DATES 

Event Date (2004) 1 

Prospectus Date 


Broker Firm Offer opens 


Foundation Offer Closing Date 

Tuesday 28 September 

Institutional Offer opens 

Wednesday 29 September 

Institutional Offer closes 


Broker Firm Offer Closing Date 


Allocations announced 


Expected commencement of trading on ASX 2 

(conditional and deferred settlement basis) 


Institutional Offer settlement and last day of conditional trading 2 


Commencement of trading on deferred basis only 

Monday 11 October 

Expected despatch of shareholder statements 2 


Expected commencement of trading on ASX on normal settlement basis 2 Thursday 14 October 

NOTES 

1. Babcock & Brown, in conjunction with the Lead Manager, reserves the right to vary the dates and times of the Offer, including to close the Offer early or 

accept late Applications, either generally or in particular cases, without notifying any recipient of this Prospectus or any Applicants. Investors are encouraged to 

submit their Applications as soon as possible. All times refer to Sydney time. 

2. Subject to ASX granting listing. 

2.1 OVERVIEW OF THE OFFER 

Babcock & Brown is seeking to raise $550 million of additional capital by way of the Offer which will comprise: 

• The Foundation Offer open to Foundation Investors, principally comprising parties who have previously 


worth of Shares under the Foundation Offer and minimum firm allocations have been made 

• The Broker Firm Offer open to Eligible Retail Investors who have received a firm allocation from their 

Broker. Commitments have already been received for approximately $100 million worth of Shares under the 

Broker Firm Offer 

• The Institutional Offer which consists of an invitation to bid for Shares made to Eligible Institutional 

Investors in Australia, New Zealand and a number of other overseas jurisdictions pursuant to this Prospectus 

There will be no general public or formal employee Offer. Employees may participate through the Foundation 

Offer or Broker Firm Offer. 

All Shares issued under the Offer will be issued at the same Offer Price. 

The minimum subscription level for the Offer is $550 million. If this level is not reached then all Application 

Money will be refunded, without interest, to Applicants in accordance with the Corporations Act. 

26


2.2 PURPOSE OF THE OFFER 

The purpose of the Offer is to: 

• Provide additional capital to facilitate long term value creation arising from principal-related and investment 

management activities 

• Facilitate access to the public equity and corporate debt markets, further increasing Babcock & Brown’s 

access to capital and reducing Babcock & Brown’s cost of capital 

• Allow investors to participate in the long term value creation across all Babcock & Brown Business Groups 

• Provide additional means with which Babcock & Brown can make acquisitions and reward employees 

2.3 OFFER PROCEEDS 

The net proceeds of the Offer will be applied to the ongoing business and expansion of the Group as referred to 

below. Expenses of the Offer will be met via the funds raised.The use of Offer Proceeds is summarised below. 

SOURCES AND USES OF PROCEEDS 1 

$ million 

Gross IPO proceeds 550 

Less: IPO costs not expensed (27) 

Less: Debt repayment 2 (120) 

Net Offer Proceeds available for deployment 403 

NOTES 

1.To the extent cash in the 31 December 2003 pro-forma balance sheet has been used to fund investments during 2004, the IPO proceeds may be used to meet 

liabilities incurred since 31 December 2003 including liabilities in respect of the distributions referred to in Section 5.3.2.4. 

2. Debt repayment comprises the repayment of $120 million of debt facilities drawn down at 31 December 2003.Total debt repayments may also include 

repayment of liabilities incurred since 31 December 2003 including additional drawdowns used to fund investments during 2004. 

The Forecasts assume that the Group will have excess cash of approximately $185 million as at 31 December 

2005.This excess cash is not required to support the activities of the Group. Management currently anticipate 

that the excess cash will be fully deployed into new investments during 2006. 

Going forward the Group should be able to recycle capital from the sale of existing investments and to obtain 

additional capital from corporate debt facilities. 

Many of Babcock & Brown’s successful investments have been made on an opportunistic basis, often taking 

advantage of dislocations in markets in which it operates. Babcock & Brown intends to continue to invest in such 

situations going forward, which could be one potential use for the additional capital that is not included in the 

above analysis.The Group has historically made several opportunistic investments each year, although there is no 

guarantee that such situations will be consistently available in the future. 

The availability of additional capital should also allow Babcock & Brown to increase its focus on strategic 

acquisitions to build its investment management business and associated fee streams, with the aim of creating a 

larger base of annuity-style revenues. 

Following the IPO, the Group will have sufficient working capital to pursue its stated objectives. 

27

SECTION 2 


2.4 WHAT IS BEING OFFERED 

The Offer comprises Shares in Babcock & Brown, which will be listed on ASX. As part of the restructuring to 

enable the IPO, all non-US Executive Stakeholders and HVB will acquire Shares in Babcock & Brown. However, 

US Executive Stakeholders will hold their interest in the Group through Babcock & Brown International Pty 

Limited (BBIPL), the holding company for the Group’s operations.The US Executive Stakeholders will hold 

their interest at the BBIPL level because direct ownership at the listed company level might have material adverse 

tax consequences for US Executive Stakeholders. 

Each Share held in Babcock & Brown and BBIPL will have materially equivalent economic rights. Executive 

Stakeholders holding BBIPL shares will be subject to the same escrow provisions as Executive Stakeholders 

holding Babcock & Brown Shares. BBIPL Shares may, however, be transferred to Babcock & Brown in return 

for Babcock & Brown Shares on, essentially, a one-for-one basis. Further, the one for one basis reduces after the 

earlier of 11 years or 60% of BBIPL Shares having been exchanged into Babcock & Brown Shares to encourage 

the exchange of BBPIL Shares for Babcock & Brown Shares. 

Post-IPO ownership structure 

Additional detail on these arrangements along with the pre-IPO restructuring, corporate structure, transitional 

arrangements between Babcock & Brown and BBIPL and rights associated with Shares held in both entities is 

contained in Section 8. 

LISTED ON ASX 

Pre-IPO Non 

US Stakeholders 

Employee 

Trust 

Pre-IPO US 

Executive 

Stakeholders 

20.4% 

3.8% 

11.9% 

33.9% 

30.0% 

Babcock & Brown Limited 

70.0% 

Redemption 

NOTE 

The split between the BBIPL and Babcock & Brown holdings of pre-IPO owners may be adjusted on or prior to the IPO as referred to in Section 4.7.8. 

28


2.5 OWNERSHIP POST-IPO 

None of the Executive Stakeholders are selling any Shares into the Offer.There may, however, be adjustments 

between owners prior to Allotment. 

Subject to the internal share transfers described above, the estimated ownership of the Group at the completion 

of the Offer is outlined in the table below. 

Economic 

Interests 1 % 

Pre-IPO Non US Executive Stakeholders 3 66,296,416 20.4 

Pre-IPO US Executive Stakeholders (BBIPL) 3 97,503,584 30.0 

Employee Trusts 12,500,000 3.8 

HVB 3 38,700,000 11.9 

Public 110,000,000 33.9 

Total 2 325,000,000 100.0 

NOTES 

1. Shares in Babcock & Brown and BBIPL have materially equivalent rights and hence are aggregated for the purposes of the table. 

2. Excludes 23.5 million Options on issue at IPO further details of which are outlined in Section 4.7.7. 

3. Indicative number due to possible adjustments between Executive Stakeholders and HVB as outlined in Section 2.4. 

On completion of the Offer, Babcock & Brown will have an equity capitalisation of $1,625 million, including 

BBIPL, and a market capitalisation of $1,136 million, excluding BBIPL.The Executive Stakeholders will have an 

Economic Interest in the Group of approximately 54.2%.The interests of the pre-IPO US Executive Stakeholders 

will be held through BBIPL.To comply with accounting regulations these interests will be treated as an outside 

equity interest of Babcock & Brown. 

2.6 VOLUNTARY ESCROW AND OTHER EXECUTIVE 

RETENTION ARRANGEMENTS 

Pre-IPO Executive Stakeholders have entered into voluntary escrow arrangements progressively ending following 

release of the 2005-2007 annual results. Selected Executive Stakeholders have also entered into Executive 

Retention Arrangements for the same period, including appropriate non-compete provisions. Further details of 

the escrow and other executive retention arrangements are set out in Sections 4.7.8 and 4.7.9, respectively. 

Interests held by Executive Stakeholders include recent grants held by the Employee Trusts.These grants were 

made to ensure the future generation of Executives have a material stake in Babcock & Brown.The details of the 

Employee Trusts are set out in Section 4.7.7. 

29

SECTION 2 


2.7 THE BROKER FIRM OFFER 

2.7.1 Who can apply in the Broker Firm Offer? 

The Broker Firm Offer is only open to Eligible Retail Investors who have received a firm allocation from their 

Broker. Commitments have already been received for $100 million worth of Shares under the Broker Firm Offer. 

All Shares under the Broker Firm Offer will be issued at the Offer Price. 

2.7.2 How to apply 

Broker Firm Applicants must complete and lodge their Application Form with the relevant Broker from whom 

they received their firm allocation in accordance with the relevant Broker’s directions. Application Forms must be 

completed in accordance with the instructions set out on the reverse of the form (or the instructions set out in 

the on-line forms, in the case of the forms in the on-line Prospectus). 

If you elect to participate in the Broker Firm Offer, your Broker will act as your agent in submitting your 

Application Form and Application Money. It will be your Broker’s responsibility to ensure that they are submitted 

before 5.00pm Sydney time on the Broker Firm Offer Closing Date. Babcock & Brown takes no responsibility 

for any acts or omissions by your Broker in connection with your Application. 

The minimum Application under the Broker Firm Offer is for 2,000 Shares (or $10,000) and increments of 

1,000 Shares (or $5,000). 

Babcock & Brown reserves the right to reject any Application which is not correctly completed, or which is 

submitted by a person who it believes may be an ineligible Applicant, or to waive or correct any errors made by 

the Applicant in completing any Application Form. 

Application Money received under the Offer will be held in a special purpose account until Shares are issued to 

successful Applicants. Any interest earned on Application Money pending allocation or payment of a refund will 

become an asset of Babcock & Brown. 

2.7.3 Closing Date for the Broker Firm Offer 

The Broker Firm Offer opens at 9.00am on Thursday 16 September 2004 and closes at 5.00pm Sydney time on 

Friday 1 October 2004. Babcock & Brown reserves the right to alter the timetable, including closing the Broker 

Firm Offer early. 

2.7.4 Acceptance of Applications 

An Application in the Broker Firm Offer is an Offer by the Applicant to Babcock & Brown to subscribe for all 

or any of the Shares specified in the Application Form at the Offer Price on the terms and conditions set out in 

this Prospectus (including any supplementary or replacement prospectus) and the Application Form.To the extent 

permitted by law, the Offer by an Applicant is irrevocable. 

2.7.5 Allocation policy under the Broker Firm Offer 

Firm stock which has been allocated to Brokers for allocation to their Australian resident retail clients will be 

issued to Applicants nominated by those Brokers. It will be a matter for the Brokers how they allocate firm stock 

among their retail clients, and they (and not Babcock & Brown or the Lead Manager) will be responsible for 

ensuring that retail clients who have received a firm allocation from them receive the relevant Shares. 

Babcock & Brown, however, reserves the right to treat any Applications in the Broker Firm Offer which are for 

more than 50,000 Shares, or which are from persons whom they believe may be Institutional Investors, as 

Applications in the Institutional Offer, or to reject them. Babcock & Brown also reserves the right to aggregate 

any Applications which it believes may be multiple Applications from the same person. 

30


2.8 FOUNDATION OFFER 

2.8.1 Who can apply in the Foundation Offer? 

The Foundation Offer is open to Foundation Investors, principally comprising parties who have previously 


worth of Shares under the Foundation Offer and minimum firm allocations have been made. 

All Shares under the Foundation Offer will be issued at the Offer Price. 

2.8.2 How to apply 

Foundation Applicants must complete and lodge a personalised Foundation Offer Application Form attached 

to, or accompanying, this Prospectus in accordance with the instructions set out on the reverse of the form. 

Foundation Offer Application Forms and Application Money should be returned to the Registry, or as otherwise 

instructed. 

Babcock & Brown reserves the right to reject any Foundation Offer Application Form, which is not correctly 

completed, or which is submitted by a person who it believes may be an ineligible Applicant, or to waive or 

correct any errors made by the Applicant in completing any Foundation Offer Application Form. 

Application Money received under the Foundation Offer will be held in a special purpose account until Shares 

are issued to successful Applicants. Any interest earned on Application Money pending allocation or payment of 

any refund will become an asset of Babcock & Brown. 

2.8.3 Closing Date for the Foundation Offer 

The Foundation Offer opens at 9.00am on Thursday 16 September and closes at 5.00pm Sydney time on Tuesday 

28 September 2004. Babcock & Brown reserves the right to alter the timetable, including closing the Foundation 

Offer early. 

2.8.4 Acceptance of Applications 

An Application in the Foundation Offer is an Offer by the Applicant to Babcock & Brown to subscribe for 

all or any of the Shares specified in the Foundation Offer Application Form at the Offer Price on the terms and 

conditions set out in this Prospectus (including any supplementary or replacement prospectus) and the 

Foundation Offer Application Form.To the extent permitted by law, the Offer by an Applicant is irrevocable. 

2.8.5 Allocation policy under the Foundation Offer 

Except as previously agreed, allocations in the Foundation Offer will be determined by Babcock & Brown in its 

total discretion. 

2.9 INSTITUTIONAL OFFER 

2.9.1 Invitations to bid 

Babcock & Brown will invite certain Eligible Institutional Investors in Australia, New Zealand and a number 

of international jurisdictions to bid for Shares in the Institutional Offer. Determination of which additional 

jurisdictions are eligible for inclusion will be at the sole discretion of Babcock & Brown in conjunction with the 

Lead Manager and will only be in jurisdictions where it is legal to participate in the Offer. 

31

SECTION 2 


2.9.2 The Institutional Offer process 

The Institutional Offer will open on Wednesday 29 September 2004 and will close on Thursday 30 September 2004. 

Participants in the Offer will be invited to bid for an allocation of Shares at the Offer Price. Details of how to 

participate, including bidding instructions, will be provided to participants by the Lead Manager. 

Bids may be amended or withdrawn at any time up to the close of the Institutional Offer. Any bid not 

withdrawn by that time is an irrevocable Offer by the relevant bidder to subscribe or procure subscribers for the 

Shares bid for (or such lesser number as may be allocated) at the Offer Price, on the terms and conditions set out 

in this Prospectus (including any supplementary or replacement document) and in any instructions provided by 

the Lead Manager to participants. 

Bids can be accepted or rejected by Babcock & Brown, in consultation with the Lead Manager, in whole or in 

part, without further notice to the bidder. Acceptance of a bid will give rise to a binding contract. All successful 

bidders in the institutional bookbuild will pay the Offer Price. 

Details of the arrangements for notification and settlement of allocations will be provided to successful bidders at 

the close of the Institutional Offer. In some cases, Shares allocated may be delivered by the Lead Manager or their 

respective international affiliates, pursuant to settlement support arrangements. See also Section 8.9.2 regarding 

the Offer Management Agreement. 

2.9.3 Allocation policy under the Institutional Offer 

The allocation of Shares amongst bidders in the Institutional Offer will be determined by Babcock & Brown, in 

consultation with the Lead Manager, at its absolute discretion.While Babcock & Brown has absolute discretion, a 

number of factors may influence allocations including: 

• The timeliness of bids by particular bidders 

• The desire for an informed and active trading market in Shares following the Offer 

• The desire to establish a wide spread of institutional Shareholders 

• The size and type of funds under the management of particular bidders 

• The likelihood that particular bidders will be long term Shareholders 

• Any other factors that Babcock & Brown and the Lead Manager consider appropriate, in their absolute 

discretion 

There can be no assurance that any bidder will be allocated any Shares, or the number or amount of Shares for 

which it has bid. 

The allocation split between the Foundation Offer, Broker Firm Offer and Institutional Offer will be at the sole 

discretion of Babcock & Brown in consultation with the Lead Manager. 

2.10 OFFER MANAGEMENT AGREEMENT 

The Offer will not be underwritten. Babcock & Brown and the Lead Manager have entered into an Offer 

Management Agreement in respect of the management of the Offer and provision of settlement support. 

The Offer Management Agreement sets out a number of circumstances under which the Lead Manager may 

terminate the agreement, including the settlement support obligations. A summary of certain terms of the 

agreement, including the termination provisions, is set out in Section 8.9.2. 

32


2.11 ASX LISTING 

Babcock & Brown will apply for admission to the official list of ASX and quotation of the Shares on ASX, no 

later than seven days after the date of this Prospectus. 

If the application is not made, or Babcock & Brown is not admitted to the official list of ASX within three 

months after the date of this Prospectus (or any longer period permitted by law), the Offer will be cancelled and 

all Application Money will be refunded (without interest). 

ASX takes no responsibility for this Prospectus or the investment to which it relates.Admission to the official list of 

ASX and quotation of the Shares on ASX are not to be taken as an endorsement by ASX of Babcock & Brown. 

2.12 CONDITIONAL AND DEFERRED SETTLEMENT TRADING 

It is expected that the Shares will be quoted initially on a conditional and deferred settlement basis on ASX on 

or about Wednesday 6 October 2004. 

All contracts formed on acceptance of bids in the Institutional Offer will be conditional on ASX agreeing to 

quote the Shares on ASX, and on Settlement occurring under the Offer Management Agreement referred to 

above.Trades occurring on ASX before Settlement occurs will be conditional on Settlement occurring. 

Conditional trading will continue until Babcock & Brown has advised ASX that Settlement has occurred, which 

is expected to be on or about Friday 8 October 2004.Trading will then be on an unconditional but deferred 

settlement basis until Babcock & Brown has advised ASX that initial holding statements have been despatched to 

Shareholders. Normal trading is expected to commence on or about Thursday 14 October 2004. 

If Settlement has not occurred within 14 days (or such longer period as ASX allows) after the day Shares are first 

quoted on ASX, the Offer and all contracts arising on acceptance of Applications under the Offer and bids under 

the Institutional Offer will be cancelled and of no further effect and all Application Money will be refunded 

(without interest). In these circumstances, all purchases and sales made through ASX members during the 

conditional trading period will be cancelled and of no effect. 

It is the responsibility of each Applicant or bidder to confirm their holding before trading in Shares.Applicants or 

bidders who sell Shares before they receive an initial holding statement do so at their own risk. Babcock & Brown, 

the Lead Manager and the Share Registry disclaim all liability, whether in negligence or otherwise, to persons who 

sell Shares before receiving their initial holding statement, whether on the basis of a confirmation of allocation 

provided by any of them or by the Babcock & Brown Share Offer Information Line or a Broker or otherwise. 

2.13 BROKERAGE, COMMISSION AND STAMP DUTY 

No brokerage, commission or stamp duty is payable by Applicants on acquisition of the Shares under the Offer. 

See Section 8.9.2 for details of various fees payable to the Lead Manager and certain Brokers. 

2.14 BABCOCK & BROWN’S DISCRETION 

Babcock & Brown reserves the right not to proceed with the Offer or any part of it at any time before the 

successful completion of the bookbuild. If the Offer or any part of it is cancelled, all Application Money, or the 

relevant Application Money, will be refunded (without interest). 

Babcock & Brown in consultation with the Lead Manager also reserves the right to close the Offer or any part of 

it early, or extend the Offer or any part of it, or accept late Applications or bids either generally or in particular 

cases, or (except in relation to the Foundation Offer) reject any Application or bid, or allocate to any Applicant or 

bidder fewer Shares than applied or bid for. 

33

SECTION 2 


2.15 ASX CLEARING HOUSE ELECTRONIC 

SUB-REGISTER SYSTEM 

Babcock & Brown will apply to participate in the ASX’s Clearing House Electronic Sub-register System 

(CHESS), in accordance with the Listing Rules and the ASTC Settlement Rules. CHESS is an automated 

transfer and settlement system for transactions in securities quoted on ASX under which transfers are effected in 

an electronic form. 

When the Shares become CHESS approved securities, holdings will be registered in one of two sub-registers, an 

electronic CHESS sub-register or an issuer sponsored sub-register. A CHESS participant, or a person sponsored 

by a CHESS participant, will have their Shares registered on the CHESS sub-register. All other Shares will be 

registered on the issuer sponsored sub-register. 

Following Settlement, Shareholders will be sent an initial holding statement that sets out the number of Shares 

that have been allocated.This holding statement will also provide details of a Shareholder’s Holder Identification 

Number (HIN) or, where applicable, the Securityholder Reference Number (SRN) of issuer sponsored holders. 

Shareholders will subsequently receive statements showing any changes to their Shareholding. Certificates will 

not be issued. 

2.16 FOREIGN SELLING RESTRICTIONS 

No action has been taken to register or qualify the Shares that are the subject of the Offer, or otherwise to 

permit a public offering of the Shares, in any jurisdiction outside Australia.The Shares have not been, and will 

not be, registered under the US Securities Act and may not be offered or sold in the United States. Further 

Shares may only be sold outside of the United States in accordance with Regulation S of the US Securities Act. 

The Offer is not an offer or invitation in any jurisdiction where, or to any person to whom, such an Offer or 

invitation would be unlawful. Babcock & Brown and the Lead Manager reserve the right not to accept bids from 

any particular jurisdiction. 

No person is authorised to provide any information or make any representations other than those contained in 

this Prospectus and, if given or made, such information or representations will not be relied upon as having been 

authorised by Babcock & Brown, the Lead Manager or any other person, nor will any such persons have any 

liability or responsibility. 

2.17 TAXATION 

The taxation consequences of any investment in Shares will depend on the investor’s particular circumstances. 

It is the responsibility of potential investors to make their own enquiries concerning the taxation consequences 

of an investment in Babcock & Brown. If you are in doubt as to the course you should follow, you should seek 

professional advice from your accountant, financial advisor, stockbroker, lawyer or other professional advisor. 

2.18 ENQUIRIES 

All enquiries in relation to this Prospectus should be directed to the Babcock & Brown Share Offer Information 

Line on 1800 883 072.The Babcock & Brown Share Offer Information Line will be open from 8.30am until 

5.30pm Sydney time Monday to Friday until completion of the Offer. 

If you are unclear in relation to any matter or are uncertain as to whether Babcock & Brown is a suitable 

investment for you, you should seek professional advice from your accountant, financial advisor, stockbroker, 

lawyer or other professional advisor. 

34

SECTION 3 

BUSINESS OVERVIEW 

3 BUSINESS DESCRIPTION 

Overview 

Babcock & Brown is a global investment and advisory firm with longstanding capabilities in structured finance 

and the creation, syndication and management of asset and cash flow-based investments. Babcock & Brown was 

formed in 1977 as an advisor and arranger of US leveraged leases. In the ensuing 27 years, Babcock & Brown has 

consistently built upon its expertise in asset-based finance to expand its activities both functionally and 

geographically into areas where these core strengths continue to provide the Group with a competitive advantage. 

Babcock & Brown operates from 19 offices worldwide, anchored by administrative hub offices in Sydney, San 

Francisco, New York, Munich and London. Post-listing, Babcock & Brown’s corporate headquarters will be in 

Sydney where the Managing Director, Chief Operating Officer, Chief Financial Officer, and three of the five 

Business Group heads will be based, and where Babcock & Brown has maintained a presence since 1984. 

GLOBAL LOCATIONS 

San Francisco 

San Diego 

Greenwich 

New York 

Dublin 

Paris 

Madrid 

London 

Munich 

Vienna 

Milan 

Tokyo 

Shanghai 

Hong Kong 

Kuala Lumpur 

Johannesburg 

Melbourne 

Brisbane 

Sydney 

Global locations 

One of the most significant aspects of Babcock & Brown’s recent development has been its continuing expansion 

from being purely an advisor and arranger to also being a principal in the transactions in which it is involved. 

Often this has been in conjunction with co-investors or on behalf of investment vehicles it has established. 

Experience has demonstrated that combining Babcock & Brown’s knowledge of certain asset classes and 

industries with its financial structuring expertise can lead to attractive returns for Babcock & Brown and its 

investor clients. 

While parts of Babcock & Brown (primarily in Australia) have utilised the Group’s capital since the early 1990s, 

this expansion into investment-related activities only began in earnest on a firm-wide basis after HVB invested 

US$120 million to acquire a 20% interest in Babcock & Brown in early 2000. Even with the capital from HVB, 

however, Babcock & Brown has increasingly had to raise third-party funds to finance its principal investment 

transactions. 

36


Babcock & Brown’s investment-related activities have been profitable for both itself and its investors. Since 

1January 2000, in aggregate, capital deployed in Babcock & Brown’s principal investments has returned an 

average pre-tax IRR in excess of 30% net of fees. 

The IPO is aimed at providing sufficient additional funds to allow Babcock & Brown to take advantage of the 

opportunities that it has identified and to expand its successful investment model. 

Business activities 

Babcock & Brown is involved in a diverse range of investment-related and advisory activities. 

Advisory 

Babcock & Brown has a long history of acting in the following roles: 

• Advisor and arranger of sophisticated leasing, project financing and structured finance transactions 

• Private placement agent for debt and equity funding of such transactions 

• Financial advisor on acquisitions and restructurings 

Babcock & Brown is recognised as a leading advisor in the fields in which it specialises, as demonstrated by its 

receipt of numerous industry awards and the quality and depth of its repeat client base. 

Babcock & Brown’s compensation in advisory assignments consists of a mix of retainers, and of up-front and 

success-based fees which are predominantly determined as a percentage of the size of the transaction. In many 

cases where Babcock & Brown advises a client on the acquisition of an asset, it will also assume a role in 

managing the asset on behalf of the client and receive ongoing fees for doing so. 

Investment 

Babcock & Brown’s investment activities are focused on the creation, syndication and management of investment 

products for itself, as a principal, and its investor clients.These clients include wholesale investors such as 

multi-national financial institutions, charitable foundations, and high net worth individuals, as well as retail investors 

through publicly-listed vehicles or financial products offered by Babcock & Brown’s retail distribution partners. 

Since 1 January 2000, in aggregate, capital deployed in Babcock & Brown’s principal investments has returned on 

average pre-tax IRR in excess of 30% net of fees. Returns on Babcock & Brown’s own invested capital have 

exceeded these levels, as it receives the benefit of transaction and funds and asset management fees paid by third 

parties. 

Babcock & Brown has completed investment transactions as an equity investor, mezzanine lender, project 

developer, fund sponsor and lease portfolio manager. 

37

SECTION 3 


Babcock & Brown’s investment activities can be segmented into the broad categories outlined below: 

Activity Description Return to Babcock & Brown 

Arrangement/ 

Syndication 

• Babcock & Brown identifies an investment, negotiates 

as a principal, arranges financing but syndicates equity 

to third-party investors prior to final commitment 

and financial close 

• Acquisition advisory fees 

• Debt/equity arrangement fees 

• Development fees 

• Equity syndication fees 

Underwriting 

Investment/ 

Asset Management 

Principal 

Investment 

• Babcock & Brown commits capital to underwrite the 

transaction and/or actually deploys funds to complete 

the acquisition, with syndication/selldown of the 

equity thereafter. Includes bridge financing where 

Babcock & Brown provides a short-term loan to 

complete a transaction prior to refinancing with 

longer-term funding sources 

• Babcock & Brown manages assets and provides other 

services post-acquisition (typically following an 

equity syndication or advisory assignment), including 

asset maintenance/upgrades, financial reporting and 

asset sales 

• Babcock & Brown deploys capital in transactions, 

often with co-investors or in conjunction with an 

equity syndication 

• Babcock & Brown has completed transactions as both 

an equity and a debt investor 

• Underwriting fees 

• Mark-up on investment upon 

syndication 

• Recurring management fees 

• Refinancing 

• Carried interest/profit 

sharing/performance fees 

upon asset disposition (sale, 

remarketing etc.) 

• Directors’ fees 

• Income returns (dividends, 

interest income) 

• Development profits 

• Proceeds upon sale of assets 

Organisational structure 

Babcock & Brown operates within five Business Groups: 

• Real Estate 

• Infrastructure and Project Finance 

• Operating Leasing 

• Structured Finance 

• Corporate Principal Investment and Funds Management 

38


The activities of these Business Groups are described in more detail in the sub-sections that follow.The Babcock 

& Brown organisational structure is outlined below: 

Infrastructure & 

Project Finance 

Australia 

Aircraft 

Special Products 

Finance 

Europe 

Finance Leasing 

Corporate/Legal 

Capital Markets 

Human 

Resources 

US 

Asia 

IR/Comms 

Information 

Technology 

Investment 

Management 

Risk 

Management and staff 

A key component of Babcock & Brown’s success is its team of experienced and high-quality professionals. 

The majority of Babcock & Brown’s Executives have significant expertise in their areas of focus, reflecting 

Babcock & Brown’s historical practice of hiring industry-recognised professionals with longstanding client 

relationships. Babcock & Brown has balanced this hiring approach in recent years with the employment of 

younger but still highly qualified and motivated professionals who can grow with the Group and benefit from the 

experience of senior management. 

Babcock & Brown’s professionals are drawn from a variety of backgrounds including law, private equity, 

investment and commercial banking, accounting and operational management.This diversity allows the Group to 

analyse a situation or set of issues from a number of different perspectives and develop innovative solutions that 

meet the requirements of multiple constituencies. 

39

SECTION 3 


Babcock & Brown seeks to have a strong local presence in each of the countries in which it operates, and to staff 

its offices predominantly with citizens or nationals of that country. Local knowledge and relationship networks 

have enhanced Babcock & Brown’s ability to grow its business in new jurisdictions and have made a strong 

contribution to the Group’s transaction origination capabilities. 

Babcock & Brown promotes a collegial and informal culture with a strong work ethic and is characterised by 

relative lack of hierarchy, a relatively flat management structure and team orientation. Babcock & Brown believes 

that these factors have all contributed to a relatively low turnover amongst professional staff, particularly at the 

senior levels. 

Employee investment 

Executives are also prominent investors in a number of Babcock & Brown investment products.This is expected 

to continue post-listing, so that Executives will be able to participate in syndications alongside (and on the same 

terms) as third party investors.The Directors believe that this should provide strong alignment between the 

interests of Executives, Shareholders and investors going forward.A summary of the policy is set out in Section 

4.8.1. 

Financial summary 

The table below summarises the historical and Forecast Net Revenue by Business Group and should be read in 

conjunction with, and qualified by, the more detailed financial information in Section 5. 

Year to 31 December ($000) 2001A 2002A 2003A 2004F 2005F 

Net Revenue 

– Real Estate 30,779 25,716 64,198 83,527 117,797 

– Infrastructure and Project Finance 42,744 69,456 84,352 104,111 156,717 

– Operating Leasing 82,036 83,226 79,704 101,619 122,604 

– Structured Finance 171,784 156,998 124,573 96,524 97,127 

– Corporate Principal Investment 

and Funds Management (996) 12,439 38,655 38,328 29,120 

Net Revenue 326,347 347,835 391,482 424,109 523,365 

Other revenue (1,263) 600 1,073 

Total business revenue 325,083 348,435 392,555 424,109 523,365 

Net Revenue by earnings type 2 

– Advisory 172,106 174,273 169,561 

– Investment Management 118,561 143,339 185,946 

– Principal Investment 100,815 106,497 167,858 

Total Net Revenue 326,347 347,835 391,482 424,109 523,365 

NOTES 

1.All amounts in foreign currencies for historical financial information in 2001-2003 and forecast financial information for 2004 and 2005 are translated at 

constant exchange rates based on the rates assumed for the 2004 Forecasts. Prior to the Offer, the Group managed its activities with US dollars as its benchmark 

currency. Historical financial information has been prepared from statements prepared in US dollars.This use of constant exchange rates, whilst not consistent 

with Australian GAAP, has been adopted in the table above and in the Business Overviews in Section 3 of this Prospectus, as Babcock & Brown believes that 

this basis provides a more meaningful insight into the activities and financial performance of Babcock & Brown given the prior practice of managing its 

activities using the US dollar as its benchmark currency. 

2. Net Revenue by earnings type was not collated prior to 2003. 

40


APPROACH TO INVESTMENT 

Investment philosophy 

Babcock & Brown will only make an investment after rigorous research and analysis, appropriate structuring to 

mitigate risk and optimise financing, and the identification of a comfortable margin of safety between the 

investment price and intrinsic value. Return hurdles for investments are risk-adjusted, taking full account of the 

downside risk and liquidity of any investment situation as well as Babcock & Brown’s ability to enhance the 

return in the future. 

In principal investment activities, Babcock & Brown has a mindset of treating its investors’ capital as if it were its 

own. Babcock & Brown Executives have historically been significant investors alongside the Group’s clients in its 

transactions and investment products, deploying their personal capital on the same terms as other third-party 

investors.This practice will continue after the Offer and that participation underpins Babcock & Brown’s 

investment philosophy. 

The Executive Stakeholders, as a group, will be the largest shareholders in Babcock & Brown after the Offering. 

Their investment in the Group as Shareholders, in addition to their participations in syndications of the Group’s 

transactions and products, mean that Executives should be highly incentivised to ensure that Babcock & Brown’s 

capital is deployed prudently and astutely in investments with a high risk-adjusted return potential, consistent 

with historical practice. 

Identifying investments 

Babcock & Brown uses its capital across its five Business Groups to generate investment returns, to secure assets 

for its investment management activities and to co-invest with its clients. 

Babcock & Brown generally seeks to identify investments that it believes have some or all of the following 

characteristics: 

• Within the areas of expertise and experience of Babcock & Brown’s Business Groups 

• Mispriced or undervalued in their market 

• Predictable cash flows and/or asset values 

• Value can be added through more efficient financing, more active management and/or strategic 

repositioning 

• In sectors in which Babcock & Brown has developed relationships with strong management teams and 

other operating partners 

• Risk can be mitigated through appropriate financial, legal, tax and accounting structures 

• Significant opportunities for financial and structural optimisation 

Babcock & Brown frequently invests in opportunities originated from its longstanding relationship network. It 

also occasionally acquires interests in listed vehicles where it believes there is inherent value that is not recognised 

by the public markets. 

Babcock & Brown’s key investment criterion is that the proposed investment meets risk-adjusted return hurdles 

that are determined by taking into account all identified downside risks and the liquidity of the investment. 

41

SECTION 3 


Financing 

Babcock & Brown uses its structured finance expertise to segment the risks and returns from various components 

of a transaction and endeavours to allocate them to the party that is best suited to hold or manage them. Babcock 

& Brown’s ability to deliver efficient financing solutions is enhanced by: 

• Longstanding relationships with a broad group of banks and other financial services companies across its 

global platform 

• Regular dealings with financial intermediaries such as investment banks, financial guarantors and ratings 

agencies as well as its own participation in financial markets 

• Experience in a wide range of financing techniques 

• Strong track record which assists it in gaining the broader market’s acceptance of innovative financing 

solutions 

Investment packaging, syndication and management 

Whilst Babcock & Brown does undertake some asset trading activities purely on its own account, the majority of 

principal investments are made in conjunction with, or syndicated through investment vehicles.These investment 

vehicles take a number of forms, including: 

• Listed investment vehicles, such as Prime Infrastructure 

• Unlisted retail funds, such as the Foundation Property Fund, a UK property fund that offers leveraged 

investment into properties with secure cash flow 

• Private equity syndicates 

Babcock & Brown typically earns annuity-style management fees in addition to performance fees for its role in 

managing the assets or investment vehicles.These fees are in addition to the investment returns Babcock & 

Brown receives from its own investment in these vehicles. 

Babcock & Brown’s investment track record has helped it to build relationships with a meaningful number of 

high net worth private investors and institutions that participate on a repeat basis in Babcock & Brown 

investments. 

Associated opportunities 

In association with its investment activities, Babcock & Brown seeks to increase its returns by providing advisory 

services to the groups in which it invests and the investment vehicles it creates. 

Track record 

In aggregate, Babcock & Brown has generated an average pre-tax IRR on its capital in excess of 30% (net of 

fees) since January 2000. 

Future growth 

The capital made available under the Offer will be used by Babcock & Brown to grow its investment-related 

activities across its Business Groups and to grow its investment management business. 

Babcock & Brown will also use the capital available from the Offer and the additional leverage this capital will 

support, to facilitate making larger investments and/or extending holding periods of investments.The third party 

syndication of the initial equity in the DBCT (see case study in the Infrastructure and Project Finance Section) is 

an example of a transaction that Babcock & Brown may not have syndicated as early or to the same extent had it 

had the capital at the time to fully fund this asset up to the point of listing Prime Infrastructure. 

As it has done historically, Babcock & Brown intends to continue to develop various investment and funding 

vehicles that will invest across a range of Babcock & Brown investments. 

42


REAL ESTATE 

Overview 

The Real Estate Group is predominantly focused on principal investment and investment management activities 

in the real estate sector worldwide.The Real Estate Group also undertakes advisory assignments where these 

involve large-scale assets, complex financing issues or are with key clients.The scope of Babcock & Brown’s roles 

within these transactions includes: 

Investment management Principal investment Advisory 

• Private investment syndicates • Development projects 

• Acquisition advisor 

• Listed vehicles 

(in joint ventures) 

• Financial advisor 

• Unlisted retail funds 

• Mezzanine debt provider 

• Debt/equity arrangement 

• Equity investor 

• Tenant advisor 

• Underwriter 

Locations 

Contribution to Net Revenue 

Australia, Japan, Europe, US 

16% 

20% 

2003A 

2004F 

The business encompasses most classes of real estate and most stages of development. A selection of the types of 

transactions which Babcock & Brown has completed are listed below: 

Residential 

Commercial 

Industrial 

Retail 

Hotels/Leisure 

Special Purpose 

• Land subdivision 

• Apartment development 

• CBD offices 

• Pre-committed lease developments 

• Warehouses 

• Bulky goods 

• Regional shopping centres 

• Portfolio acquisitions 

• Leased hotel properties 

• Listed hotel securities 

• Wool stores 

• Caravan parks 

• Archives facilities 

• House and land packages 

• Integrated golf courses 

• Portfolio acquisitions 

• Distribution centres 

• Department stores 

• Neighbourhood shopping centres 

• Operating golf courses 

• Ski resorts 

• Hospitals 

• University buildings 

• Petrol stations 

43

SECTION 3 


Background 

Babcock & Brown began its involvement in the real estate sector as an advisor on structured finance transactions. 

Babcock & Brown’s first principal investment transactions took place in Australia in the early 1990s and focused 

on sale-and-leaseback transactions to investment grade tenants where Babcock & Brown could add value through 

efficient, highly leveraged financings. 

In 1992, Babcock & Brown expanded this model to include pre-committed developments to creditworthy 

tenants, for example the Australian Taxation Office. In 1994, Babcock & Brown listed Prime Credit Property 

Trust, an ASX listed property trust that held a number of the assets that had been acquired or developed by 

Babcock & Brown in conjunction with its clients. 

In 1997, the Real Estate Group in Australia increased its focus on development transactions; in particular, entering 

into partnerships with construction companies and smaller development groups that would benefit from Babcock 

& Brown’s structuring skills and capacity to procure development equity and subordinated debt. 

Babcock & Brown’s Japanese real estate operations were established in 1998, concentrating on the leveraged 

acquisition of income-producing properties and building assets under management. In 2001, Babcock & Brown 

established a UK-based real estate operation and in 2003 commenced its expansion into other European venues. 

Babcock & Brown is also pursuing a measured expansion into niche markets in the US. 


Australian Real Estate 

BBRE 

In 2001, Babcock & Brown established Babcock & Brown Real Estate (BBRE), a segregated fund of 

approximately $120 million that provides equity and subordinated debt (often with equity participation features) 

to a wide range of real estate investors, builders and developers and takes mezzanine debt and equity positions in 

various real estate assets and vehicles. Approximately 50% of the capital in BBRE is provided by a third-party 

senior debt lender, with the balance provided by Babcock & Brown. Since its inception, BBRE has been the 

principal vehicle for Babcock & Brown’s real estate investment activities in Australia. 

Babcock & Brown is seeking to replicate the BBRE model in Europe, where Babcock & Brown sees significant 

potential in its real estate business. 

Development partnerships 

Since the mid 1990s Babcock & Brown’s property investment activities have extended to real estate development 

in partnership with construction firms and developers with access to opportunities in specialist areas. Babcock & 

Brown has typically contributed finance in the form of either mezzanine debt or equity (or a combination) to 

individual development projects with a significant portion of this funding coming from the BBRE fund. 

Babcock & Brown currently has interests in a number of development projects which it anticipates will 

contribute substantial profits to the Group post the Forecast Period.These embedded profits should contribute to 

the predictability and consistency of the Group’s long-term earnings profile. 

44


A selection of Babcock & Brown’s development partnerships are shown below. 

Estimated Estimated 

completion completion 

Development JV partner Description value ($m) date 

Victoria Park 

Cardy & Co 

6.2ha site in Zetland, South Sydney. 

Site is planned for a predominantly 

residential, mixed-use development 

1,000 

2009 

Ascot Vale 

Urbex 

(BMD Group) 

Proposed scheme is a master-planned 

residential precinct in Melbourne 

240 

2008 

Sydney Olympic 

Park 

Multiplex 

Residential apartment development 

in Homebush, Sydney 

350 

2006 

(stage 1) 

A selection of Babcock & Brown’s completed development-partnerships are listed below. 

Completion Year 

Development JV partner Description value ($m) completed 

Felix Street 

Citimark Properties 

42-level residential apartment 

development in Brisbane 

95 

2004 

Amphora 

Thakral Holdings 

Amphora is a low rise residential 

apartment complex in Cairns 

comprising 108 residential apartments 

spread over seven buildings 

50 

2004 

David Jones 

MAB Corporation 

Major 22,000m 2 Perth department store 

subject to long-term leases. Sold on 

completion to Centro Properties Group 

90 

2002 

CUB Brewery 

Citimark Properties 

A mixed use development (residential, 

retail and commercial) on the former 

CUB Brewery site in Fortitude Valley, 

Brisbane 

155 

2000 

As an extension of its development-partnership activities, in 2002 Babcock & Brown established Citta Property 

Group (Citta) in conjunction with three former executives of Lend Lease Developments. Citta has been 

specifically established to manage, invest in and develop large-scale property development opportunities. Citta’s 

most significant current project is the $450 million Parkville Gardens residential development in Melbourne 

which will initially comprise an athletes’ village.This facility is being developed in a 50/50 joint venture with 

Australand. 

45

SECTION 3 


Principal investment management 

In addition to investments in the BBRE facility and development-partnership activities, Babcock & Brown is 

active in other forms of principal real estate investment and management. A selection of representative 

transactions is listed below: 

Value Acquisition 

Project Description ($m) date 

CSIRO, ACT 

Underwrote the acquisition of three ACT properties subject 

to long-term leases to CSIRO 

50 

2002 

TAHL 

See case study below 

800 

2001 

Commonwealth 

Office Properties 

Portfolio 

Arranged syndicates to acquire various portfolios of office 

properties in the Commonwealth Government tender 

program. Underwrote the purchase of seven of these buildings 

283 

1997 

Roselands shopping 

centre 

Purchased a Sydney landmark sub-regional shopping centre. 

Sold two years later at a profit 

130 

1997 

Case study Tourism Asset Holdings Limited (TAHL) 

TAHL was an Australian listed hotel company whose assets were subject to long-term leases guaranteed 

by Accor SA, a global hotel operator. TAHL was not well supported in the public equity markets as it was 

viewed as a fixed income investment with limited capital growth potential. Babcock & Brown identified 

the opportunity to unlock value by refinancing the assets in a manner that took full advantage of Accor’s 

strong credit rating and the length of the lease terms. 

The Real Estate Group worked together with the Corporate Principal Investment Group to structure, 

coordinate and lead a $180 million public offer for TAHL in a joint bid with Guinness Peat Group Plc, 

Accor and Jagen in 2001. 

Babcock & Brown invested a total of $58 million to fund its share of the offer consideration. This has 

been Babcock & Brown’s largest single equity investment to date with the commitment made only after 

post-takeover refinancing was fully underwritten by an international banking syndicate. Upon 

completion, Babcock & Brown releveraged TAHL’s property using this syndicated senior bank facility and 

a public bond issue in New Zealand. The refinance resulted in a return of approximately 50% of Babcock 

& Brown’s capital investment. In early 2003, Babcock & Brown sold down most of its interest in TAHL to 

a syndicate of investors generating an IRR on its investment of approximately 30%. 

Advisory 

Babcock & Brown’s reputation for innovative financial structuring of real estate transactions has led it to be 

engaged in a number of large scale financial advisory assignments. Babcock & Brown has historically limited its 

advisory work to sizeable transactions requiring complex financing solutions and those which help to establish or 

cement relationships with potential partners for the Group’s investment activities. Examples include: 

Completed 

value 

Project Babcock & Brown role ($m) Date 

Kens Building 

Advised the developer in the structured sale of a 77,000m 2 

Sydney office building 

670 

2003 

Eureka 

Arranged debt financing for an 88-storey residential tower, 

presently under construction in Melbourne 

400 

2002 

No 1 Martin Place 

Arranged project financing and funding for a landmark 

office, hotel and car park property in Sydney 

440 

1998 

46


Japanese Real Estate 

Babcock & Brown established a Japanese subsidiary and commenced real estate operations in 1998. Babcock & 

Brown was attracted to this market due to its size, attractive property yields relative to the cost of funds, and the 

opportunity to increase returns through more pro-active and cost-effective asset management.The fragmented 

nature of property ownership, and the historical absence of traditional property-financing techniques led to 

significant opportunities for Babcock & Brown. 

Babcock & Brown’s Japanese operations have the same general mix of advisory and investment activities as the 

Australian Real Estate business, although the Japanese business has more recently focused on syndication rather 

than use of the Group’s capital to finance transactions. A selection of representative transactions is listed below: 

Value 

Project Babcock & Brown role (US$m) Date 

Akihabara 

Babcock & Brown sourced and negotiated the acquisition for 

a large European institution of a single-tenant specialty retail 

property in central Tokyo and repositioned the building with 

a lease to a leading retail tenant 

91 

2004 

Tokyo office 

portfolio 

Babcock & Brown took over asset management of two Tokyo 

office properties for a large European institution 

120 

2003 

Vivre/Esquisse 

Acquired an underperforming retail building in central 

Tokyo from a distressed seller.With Mitsubishi Corporation 

as co-investor conducted a major renovation, repositioned 

the building as a multi-tenant, high-end retail property. 

Exited profitably within 12 months 

140 

2001 

Motomachi 

Acquired a non-performing loan secured by a property in a 

prime retail location in Yokohama and restructured the lease 

to a luxury retail tenant 

Gained ownership of the property after resolving debt owed 

by the property owner and subsequently sold the asset to a 

syndicate of investors 

18 

2001 

Case study Tokyo area portfolio 

In late 2002, Babcock & Brown was negotiating with two separate vendors – one distressed, the other 

making a strategic exit – to acquire two separate portfolios totalling 17 assets, predominantly office 

properties located in and around Tokyo ranging in size from around US$30 million down to less than 

US$1 million. 

Babcock & Brown was able to coordinate and converge the two acquisitions into one closing in March 

2003, creating one pool financed on a cross-collateralised basis on attractive terms that gave flexibility 

either to exit quickly or build long-term cash flow. A number of the assets were older and/or had 

planning compliance/physical issues which Babcock & Brown believed made them less attractive to pure 

financial investors lacking the property expertise to be able to price these elements and the high initial 

yield reflected this. 

When leveraged on a portfolio basis, the initial cash on cash return from operating revenues alone was 

more than 20%. 

Immediately following acquisition Babcock & Brown’s asset management team focused on stabilising 

and improving cash flow, particularly in some of the larger assets. Within 16 months of acquisition 

Babcock & Brown has profitably sold more than half of the assets by number and almost 70% by value, 

which it believes creates a strong likelihood of a very high IRR to investors. 

47

SECTION 3 


European Real Estate 

The Babcock & Brown Real Estate Group established a dedicated presence in the UK in 2001 and more recently 

in Continental Europe with an initial focus on Spain, Italy, France and Germany. 

Like the Real Estate Group’s expansion into Japan in 1998, the development of the European business is based on 

the successful Australian principal investment model.The initial expansion effort has involved co-operation with 

the Australian real estate team thereby ensuring effective transfer of intellectual property. 

Babcock & Brown’s recent transactions in the UK have included: 

Value 

Project Babcock & Brown role (£m) Date 

Global Switch 

Arranged a £110 million debt facility for the refinancing of 

a portfolio of data switching centres 

110 

2004 

Eagle II 

Acquired a portfolio of 17 commercial properties syndicated 

out to Babcock & Brown clients. Babcock & Brown is 

managing the realisation of the portfolio (14 out of the 

17 properties have been sold) 

48 

2003 

Eagle III 

Acquired a portfolio of nine commercial properties 

39 

2003 

Senator House 

Advised Challenger International in connection with the 

acquisition of an office building in central London 

80 

2002 

Eagle I 

Purchase of an office building in Manchester subject to a 

35 year lease to a listed UK company 

20 

2001 

In early 2004 the UK team also took the strategic step of co-establishing the first Foundation Investment Fund to 

provide retail investors the opportunity to invest in a leveraged, diversified portfolio of income producing 

properties. Once invested, the fund will have approximately £90 million of property assets under management. 

Babcock & Brown’s expansion into continental Europe was only commenced in late 2003 with the acquisition of 

a portfolio of 6,000 apartments in Kiel, Germany for approximately ¤170 million (see case study below). Since 

January 2004, the Group has committed, via joint ventures, to an additional seven projects with a total completed 

value of approximately ¤530 million, including: 

Completed 

Location Sector Description value (¤m) 

Germany 

Commercial 

Arranged debt and partially underwrote the 

syndication of a portfolio of long-term leased 

commercial office buildings in Cologne 

225 

Italy 

Residential 

Acquired four separate development projects with 

different JV partners including land subdivision and 

apartment development projects 

205 

Spain 

Residential 

Acquired a 150-lot residential subdivision in a master 

planned golf course project in Marbella, in JV with 

La Perla Group 

100 

48


Case study Kiel 

In December 2003, Babcock & Brown acquired a 6,000-unit residential portfolio in Kiel, a port city in 

northern Germany, for approximately ¤170 million. The portfolio accounts for approximately 4.8% of the 

total housing stock in Kiel. 

Babcock & Brown acquired the properties in partnership with an experienced German real estate asset 

manager, who is responsible for the day-to-day management of the portfolio (Babcock & Brown has a 

94% interest in the portfolio). The seller was a German leasing company with whom Babcock & Brown 

had a previous relationship through its structured finance activities. 

The size of the portfolio and its strategic nature in the context of the Kiel property market offered 

Babcock & Brown a number of different options to realise value, including targeted sales of individual 

units or blocks of the portfolio, site redevelopment and the syndication of the Group’s equity in the 

portfolio. Babcock & Brown has had previous success in dealing with large property portfolio 

acquisitions in Australia, the UK and Japan in this manner. 

The purchase price was at an attractive yield compared to German interest rates, reflecting the generally 

depressed condition of the German property market. The estate was also 6% vacant, offering the 

potential for increasing value through more aggressive asset management. Babcock & Brown was able 

to secure significant leverage against its purchase price and to lock in interest rates for a ten-year period 

to mitigate the risk of interest rate rises if Babcock & Brown decided to hold the portfolio for the long 

term. Babcock & Brown also structured the transaction so that the rental income is sufficient to cover all 

debt-related payments, property management and improvement expenses, and taxes, effectively creating 

a portfolio of long-term cash flow streams. 

Babcock & Brown is in final negotiations to sell approximately 20% of the portfolio to a German 

institutional property fund with the expectation of an uplift on the acquisition price. 

Future growth 

Consolidate the Australian platform 

Building on its long operating history, the Australia Real Estate business still has significant growth potential, 

particularly to expand the scope of its principal investment activities. Further expansion may take various forms 

including: 

• Expanding existing activities including the BBRE fund and development partnerships 

• Forming further strategic relationships with operating partners such as Citta to extend the scope of the 

Australian property business. For example, a partnership was recently formed with an experienced 

leisure-management company to establish a vehicle to acquire and redevelop coastal caravan parks 

• Launching and managing wholesale or retail property funds based on Babcock & Brown’s existing 

investment portfolio or new assets with particular emphasis on products offering Australian investors the 

opportunity to invest in offshore real estate 

49

SECTION 3 


Accelerate the expansion in Europe and Japan 

Babcock & Brown has observed similar types of market inefficiencies and value arbitrage opportunities in its 

target sectors of the European and Japanese property markets to those that existed in Australia prior to the 

mid-to-late 1990s.There is also significant potential to transfer a number of products, financing structures and 

operating practices that have been successfully employed in Australia to these markets. In the past 18 months, the 

Group has built a pipeline of European property transactions that is expected to require at least $50 million of 

capital deployment during the Forecast Period, including the acquisition of further residential portfolios. 

In Japan the business will seek to further build on its successful track record and market presence both as an 

investor and asset manager, and to continue the growth in its assets under management, both through acquisitions 

as a principal and on behalf of clients, including a large European real estate mutual fund manager. Given the size 

and nature of the Japanese market, Babcock & Brown believes there is ample room for expansion both in 

principal investment and asset management for some years to come. Babcock & Brown will also seek to broaden 

the types of investment products it offers with respect to Japanese real estate and is currently reviewing the 

potential launch of a diversified Japanese property investment product. 

Increase capital deployed in investments 

Babcock & Brown has traditionally syndicated most of its property investment positions. In retrospect, Babcock & 

Brown would have received substantial financial benefits had it had sufficient capital to allow it to retain a greater 

stake in many of those investments for a longer period of time. 

With an expanded capital base, Babcock & Brown intends to hold more significant positions in its investments 

where appropriate, while continuing to build its investment management business by syndicating the remainder of 

the assets to private investors or to investment vehicles that it has established. 

Expansion in selected niches in the US 

Babcock & Brown has established a team to pursue opportunities in specialised sectors in the US real estate 

market. A particular focus is the provision of structured finance solutions for US property transactions. 

FINANCIAL SUMMARY 1 

Year ended 31 December ($000) 2001A 2 2002A 2 2003A 2004F 2005F 

Net Revenue 

– Advisory 4,338 14,385 6,398 

– Investment management 27,551 19,152 32,949 

– Principal invested 32,309 49,990 78,451 

Net Revenue 30,779 25,716 64,198 83,527 117,797 

Operating costs 3 (16,587) (21,992) (24,394) 

Operating profit before bonuses 47,611 61,535 93,403 

NOTES 



currency. Historical financial information has been prepared from statements prepared in US dollars.The use of constant exchange rates, whilst not consistent 




2. Babcock & Brown did not segment revenues or operating costs by Business Group prior to 2003. 

3. Includes operating costs attributable to the segment and allocated corporate overhead costs. 

50


Management discussion and analysis 

Historicals 

2003 compared with 2002 

Net Revenue increased 149.7% from $25.7 million to $64.2 million primarily due to significant growth in the 

Australian business driven by: 

• Continued expansion and turnover of the BBRE portfolio 

• Refinancing fees and investment gains on investments which Babcock & Brown managed and in which it 

held equity interests 

• Exit and performance fees derived from private investment syndicates managed by Babcock & Brown 

The Japanese business achieved Net Revenue levels above its previous record 2001 performance as it expanded its 

investment management portfolio with major property acquisitions, including a portfolio of properties in the 

Tokyo and Yokohama areas. Unlike 2001 this level of Net Revenue was achieved from a much wider spread of 

transactions and included advisory fees, asset management fees, trading profits and performance fees. 

The UK real estate business was still in development mode and was not a significant contributor to Net Revenue 

with substantial focus being directed towards the creation of a retail syndication business.The first fund 

(Foundation Property Fund) achieved a successful close in early 2004. 


Net Revenue decreased 16.5% from $30.8 million to $25.7 million as substantial Net Revenue growth in the 

Australian business, which approximately doubled its Net Revenue, was exceeded by a temporary decline in Net 

Revenue from the Japanese business (see below). 

2002 was the first full year of operation of the BBRE fund which facilitated the profitable expansion of the 

Australian business’ investment and lending activities. Fees from sale and lease-back activities and profits from the 

syndication of the Group’s investments were other important revenue drivers for the Australian business. 

The UK real estate business grew revenues off a low base in 2001 in its first full year of operation as an 

independent Business Unit. 

In Japan, the focus on transitioning the business model to one less dependent on the Group’s capital (given the 

constraints on the Group’s capital at the time), and the decision to delay a large scheduled portfolio acquisition 

until 2003, resulted in a significant decline in transaction closings which had a temporary adverse impact on 

revenue in 2002. 

Forecasts 

In Australia, the BBRE investment portfolio has continued to grow, reaching more than $120 million as of 

30 June 2004.The Group has seen increased demand for mezzanine loans and equity financing from property 

developers and other sponsors seeking structured financings due to the tightening of credit parameters by 

first-mortgage lenders, particularly in the residential sector.The existing BBRE investment portfolio continues to 

perform to expectations despite generally more challenging market conditions reflecting the quality of the assets 

and the high levels of pre-sales at most residential developments in the portfolio.The gains from investments 

realised thus far in 2004 support this trend. 

Revenue associated with BBRE is the principal driver of growth for Australian Real Estate over the Forecast 

Period. Specific assumptions relating to the forecasts for BBRE are listed below: 

• Loans and equity investments outstanding are assumed to grow to $150 million 

• As existing investments are realised, they are assumed to be replaced with new investments, such that the 

portfolio stays constant at $150 million for the remainder of the Forecast Period 

51

SECTION 3 


• New investments that are not identified in the BBRE pipeline are assumed to be mezzanine loans earning 

fixed returns over the Forecast Period together with establishment and arrangement fees with respect to 

these loans. No income from profit shares has been assumed from any new transactions added to the 

portfolio in 2005 with such profits unlikely to emerge until a subsequent period 

The Japanese business has already met its budget for record revenues in 2004, with a number of transactions 

closed, including the realisation of principal investments, the completion of various acquisitions, syndications of 

equity in respect of a ski resort and hotel complex and a number of advisory transactions.The transaction 

pipeline for the Japanese business continues to be robust and revenues in the remainder of the Forecast Period are 

assumed to be generated from a spread of different activities, consistent with the performance so far in 2004. 

Furthermore, the Group is currently reviewing the potential launch of a diversified Japanese property investment 

product during the last quarter of this year, that may bring forward some of the revenue forecast for 2005 into 

2004. 

The European business’ transaction pipeline has grown significantly since its pan-European expansion initiative 

was launched at the end of 2003. Since January 2004, the Group has committed, via joint ventures, to additional 

projects with a total completed value of approximately ¤530 million.This strong growth is forecast to continue 

in 2005, with revenues forecasts to be generated principally from the realisation of existing investments and other 

transactions that are currently in the Group’s pipeline. 

52


INFRASTRUCTURE AND PROJECT FINANCE 

Overview 

The Infrastructure and Project Finance Group has a balanced mix of financial advisory, principal finance and 

funds management activities.The scope of its roles within these activities includes: 

Investment management Principal investment Advisory 

• Private investment syndicates • Project developer 

• M&A advisor 

• Listed funds 

• Equity investor 

• Project finance advisor 

• Senior and mezzanine debt 

provider 

• Corporate advisor 

• Debt/equity arranger 

Locations 


Australia, US, Europe, Malaysia, Hong Kong 

22% 

24% 

2003A 

2004F 

The Infrastructure and Project Finance Group’s activities are diversified across a range of sectors and 

geographic regions. 

Sectors 

• Renewable energy 

• Power 

• Transportation 

• Distribution and transmission 

• Resources 

• Public Private Partnerships (PPP) 

• Water treatment 

Countries 

• Australia • Malaysia • New Zealand 

• China/Hong Kong • USA • Korea 

• Canada • India • UK 

• France • Germany • Hungary 

• Italy • Iceland • Spain 

• Turkey 

• Greece 

The Infrastructure and Project Finance Group has drawn on its structured finance expertise to develop its 

advisory practice, focusing on more complex transactions that require innovative financing solutions. Babcock & 

Brown has historically targeted niche sectors of the market where it perceives that there will be significant 

growth and where it has the ability to capture a market-competitive position. 

In recent years, Babcock & Brown has placed a greater emphasis on principal investment-related activities and has 

increased its role as an originator and investor in development projects.The goals of this strategy include 

generating attractive development returns and developing long-term investment management roles in relation to 

assets or vehicles acquired or originated by the Business Group, increasingly providing the Infrastructure and 

Project Finance Group with new transaction opportunities or clients. 

The business is well established in the US, Europe and Australia and has recently expanded into Asia. 

Background 

Babcock & Brown commenced its involvement in the infrastructure sector in the 1980s as an advisor and 

arranger of project financings. Operations began in the US and were subsequently expanded into Europe. By the 

mid 1990s, Babcock & Brown was a financial advisory market leader to independent power producers in both 

the US and Europe. 

53

SECTION 3 


In 1996, Babcock & Brown began to focus on taking principal investment positions in projects developed under 

the UK Government’s Private Finance Initiative (PFI or PPP) and has since developed assets in the sector with a 

gross development value of £418 million. 

In 1997, the Infrastructure and Project Finance Group expanded into the Australian infrastructure market through 

the acquisition of Australian Industry Development Corporation (AIDC). AIDC was a Commonwealth 

Government-owned investment bank with a significant presence in the Australian infrastructure and project 

finance market. Babcock & Brown on-sold or liquidated certain businesses of AIDC, principally the 

non-infrastructure-related businesses, retaining a significant and profitable infrastructure investment portfolio and 

pipeline.This business formed the basis of the current Australian Infrastructure business. 

Babcock & Brown’s Australian business was further strengthened through the establishment of Prime 

Infrastructure (Prime Infrastructure), an ASX listed infrastructure fund. Prime Infrastructure was established with 

the Dalrymple Bay Coal Terminal (DBCT) (see case study that follows) as its foundation asset. 

The Asian business was established in 2002. Babcock & Brown believes that there are significant opportunities 

in a number of Asian markets as private infrastructure development is further encouraged in those regions. 


Financial advisory and arrangement 

Babcock & Brown’s financial advisory and arrangement practice was established in the 1970s.The Infrastructure 

and Project Finance Group has built a strong reputation for its ability to execute complex transactions requiring 

innovative financing solutions. Babcock & Brown’s success in this field has been acknowledged through a high 

level of repeat business and its receipt of a number of industry awards. Recent awards include: 

• 2003 Financier of the Year – American Wind Energy Association 

• 2003 Asian Infrastructure Deal of the Year (Pusan Newport) – Project Finance International 

• 2003 Asia-Pacific Project Finance Advisor of the Year – Project Finance International 

• 2003 European Utilities Deal of the Year (City of Mannheim) – Asset Finance International 

• 2003 US Power Distribution Deal of the Year (Tennessee Valley Authority) – Asset Finance International 

• 2002 European Renewable Deal of the Year (Eurovento) – Project Finance 

• 2002 European Manufacturing Deal of the Year (Stendal Pulp Mill) – Project Finance 

Principal investment and investment management 

Babcock & Brown has successfully parlayed its industry expertise, experience and relationships developed as an 

advisor into successful principal investment businesses in Australia, the US and Europe. Babcock & Brown has 

acted as a principal, developer, equity sponsor and bridge financier, and has also purchased portfolios of completed 

infrastructure assets. Babcock & Brown’s typical focus is on the “risk capital” component of any funding, being 

the equity, preferred equity or subordinated debt. On limited occasions Babcock & Brown may invest in the 

direct senior debt component of the capital structure. 

Sector focus and experience 

Over the past 20 years, Babcock & Brown has completed transactions across a wide range of infrastructure 

industry sub-sectors but has to date chosen to focus on several specific sub-sectors where it believes it has a 

competitive advantage. Babcock & Brown’s recent experience in these sub-sectors is described on the 

following pages. 

54


Renewable energy generation 

In the wind sector, over the last 15 years, Babcock & Brown has arranged financing for almost 2,000MW of wind 

energy projects and companies, valued at over US$2 billion. Babcock & Brown is active as an advisor, developer 

and investor in the wind energy sector in Australia, the US and Europe. Selected recent projects are listed below: 

Development Location Capacity Babcock & Brown role Date 

Lake Bonney 

Stage 1 & 2 

South Australia 

220MW 

Currently Australia’s largest wind farm 

being developed in JV with National 

Power. Babcock & Brown has invested in 

and acted as co-developer of the project 

2004-2005 

Alinta Wind Farm Western 90MW JV with National Power and Carbon 

2004 

Sweetwater 1 Texas, USA 400MW Babcock & Brown is co-developer of this 2003 

Australia 

Solutions.The project has secured an 

offtake agreement with Alinta 

multi-stage development and has invested 

in and acted as a financial advisor in the 

37.5MW Phase 1 (operational) and the 

91.5MW Phase 2 (under construction). 

Phase 1 has a pre-arranged 20-year and 

Phase 2 a 12-year power purchase contract 

2003 

Robin Rigg Scotland, UK 198MW JV with TXU Europe under which 

Offshore Wind 

Energy project 

Blue Canyon 1 Oklahoma, USA 74MW 

Babcock & Brown took a lead role in 

the development of the project. Babcock 

& Brown and TXU Europe sold the 

project following completion of the 

pre-construction development phase 

Babcock & Brown invested in and acted 2003 

as a financial advisor.The project has 

pre-arranged 20-year power purchase 

contracts 

Cabazon Wind 

Power 

California, USA 

41MW 

Babcock & Brown advised Cannon 

Power Company, funded development 

and provided stand-by equity 

commitments for the construction and 

sale of the project. Babcock & Brown 

arranged construction financing and, 

together with Cannon, negotiated the 

sale to a take-out buyer for the project 

2002 

NOTE 

1. Babcock & Brown was awarded the American Wind Energy Association Financier of the Year Award for its structuring of these projects and the 41MW 

Combine Hills project located in the state of Oregon. 

55

SECTION 3 


Case study Sweetwater wind project,Texas 

Sweetwater is a 400MW multi-stage development windpower project located in Texas that is being 

developed by Babcock & Brown and DKR Development LLC, a small independent wind-development 

company located in Houston, Texas. The 37.5MW Phase 1 commenced commercial operations in 

December 2003. The 91.5MW Phase 2 is under construction and is scheduled to commence operations in 

December 2004. The 271MW balance of site capacity is anticipated to be built out in 2005 and 2006. 

Babcock & Brown also acted as financial advisor and as an investor, providing loans to DKR and other 

credit support to the project. In addition, Babcock & Brown took a longer-term equity investment in the 

project. Babcock & Brown placed the remaining equity with institutional investors and a utility affiliate. 

Babcock & Brown has an ongoing role as fiscal administrator and investment manager which involves 

overseeing the operations and maintenance at the project. Day-to-day responsibility for operation and 

maintenance is outsourced to General Electric. 

The transaction is notable since it represented a return to the windpower market by institutional 

investors who had been absent for over a decade (recent US wind projects have been predominantly 

owned on balance sheet by large utilities and power companies). Their return was facilitated by an 

investment structure devised by Babcock & Brown, and the Group’s work on educating institutional 

investors about the wind market. 

Babcock & Brown was awarded the 2003 American Wind Energy Association Financier of the Year for 

its role in the Sweetwater transaction and two other wind projects that also attracted institutional 

investor support. 

The windpower market is growing strongly and has significant government support worldwide as an 

environmentally friendly energy source. According to BTM Consult, global windpower capacity grew at an 

average compound rate of 26.3% between 1998 and 2003 to an estimated 40,301MW, and is forecast to grow at 

an average compound rate of 18.9% from 2004-2008. As a result, BTM Consult estimates that total global 

electricity production from windpower (as a percentage of all sources) will increase from 0.49% to 1.06% by 

2008.The increased production of renewable energy is being encouraged by governments worldwide through a 

combination of tariffs and other legislation such as minimum renewable energy consumption requirements and 

tax credits. 

FORECAST WINDPOWER CAPACITY (MW) 

16,000 

CAGR 17% 70,000 

CAGR 18% 2,000 

CAGR 50% 

14,000 

12,000 

10,000 

8,000 

6,000 

4,000 

2,000 

0 

6,361 

13,761 

03 08 

USA 

Source: BTM Consult 

60,000 

50,000 

40,000 

30,000 

20,000 

10,000 

0 

29,301 

65,981 

03 08 

EUROPE 


1,600 

1,200 

800 

400 

0 

239 

1,809 

03 08 

AUSTRALIA 


56


In certain countries wind energy has become a very significant contributor to the national energy supply. For 

example, according to BTM Consult, in Denmark wind energy accounts for 20% of electricity consumption. 

In certain German states wind energy accounts for 25% of electricity production, although the national 

contribution is only 6%. 

Conventional power generation 

Babcock & Brown is also active in developing or acquiring conventional power projects through investing, 

underwriting and/or syndicating equity. Babcock & Brown has also acted as an advisor, particularly where it has 

been able to use its project and structured finance skills to enhance returns to itself, its co-investors and/or its 

clients. Selected recent projects are listed below: 

Completion 

Project Description Babcock & Brown role Size date 

Ecogen 

Acquisition of 

Victorian-based 

gas-fired electricity 

generation assets 

JV with co-investors including Prime 

Infrastructure 

$206m 

2003 

Homer City 

Sale and leaseback 

of a 1,884MW 

merchant generating 

facility owned by a 

subsidiary of Edison 

Mission Energy 

Advised General Electric on the 

acquisition and lease-back financing, 

involving the incorporation of a 

lease structure into an existing 

Rule 144A borrowing 

US$1,600m 

2001 

Redbank Power 

Development of a 

131MW generator 

facility in the 

Hunter Valley 

Advised and arranged financing on the 

development and owned 30% of the 

project (via AIDC). Babcock & Brown 

also assisted in the negotiation of a 

long-term hedge contract for the plant, 

one of the first for a greenfields power 

plant in the Australian electricity market 

$326.5m 

1999 

Sarlux IGCC 

Project 

Development and 

financing of a 

gasification of 

refinery residue 

and CCGT 

(Integrated 

Gasification 

Combined Cycle) 

project 

Financial advisor 

US$1,500m 

1996 

57

SECTION 3 


Power transmission and distribution 

Babcock & Brown has been involved principally as an advisor in power transmission and distribution projects. 

Completion 

Project Description Babcock & Brown role Size date 

Powerco 

Acquisition of a 

majority stake by 

Prime Infrastructure 

in New Zealand’s 

largest listed power 

distribution 

company 

Financial advisor to Prime 


$1,600m 

2004 1 

Basslink 

Development by 

National Grid plc 

of non-regulated, 

sub-sea transmission 

interconnector 

between Tasmania 

and Victoria 

Financial advisor to National Grid on 

its successful bid for the development 

contract 

over $500m 

2002 

Tennessee Valley 

Authority 

Long-term lease 

financing for TVA’s 

digital control and 

monitoring network 

Advisor to the US equity investors 

US$386m 

2003 

NOTE 

1.The acquisition is pursuant to a takeover offer and is still subject to the satisfaction of certain conditions. 

Transportation 

Babcock & Brown’s most significant recent investment in the transportation sector was the acquisition of the 

DBCT in 2001 which was the foundation asset of the publicly-listed Prime Infrastructure (see case study below). 

Other representative transactions that Babcock & Brown have undertaken in this sector have included: 

Project Financial 

Project Description Babcock & Brown role size close 

Pusan Northern 

Port 

Development of a 

marine container 

terminal and 

logistics hub in 

Pusan, South Korea 

International financial advisor 

US$1,770m 

2003-2004 

Virgin Trains 

Virgin Rail Group’s 

replacement of 

rolling stock for the 

Cross Country train 

franchises in the UK 

Financial and procurement advisor to 

Virgin Rail Group 

£407m 

1998 

Angel Trains 

Privatisation of 

Angel Trains, rail 

operating lessor 

Financial advisor and member of a 

consortium with Nomura that acquired 

Angel Trains from the UK Government 

£696m 

1996 

58


Case study Dalrymple Bay Coal Terminal (DBCT) 

DBCT is one of the largest open-access-coal-handling terminals in the world, with a net operating 

capacity of 56MTA, or approximately 6% of the world’s seaborne coal trade. In September 2001, Babcock 

& Brown led a consortium which purchased a 100% leasehold interest in DBCT from the Queensland 

Government, with the view to creating a listed diversified infrastructure-investment entity with DBCT as 

its foundation asset. 

Babcock & Brown syndicated the majority of its expected principal position during the bid process for 

DBCT. Shortly after the financial close of the DBCT acquisition, Babcock & Brown had completed the 

partial selldown of its equity stake to a group of private equity investors. 

In June 2002, nine months after the acquisition of DBCT, Babcock & Brown successfully led and 

completed the IPO of Prime Infrastructure on the ASX with DBCT as its foundation asset. A Babcock & 

Brown subsidiary continues to act as the Responsible Entity for the Prime Infrastructure Trust and also 

acts as Prime Infrastructure’s financial advisor. Moreover, Babcock & Brown remains a significant stapled 

security holder and, with its associates, has undertaken to hold a minimum of 20 million stapled 

securities until 2006. 

PFI/PPP 

PFI (Private Finance Initiative) or PPP (Public Private Partnership) projects are those where the public sector 

commissions private sector participants to provide services to the public sector which include building, financing 

and operating various forms of infrastructure before, in most instances, transferring operations to the public sector 

after a pre-agreed period, typically 25 years and in some cases up to 35 years.The government typically pays a 

pre-determined fee (often subject to an agreed formula) over the period of time that the private sector provides 

the agreed services. 

The long-term cash flow streams generated by these assets, backed by government credits, lend themselves to the 

types of asset financing techniques in which Babcock & Brown has considerable expertise. 

Babcock & Brown has developed a specialisation in smaller-sized accommodation-based PFI/PPP projects such as 

schools, prisons, courts and police stations, where revenues are not subject to patronage risk (in contrast, revenues 

for a toll road, for instance, depend on usage levels by commuters). A dedicated team was formed in the UK in 

1997 to focus exclusively on such projects.The Australian Infrastructure Group also is an active participant in the 

emerging Australian PPP market. 

Babcock & Brown acts as the leader of a consortium of construction firms, architects, facilities managers, financiers, 

lawyers and other partners. Babcock & Brown’s typical role in the development is to structure the bid, arrange 

finance and negotiate operating agreements with the government and other operating partners. In general, 

Babcock & Brown receives development fees upon financial close of each project. Post-acquisition, Babcock & 

Brown will typically oversee all development activities and then in most cases acts as investment manager on behalf 

of equity providers. Babcock & Brown also frequently takes a principal equity position in the project. 

To date, Babcock & Brown has developed 13 projects in the UK with total gross development value of 

approximately £418 million.Three additional PFI projects with a development value of £260 million are at a 

preferred bidder stage and are expected to reach financial close in the forecast period. A further pipeline of 

developments is in the initial bid stage. 

59

SECTION 3 


Selected projects developed by Babcock & Brown, or in its development portfolio are listed below: 

Gross 

development Construction 

Project Description value (£m) 1 commenced 

Derby Schools 1 

and 2 

• Development of four secondary schools 

• Facilities of 44,000m 2 

• 25-year concession term 

71 

2003 

(Stage 1) 

2004 

(Stage 2) 

Calderdale School 

• Grouped school scheme comprising five schools 

• 3,800 school places 

58 

2003 

• Total area 38,000m 2 

• 25-year concession term 

Norfolk Police 

Authority 

• New police headquarters 

• Premises of around 15,000m 2 including office 

accommodation, a restaurant, vehicle servicing area and an 

indoor firing range 

30 

2000 

• 35-year lease term 

Bootle 

• Office accommodation for the Inland Revenue 

16 

1999 

• Premises of around 7,800m 2 

• 15-year lease term with freehold ownership 

Abingdon 

• Area headquarters for Thames Valley Police Authority 

9 

1999 

• Premises at around 4,000m 2 including a custody suite, 

interview rooms, locker rooms and restaurant 

• 30-year lease term 

NOTE 

1. Gross development value includes costs of land, design and construction, legal costs (including lenders’ costs), bid development costs, interest during construction 

and other associated costs. 

60


Babcock & Brown also acts as an advisor on larger PFI/PPP projects that fall outside the target areas of the 

Group’s principal investment activities. Selected projects are listed below. 

Project size 1 Financial 

Project Description (£m) close 

Project Aquatrine 

Babcock & Brown advised Brey Utilities, a consortium of 

Yorkshire Water, Earth Tech and Kellogg Brown & Root, on 

its successful bid for Package A of the Aquatrine PPP. The 

project involved the provision of water and waste water 

services to the Ministry of Defence at bases across the west of 

England and Wales 

300 

2003 

Levenmouth Waste 

Water Treatment 

Works 

Babcock & Brown advised Northumbrian Lyonnaise 

International and Degremont on their successful bid to 

design, build, finance and operate this new water treatment 

works in Scotland.The project was financed with a 37-year 

monoline guaranteed bond – the longest tenor then achieved 

in the UK PFI debt market 

75 

2000 

Fazakerley Prison 

Babcock & Brown advised Group4 and Tarmac on their 

successful bid to design, build, finance and manage the first 

UK PFI prison at Fazakerley, Merseyside 

95.5 1995 

NOTE 

1.Amount reflects total funds raised through both debt and equity financing. Babcock & Brown may not have acted as advisor on all tranches of fundraising. 

Other 

In addition to the sectors described above, Babcock & Brown has also successfully completed transactions in the 

following sectors: 

• Industrial processes/infrastructure, e.g. manufacturing plants 

• Satellites and other IT infrastructure 

• Large-scale public venues 

Representative transactions include: 

Financial 

Project Description Project size 1 close 

Stendal Pulp Mill 

Babcock & Brown acted as advisor on the financing for the 

development of a 552,000 tonnes p.a. Kraft pulp mill in 

Germany. Babcock & Brown also supported the transaction 

with a corporate bridge loan 

¤1,000m 

2002 

Wembley Stadium 

Babcock & Brown acted as financial advisor to the Football 

Association’s borrowing vehicle,Wembley National Stadium 

Limited, on the redevelopment of Wembley Stadium 

£757m 

2002 

NOTE 

1.Amount reflects total funds raised through both debt and equity financing. Babcock & Brown may not have acted as advisor on all tranches of fundraising. 

61

SECTION 3 


Future growth 

Expand investment in renewable energy 

Babcock & Brown has developed a pipeline of potential wind energy and gas-fired power developments and 

other infrastructure opportunities in Australia, Europe and the US which are anticipated to require a capital 

commitment of over $100 million during the Forecast Period. Global government-supported initiatives to 

increase the development of renewable energy sources should result in further development and investment 

opportunities in the medium-to-long term. 

Increase capital deployed in investments 

Like the Real Estate Group, the Infrastructure and Project Finance Group has traditionally syndicated most of its 

investment positions. For instance, Babcock & Brown only retained a 13.5% stake in the DBCT investment 

which has provided initial wholesale investors with an IRR in excess of 66% per annum when calculated by 

reference to the market value of Prime Infrastructure stapled securities as at 31 July 2004. 

Following completion of the Offer, the Infrastructure and Project Finance Group intends to selectively hold 

for longer periods of time, more-significant positions in its investments, while continuing to build its investment 

management business by syndicating the remaining positions to private investors or to investment vehicles it has 

established. 

Create additional investment products based on infrastructure assets 

The long-term, stable cash flow streams generated by many infrastructure assets are attractive to superannuation 

and other retirement-focused funds seeking secure, long-term investments.These sources of capital are growing 

due to the worldwide trend towards self-funded retirement and an ageing population. Babcock & Brown sees a 

significant and growing opportunity to use its capital to secure assets which can be incorporated into widely 

distributed and/or listed investment products. 

Continue development of the Asian Infrastructure and Project Finance business 

Strong economic growth in Asia’s economies is expected to drive robust demand for infrastructure development 

over the medium term.This trend should support the continued growth of Babcock & Brown’s Asian 

Infrastructure and Project Finance advisory practice. Furthermore, the Infrastructure and Project Finance Group 

is actively reviewing potential principal investment opportunities in this region. 

Financial summary 1 


Net Revenue 

– Advisory 28,267 56,678 71,957 


– Principal invested 32,514 22,258 44,857 

Net Revenue 42,744 69,456 84,352 104,111 156,717 



NOTES 









62



Historicals 


Net Revenues increased 21.4% from $69.5 million to $84.4 million primarily due to significant increases in the 

European and UK PFI businesses outweighing declines in Net Revenue from the Australian and US businesses. 

An increase in Net Revenue in the Asian business also contributed to overall Net Revenue growth. 

The European business’ Net Revenue growth was principally driven by gains from principal investments in an 

offshore windfarm in the UK and fees and interest from a corporate bridge loan it provided in respect of a major 

European paper mill project for which Babcock & Brown acted as financial advisor. 

UK PFI’s Net Revenues were driven primarily by profit on the sale of the Group’s 50% interest in a secondary 

portfolio of 18 UK-based infrastructure projects and by leveraging equity cash flows on the portfolio of PFI 

projects developed by the Group to that point in time.This profit coupled with continued success in generating 

advisory and development fees from new projects underpinned a very successful year for this business. 

Revenues in the Australian business declined from record levels in 2002 when returns from the listing of Prime 

Infrastructure had a disproportionately positive impact on revenues (see further discussion of this in the discussion 

of 2002 versus 2001 below). 2003 revenues in Australia were, however, still materially higher than in 2001, 

continuing a very positive growth trend. 

The US business was exclusively an advisory business until the beginning of 2002. In 2001 and prior years it was 

a leading advisor in the power sector helping structure plant-acquisition financings for large US power companies 

as they aggressively expanded their generation capacity.This activity was significantly curtailed in 2002 due to 

significant overcapacity in the US power sector and the Enron bankruptcy. In response, the business began to 

diversify its activities in 2002, completing its first wind development in that year. In 2003, the US business 

concentrated its efforts on building its development capabilities and had closed three wind development 

transactions by the end of the year.The revenues from this development activity did not fully compensate for the 

lower level of advisory business during the year and hence revenues declined from 2002 to 2003. 


Revenues increased 62.5% from $42.7 million to $69.5 million primarily due to increases in revenues 

from the Australian and US businesses, which accounted for almost 85% of overall Infrastructure and Project 

Finance revenues. 

The Australian Infrastructure and Project Finance business had a record year in 2002. Revenues from the 

listing of Prime Infrastructure and the partial realisation of the Group’s investment in the DBCT were the 

major revenue contributors during the year. 

The increase in the US business’ revenues was driven principally by advisory fees with respect to 

merger-and-acquisition activity involving large power stations. Fees and profits were also derived from the 

Group’s role as advisor and co-developer of the Cabazon wind farm, the Group’s first foray into principal 

investing activity in the US wind sector. 

The European business continued the progress achieved during 2001 under a consolidated pan-European 

management structure and increased revenues by approximately 90% during the year.The Asian business made 

a small revenue contribution in 2002 in its first full year of operation. 

The UK PFI business’ revenue declined mainly as a consequence of delays in projects achieving financial close 

as well as equity-accounting losses generated from the Group’s 50% holding in a secondary market portfolio of 

18 PFI projects, which was subsequently sold for a significant profit in 2003. 

63

SECTION 3 


Forecasts 

Management fees and distributions from investment funds managed by the Australian business have continued to 

provide a solid base of revenues in 2004.The assets managed by these vehicles are forecast to grow through the 

development or expansion of existing assets, and new acquisitions, thus driving increased management fees and 

advisory fees associated with these growth initiatives. Forecast Net Revenue in 2004 for the Australian business 

includes advisory fees in relation to the acquisition by Prime Infrastructure of a majority stake in Powerco. 

The Australian business also has a strong pipeline of wind and gas-fired energy development projects that are 

forecast to be important contributors to revenue in the Forecast Period. Several of these projects are the product 

of strategic site acquisitions by the Group in the last five years, underscoring the Group’s long-term perspective 

on developing its investment management business. Activity from various other Infrastructure sub-sectors is also 

forecast to generate revenue for the business. 

Revenues for the European business are expected to be generated from a diverse range of activities in a number 

of infrastructure industry sub-sectors including rail, toll roads, healthcare, defence equipment, conventional energy 

and renewable energy. 

Net Revenues forecast for the US business result from a heavy concentration on wind energy projects, with 

advisory and development fees associated with these projects forecast to account for most of the business’ revenue. 

Approximately $6 million of Net Revenue forecast for 2004 may be deferred until 2005 if US legislation extending 

the Production Tax Credit (PTC) regime is not passed by the end of 2004. See Section 7.1.16 for a detailed 

discussion of this legislation. 

A material amount of the Forecast Net Revenues for the Infrastructure and Project Finance business, in both 

2004 and 2005, is associated with windpower projects.The revenues are generated by over 20 different projects 

across the US, Australia and Europe.The revenue is also diversified across advisory, investment management and 

investment activities, and is entirely associated with projects for which the Group either has an advisory mandate, 

an equity investment or both. Of course, fees and profits from projects are generally contingent on the project 

proceeding to completion. 

64


OPERATING LEASING 

Overview 

Babcock & Brown’s operating leasing business manages a portfolio of over US$4.4 billion in assets within three 

Business Units: 

Babcock & Brown Aircraft Babcock & Brown Rail Babcock & Brown Electronics 

Management (BBAM) Management (BBRM) Management (BBEM) 

• Manages approximately 144 

leased commercial jets 

• Portfolio valued in excess of 

US$3.8 billion 

• Estimated to be sixth largest 

portfolio of leased commercial 

jets worldwide by value 

• Manages over 10,000 freight 

railcars in North America 

• Portfolio value in excess of 

US$600 million 

• Relatively new business built 

around a management team with 

over 20 years’ combined average 

experience 

• Focused on trading, lease-portfolio 

management and the creation of 

financing products for 

semiconductor manufacturing 

equipment 

Locations 


USA, Europe, Japan 

20% 

24% 

2003A 

2004F 

Babcock & Brown’s principal strategy in its operating leasing businesses is to acquire assets that can be placed 

with appropriate long-term investors, while maintaining an ongoing management role.The assets are typically 

held under investment structures designed by Babcock & Brown to optimise financial returns which are shared 

between itself and investors.This model allows Babcock & Brown to rely on its investment selection and 

structuring expertise, rather than its financial resources, to build its operating lease portfolios, allowing it to 

compete effectively with better-capitalised competitors. 

Babcock & Brown has minimal exposure to the residual risk on the leased assets it manages, with that exposure 

typically limited to its ultimate income from remarketing or exit fees at the end of the lease term.This business 

model has proven highly scalable and has allowed Babcock & Brown to grow its operating lease portfolios with a 

relatively modest deployment of capital. Strong long-term relationships with debt and equity providers give 

Babcock & Brown a significant competitive advantage. 

Babcock & Brown earns revenue from asset-acquisition and syndication fees, ongoing management fees, 

equipment trading and performance-based remarketing and exit fees. Management, remarketing and exit fees 

have grown together with the size of the leased asset portfolios and, due to the long-term nature of most 

management contracts, provide an element of highly reliable ongoing revenue. 

Leveraging its in-depth knowledge of these asset classes and its investment selection skills, Babcock & Brown is 

also active in acquiring assets for short-term resale, typically after it has added value by restructuring the lease 

or completing a refurbishment or reconfiguration of the asset.These assets may be sold into a Babcock & 

Brown-managed leased portfolio or to a trade buyer as dictated by market conditions.These asset trading 

activities provide a useful hedge against downturns in the cyclical aircraft, railcar and semiconductor 

manufacturing equipment markets as assets can be acquired at attractive valuations to then be sold at a profit 

when market conditions improve. 

65

SECTION 3 


Background 

Babcock & Brown’s operating lease business grew out of the Group’s long history as an advisor and arranger of 

sophisticated finance leasing transactions. 

In 1986, Babcock & Brown formed a joint venture company with the Nomura Group, Nomura Babcock & 

Brown (NBB), to market and syndicate aircraft subject to operating leases into Japan. Babcock & Brown’s aircraft 

operating lease group (BBAM) was formed in 1989 to leverage the resulting demand from Japanese private equity 

investors for leased aircraft. BBAM is now the leading arranger of syndicated aircraft finance in the Japanese 

market and manages the world’s sixth largest portfolio of leased commercial jets by value. 

Having identified the opportunity to extend the skills gained through aircraft leasing to railcars, the rail division 

was formed in 1999 when Babcock & Brown hired a team of senior professionals from CIT, including the 

President of its Rail Division.This business has grown rapidly and now manages over 10,000 railcars. 

The model was further extended to semiconductor manufacturing equipment in June 2002, when a team of 

senior professionals joined Babcock & Brown from Comdisco after the electronics portfolio of Comdisco was 

sold.The team has a track record of over 20 years in the semiconductor manufacturing equipment industry.The 

team has closed over US$5 billion in leasing transactions and provided equipment advisory services on more than 

US$500 million of additional transactions prior to joining Babcock & Brown. 


Aircraft: Babcock & Brown Aircraft Management 

BBAM’s primary activities are: 

• Acquiring and selling aircraft to both trade and financial buyers 

• Arranging aircraft leases with end users 

• Providing management and remarketing services to investors 

On occasions, BBAM will acquire aircraft where there is either no lease in place or only a short lease term 

remaining. BBAM will then seek to reposition the asset, often by negotiating a new lease or reconfiguring the 

aircraft prior to resale. 

Babcock & Brown has a longstanding, mutually exclusive joint-marketing arrangement with NBB, which is now 

the leading arranger of syndicated aircraft finance in the Japanese private equity market. Over the last 15 years 

BBAM has syndicated 145 aircraft into the Japanese private equity market through NBB. 

Although NBB was originally jointly owned by Babcock & Brown and Nomura, Nomura purchased Babcock & 

Brown’s stake in NBB in 1999 and NBB is now wholly owned by Nomura. Babcock & Brown and NBB 

continue to co-operate under a mutually exclusive joint-marketing arrangement in the same manner as prior to 

this change in ownership, maintaining a longstanding relationship that continues to be mutually beneficial and 

profitable for both parties. 

In a typical transaction BBAM will identify an aircraft, negotiate its purchase or arrange a lease to a creditworthy 

aircraft operator (often the vendor) and source non-recourse finance. BBAM will often warehouse the aircraft in 

a special purpose vehicle, funded by NBB, prior to syndication. 

Equity in the vehicle will then be syndicated into Japan via NBB. Fees on syndication plus any profit on the sale 

of the aircraft are shared equally between BBAM and NBB. BBAM provides ongoing management services, 

remarketing services at the end of the lease and, at the appropriate time, manages the sale of the aircraft. BBAM 

typically receives fixed percentage fees for management and remarketing and a base fee plus an incentive fee on 

disposal, all of which are shared with NBB on a pre-agreed basis. 

BBAM is a global business with professionals located around the world, and an international client base, 

principally consisting of European and Asian airlines. 

66

SECTION 3 



Aircraft leasing industry 

There are approximately 15 significant groups operating in the aircraft operating-leasing industry, with ILFC and 

GECAS (subsidiaries of AIG and GE respectively) being the largest participants with a combined market share 

estimated to be in excess of 60%. Of the remaining market participants there are several groups of a similar size to 

BBAM linked to major commercial banks or equipment finance organisations. Business models vary widely 

between groups. For example, GECAS and ILFC generally place large orders with the aircraft manufacturers, 

whereas BBAM principally engages in sale/lease-back transactions with airlines and opportunistic trading 

acquisitions which subsequently can be syndicated to investor groups. 

The international airline industry has recently been through a significant downturn driven by the global 

terrorism threat, political instability in the Middle East, increasing oil prices and SARS in Asia and Canada. 

Babcock & Brown believes current market conditions, however, have improved considerably and consider the 

outlook for the European and Asian airline industry to be more robust than at any time in the last three years. 

Airline Monitor forecasts global passenger traffic, a key driver for aircraft operating lessors, to increase by 8.7% 

and 6.5% in 2004 and 2005, respectively.Through the first six months of 2004, IATA reported that international 

passenger traffic increased 20.4% over 2003. 

Following the recent downturn in the industry, several aircraft operating lessors have reduced their investment in 

the sector. In contrast, BBAM continued to engage actively in the sector and has grown its aircraft portfolio by 

26% since the end of 2001. As demand for leased aircraft continues to grow Babcock & Brown is in a strong 

position due to the fact that its aircraft fleet is being primarily focused on modern, narrow body jet aircraft with 

broad customer appeal. Furthermore, its model of syndicating ownership of its managed fleet generally places the 

primary-residual value risk with third parties. 

According to Boeing’s Current Market Outlook 2004, the worldwide jet fleet is estimated to more than double by 

the end of 2023 to 34,764 jet aircraft. Babcock & Brown believes that approximately 25-30% of current year 

deliveries of new aircraft will be financed using operating leases and that airlines will need to rely more on 

operating lessors in the future as banks and capital markets will be slow to finance airlines directly.This long-term 

situation is expected to underpin ongoing activity in the aircraft leasing market which should provide ongoing 

opportunities to BBAM. 

Leased aircraft portfolio 

BBAM manages a portfolio of 144 leased commercial jets with a total value in excess of US$3.8 billion.The fleet 

is currently 99% utilised and is leased to 47 customers.The fleet has an average age (weighted by value) of 

7.0 years, with 42% of BBAM’s portfolio being less than six years old.The average remaining lease term 

(weighted by value) within the portfolio is 47 months.The growth of Babcock & Brown’s managed aircraft fleet 

over time is shown in the chart below. 

AIRCRAFT PORTFOLIO SIZE AND VALUE 

160 

5 

No. of Aircraft 

120 

80 

40 

3.8 

3.7 

3.5 3.5 

2.9 

4 

3 

2 

1 

US$ billion 

0 

102 114 127 137 144 

Dec00 Dec01 Dec02 Dec03 Jun04 

0 

Aircraft managed 

Source: Babcock & Brown 

Portfolio value 

67

SECTION 3 


The composition of the portfolio by aircraft type and lease termination profile as of 30 June 2004 is outlined in 

the charts below.The majority of aircraft in the portfolio are comprised of narrow bodied jets which have a more 

liquid market as compared to wider bodied aircraft. 

AIRCRAFT TYPE BY VALUE 

4% 

17% 

41% 

6% 

4% 

18% 

10% 


B737 41% 

B747 10% 

B757 18% 

B767 4% 

B777 6% 

A320 17% 

Other 4% 

AIR PORTFOLIO LEASE TERMINATION PROFILE 

BY VALUE 

35% 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

10% 

19% 

8% 

04 05 06 07 08 09 10+ 


11% 

6% 

13% 

33% 

Asset trading 

Babcock & Brown selectively invests in aircraft for its own account where there exists: 

• Value arbitrage opportunities between different owners and different jurisdictions 

• Value creation opportunities through restructuring, replacing or renewing underlying leases, and or 

• An expectation of short-term changes in market rentals or asset values 

Babcock & Brown typically holds aircraft only for as long as is necessary to reposition the asset before selling it 

either to trade buyers or through syndication.This often has meant on-selling the asset simultaneously with 

purchase. 

Rail: Babcock & Brown Rail Management 

BBRM’s primary activities include: 

• Origination and acquisition of railcar assets (predominantly freight cars in North America) 

• Leasing of railcar assets to end users 

• Sale of assets to investors using proprietary financing structures that maximise the returns to those investors 

• Fleet management, including lease administration, remarketing of equipment for renewal or placement with 

new lessees 

• Asset management, including overseeing the sale of railcars for investors 

Babcock & Brown is currently active in railcar lease management only in North America, but has recently begun 

to expand its activities to Europe. 

BBRM’s business is highly scaleable, with management of an additional 10,000 railcars (an approximate doubling 

of the current portfolio) requiring only approximately two additional full-time employees. 

BBRM has strong relationships with railcar manufacturers developed through the team’s long history of operating 

in the market. Babcock & Brown believes it is thus able to source railcars even in a tight market. 

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SECTION 3 



Case study Portfolio acquisition financed by Japanese operating lease 

BBRM identified an opportunity to acquire a portfolio of assets from a railcar leasing company and to 

add value through more efficient financing sourced from the Japanese operating lease market. Using 

relationships developed in Babcock & Brown’s aircraft leasing activities, BBRM was able to structure a 

pioneering Japanese operating lease for railcar assets. 

BBRM assumed the role of remarketing agent for the portfolio, which was important for underpinning 

the railcar rental forecasts given the short-term nature of the leases. BBRM also negotiated a fixed price 

maintenance contract with the seller that eliminated the cash flow risk associated with maintenance. 

BBRM then developed an extensive presentation on the equipment and the North American railcar 

market and with this identified a bank that was prepared both to lend on a non-recourse basis and share 

remarketing and future asset risk associated with the portfolio. In this way, BBRM developed a 

non-recourse market for railcar operating lease finance. 

This acquisition structure was used to sell 82% of the portfolio acquired. The balance of the portfolio was 

sold at a profit in the US market in approximately 90 days. 

The transaction provides an example of BBRM using its structuring capability and relationship network to 

identify a “best-holder” balance sheet that enables BBRM to secure and manage assets with only limited 

use of its own capital. 

A longstanding client of Babcock & Brown is the equity investor in more than 90% of BBRM’s railcar portfolio 

by asset value, and continues to be the long-term investor in all of BBRM’s underwritten acquisitions in the 

North American railcar market.This relationship has been developed and maintained as a result of significant 

mutual benefit for both Babcock & Brown and its client. Railcars owned by this investor that are already in the 

managed portfolio are subject to long-term management contracts with BBRM, each with an average remaining 

length of approximately 7.8 years as of 30 June 2004. In conjunction with its plans to continue building this 

investor client’s portfolio of railcars, Babcock & Brown is actively seeking to establish or deepen other strategic 

relationships with equipment manufacturers, funding sources and other partners in order to enhance its ability to 

source, trade and manage equipment, and diversify the range of partners with which it works. 

Railcar leasing industry 

The North American freight rail industry is a mature business with many attributes that appeal to investors and 

financial institutions: 

• Historic stability of rail transport industry and infrastructure for long-distance haul of bulk commodities 

• Broad mix of commodities transported by rail reduces volatility 

• Freight railcars are generally leased rather than acquired by end users to transport goods 

• Long economic life of railcars (up to 50 years) with low to moderate risk of obsolescence 

• Liquid market for asset trading 

• Strong on-time receivable history for railcar leasing 

Market conditions in the North American railcar sector are currently very positive, with railcar loadings up 

considerably from last year. According to published statistics by the Association of American Railroads, US and 

Canadian combined cumulative carloads for the period ending May 2004 were up 4.5% when compared to the 

same period in 2003.This has led to increased utilisation and upward pressure on rental rates, coupled with 

increased investor demand. In the current market, ability to access new railcars has become an important source 

of competitive advantage. 

BBRM’s managed fleet only accounts for approximately 1% of the US railcar fleet.Thus, while general market 

conditions are positive, business-specific factors, such as the investment appetite of BBRM’s investors, should have a 

greater impact on the growth of its business.The trends in these business-specific drivers currently remain positive. 

69

SECTION 3 


Railcar portfolio 

The managed fleet comprises over 10,000 freight railcars.The fleet has been 100% utilised for the last three years 

versus an industry-standard utilisation rate in the 90% to 95% range. A total of 2,787 railcars are available for 

re-lease in 2004, of which 2,165 have already been remarketed with year-to-date customer retention on renewals 

running at approximately 80%. Lease terms range from four months to 122 months, with the average remaining 

lease term being 33 months.The growth of Babcock & Brown’s managed railcar fleet over time is shown in the 

chart below. 

RAILCAR PORTFOLIO SIZE AND VALUE 

No. of Railcars 

12,000 

10,000 

8,000 

6,000 

4,000 

2,000 

0 

611 

556 

418 

19% 

275 

10% 

29 

5,028 7,263 9,211 10,040 

Dec00 Dec01 Dec02 Dec03 Jun04 

700 

600 

500 

400 

300 

200 

100 

0 

US$ million 

Cars managed (railcars) 

Portfolio value 


The railcars in BBRM’s fleet have an average age of 6.5 years, versus the average US freight car age of 18.8 years. 

Whilst significant changes in railcar design are rare, newer railcars tend to be lighter and have a higher load 

bearing capacity enabling higher lease rates in stronger markets and maintaining utilisation in softer markets. 

BBRM’s fleet is comprised predominantly of general service railcars. Unlike cars designed for chemicals, gases, 

and other commodities which require features such as pressurisation, refrigeration, heat, etc., BBRM prefers to 

manage railcars which have a generic design and can be used by multiple customers handling dry bulk 

commodities such as coal, grain, metals, cement, paper and timber. 

The fleet is currently leased to 38 customers under 72 separate contracts. 

The composition of the portfolio by railcar type and termination date is outlined in the charts below: 

RAIL FLEET COMPOSITION 

RAIL PORTFOLIO LEASE TERMINATION PROFILE 

8% 

20% 

7% 

1% 

6% 

8% 

7% 

20% 

9% 

14% 

Coal Gondolas 20% 

Box Cars 14% 

Centrebeam Ratcars 9% 

Coil Cars 7% 

Mill Gondolas 8% 

Coal Hoppers 20% 

Cement Covered Hoppers 8% 

Grain Covered Hoppers 7% 

Tank Cars (food services) 6% 

Plastic Pellet Covered Hoppers 1% 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

25% 

22% 

15% 

14% 

10% 

8% 

6% 

04 05 06 07 08 09 10+ 



70

SECTION 3 



Electronics: Babcock & Brown Electronics Management 

BBEM operates in the global semiconductor manufacturing equipment market. It targets the following activities: 

• Contractual remarketing and leasing programs with Original Equipment Manufacturers to deliver both 

leasing and equipment remarketing products 

• Private label operating lease programs established for financial investors including banks and third-party 

leasing companies to leverage BBEM’s industry and equipment knowledge 

• Speculative buy/sell trading in used semiconductor manufacturing equipment 

• Residual value insurance products or forward acquisition contracts for financial investors and other funding 

sources to monetise equipment value into the lease contract 

Babcock & Brown believes these four business segments are complementary and believes these segments will 

create a sustainable business model over the long term, in which BBEM shifts its product emphasis and customer 

targets as the semiconductor industry transitions from contractionary to expansionary cycles. 

Babcock & Brown believes creating operating-lease products and managing a portfolio of such assets in the 

semiconductor industry is complex. Although most semiconductor manufacturing equipment has an estimated 

useful life of approximately 12-15 years, during its lifecycle the equipment will typically cascade to several 

different types of end-users and different product applications.This is driven by the continuous evolution of 

semiconductor manufacturing technology which results in a particular semiconductor moving from leading edge 

(e.g. microprocessor and DRAM), to current production (e.g. medical and automotive) to trailing edge (e.g. home 

electronics) over the course of its lifecycle. As a given semiconductor technology migrates down the technology 

spectrum the number of end-user customers for the manufacturing equipment related to that technology 

dramatically increases, reflecting the pervasiveness of semiconductor content in electronic devices today. 

Remarketing and managing residual risk for such equipment thus requires deep industry knowledge and 

relationships across a range of end-user categories since the potential end-user market will most likely change 

over the duration of the lease. 

BBEM endeavours to distinguish itself through technical experience and industry knowledge developed over the 

management team’s combined average experience of over 20 years in the market.The team’s goal is to develop 

products that are consistent with a client’s technology “roadmap” and factory utilisation requirements, which 

Babcock & Brown believes will provide a competitive advantage over those industry participants that offer 

financing solutions without addressing their client’s technology migration and management requirements. 

BBEM’s focus to date has been on equipment trading, seeking to capitalise upon the depressed state of the 

semiconductor equipment market in 2002 and 2003. However, as market conditions improved in 2004, BBEM’s 

goal is to refocus part of its attention on working to build up an operating lease portfolio. 

BBEM’s operations are based in the US and Japan and it sources assets throughout the world. BBEM has a global 

network of clients, investors and operating partners. 

Semiconductor manufacturing equipment leasing industry 

The demand for semiconductor manufacturing equipment is highly cyclical but has demonstrated consistent 

growth over the long term as illustrated in the chart below. 

SEMICONDUCTOR EQUIPMENT MARKET - CONSISTENT LONG–TERM GROWTH 

(US$) billions 

50 

40 

30 

20 

10 

0 

1.2 1.5 1.9 1.8 2.0 2.5 

3.6 3.0 3.7 

4.7 7.9 

8.9 8.3 8.6 7.9 10.3 14.5 

27.6 27.0 25.6 

23.9 

21.3 

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04E 05E 06E 07E 08E 09E 


47.1 

29.0 

20.7 22.8 33.7 35.9 29.9 29.0 

36.7 38.4 

71

SECTION 3 


The semiconductor equipment market has recently emerged from its worst downturn ever during 2001-2002, when 

the market declined by over half. Babcock & Brown believes that in this period of overcapacity, device manufacturers 

were hesitant to make new investments.The industry has now moved into the second year of a cyclical upturn with 

factory utilisation running close to capacity and thus increased demand for semiconductor manufacturing equipment. 

According to the Semiconductor Industry Association (SIA) the world market for semiconductors (chips) is 

expected to increase from US$166 billion in 2003 to US$247 billion in 2007, growth of 48% in four years.This 

increasingly global industry is forecast to achieve its fastest growth in the Asia Pacific region – 68% during this 

period. Babcock & Brown believes that as both the content of chips in technology products increase together 

with the pervasiveness of technology in every facet of daily life, this industry should remain one of unusually high 

overall growth and capital intensiveness. 

Asset trading 

BBEM’s early successes include opportunistic asset trading in which BBEM purchased used equipment for resale, 

usually after a relatively short holding period. BBEM has a profitable investment track record in asset trading since 

commencing operations in June 2002. In 2003, BBEM equipment sales achieved an average 2.8x multiple on the 

equipment purchased within approximately one year. Babcock & Brown believes that this performance will be 

difficult to replicate in the current environment due generally to what BBEM perceives as increasing asset prices. 

However, the market for used semiconductor manufacturing equipment is highly fragmented, illiquid and 

inefficient and BBEM continues to search for attractive asset trading opportunities. 

Case study Integrated equipment products and solutions 

Over the last year BBEM has successfully targeted top semiconductor device (chip) manufacturers 

like IBM, Micron, Samsung and Philips and has acquired over $30 million of used semiconductor 

manufacturing tools from them. Babcock & Brown believes these opportunities were available because 

these tools were either surplus to the customer’s current product generation, or because of changes in 

the factory production schedule, the customer required far greater manufacturing capacity to meet 

growing product sales. Because the equipment acquired was targeted and determined to be generic 

manufacturing equipment, BBEM was successful in profitably redeploying the tools to other device 

manufacturers like Samsung and IBM to build different technology products. 

Operating leasing 

BBEM expects to develop its operating leasing activities as the semiconductor market strengthens. BBEM expects 

to target typical operating leases of 36 to 60 months in duration with a fair market value purchase option on 

expiry. BBEM is often asked to acquire assets or configure a leased asset portfolio to help clients migrate and 

cascade technology between different-generation products through advisory and trading services. 

Case study Leading equipment manufacturers working with BBEM 

As the cost of new equipment continues to rise approximately 15% per year, the cost of a new 

manufacturing plant also continues to escalate. It is estimated that the cost of a new wafer 

manufacturing plant today exceeds $2 billion with over 85% of the cost coming from the purchase of 

semiconductor manufacturing equipment. 

Recently, ASML, the largest lithography equipment-manufacturer in the world and with whom BBEM 

currently has a successful secondary market equipment purchase and remarketing relationship, 

requested that BBEM and ASML implement the financing segment of the contractual agreement to 

include leasing for its worldwide customer base. Babcock & Brown believes that ASML’s objective was to 

minimise the equipment cost versus production benefit, since ASML lithography equipment is 

considered highly priced, but also has greater manufacturing output. Also, Babcock & Brown believes 

72

SECTION 3 



that ASML’s goal was to provide a more affordable solution via leasing in order to decrease the cost per 

wafer start in the factory, while allowing the flexibility for customers to migrate from one generation to 

the next seamlessly. 

BBEM is working directly with ASML and, in consultation with ASML’s customer base, has developed a 

“refresh lease” which allows the lessee to acquire multiple generations of ASML tools over an extended 

lease term, thus benefiting from both BBEM’s financial capabilities and its ability to redeploy the surplus 

assets. Babcock & Brown believes that ASML would benefit from converting such used equipment into 

new sale opportunities. 

In addition, BBEM has worked for the last 12 months to create a sophisticated asset-scoring 

methodology, similar to a traditional credit-scoring process. This methodology provides investors with a 

quantitative valuation model to forecast the future residual and collateral value of the equipment under 

the portfolio management of BBEM. 

Future growth 

Expand business through increased investment in existing activities 

Each of the Business Units within the Operating Leasing Group is currently experiencing improving operating 

conditions given the general upturn in demand for aircraft, railcars and semiconductor manufacturing equipment. 

The Operating Leasing Group aims to take advantage of these advantageous conditions through increased growth 

of the leased asset portfolios with the objective of securing ongoing management and remarketing fees. 

There may also be opportunities to acquire substantial asset portfolios as they are sold by owners who no longer 

view operating leasing as a core activity, particularly in the aircraft and rail sectors. 

Establish vehicles to extend principal investment activities 

Despite generally improving market conditions, there remain market inefficiencies that provide value arbitrage 

opportunities in selected niches of the Group’s focus areas.The Operating Leasing Group intends to take 

advantage of these opportunities. 

Product innovation 

One key to the Operating Leasing Group’s success has been its ability to create and apply innovative financing 

structures and leasing products that give it a competitive advantage.The business will continue to innovate in 

response to changing market conditions to maintain its leading edge. 

Geographic expansion 

BBRM and BBEM expect to continue to take measured steps to expand the geographical reach of these business 

areas over the medium term. For BBEM, this is expected to primarily involve expanding its marketing network, 

while for BBRM this will involve establishing beachhead operations such as the recently established European 

operating leasing business. 

Diversify operating leasing activities to related product areas 

The Group may extend its activities to related asset classes over the medium-to-long term.These could include: 

• BBAM: Ordering new aircraft directly from manufacturers, engine leasing and freighter conversions 

• BBRM: Intermodal equipment and locomotives 

• BBEM: Complementary markets including healthcare, radiology, diagnostic equipment and life sciences 

73

SECTION 3 




Net Revenue 

– Advisory 12,134 3,001 4,120 


– Principal investment 7,517 3,806 11,252 

Total Net Revenue 82,036 83,226 79,704 101,619 122,604 



NOTES 




with Australian GAAP, has been adopted in the table above, as Babcock & Brown believes that this basis provides a more meaningful insight into the activities 

and financial performance of Babcock & Brown given the prior practice of managing its activities using the US dollar as its benchmark currency. 




Historicals 


Net Revenue in this segment declined 4.2% in this period from $83.2 million to $79.7 million notwithstanding 

the successful first full year of operations for the Electronics business. 

Net Revenue in the Aircraft business declined from 2002 to 2003 particularly with respect to European airlines 

reflecting continued soft conditions in the airline industry as a result of the Iraq War. 

The Rail business’ Net Revenue also declined between 2002 and 2003, as its activities were restructured to focus 

more on investment syndication and asset management, as opposed to its previous focus on opportunistic asset 

trading. Although up-front fees and trading gains declined, the value of assets under management increased and 

with it, the potential for future earnings from annuity-like management and remarketing fees. 


Net Revenue increased 1.5% from $82.0 million to $83.2 million as an increase in Net Revenue from the Rail 

business offset a decline in the Aircraft business caused by deteriorating airline industry conditions precipitated by 

the events of 11 September 2001.The Rail business increased Net Revenues by over 25% in its third full-year of 

operation principally due to profitable asset trading activities.The Electronics business only began operations in 

June 2002 and therefore only had a small Net Revenue contribution during the year. 

Forecasts 

The principal drivers of the Aircraft businesses revenues are: 

• Volume of aircraft acquired and syndicated or sold to investors – drives acquisition and syndication fees 

• Size of managed portfolio – drives management fees 

• Turnover of portfolio – drives remarketing fees and sale/exit fees 

• Aircraft values and lease rates – drive principal trading profits and performance fees 

74

SECTION 3 



Acquisition and syndication volume is forecast to increase in both 2004 and 2005 based on the continued recovery 

of the airline industry outside of the US and the need for additional aircraft to meet the growing global demand 

for air travel after a three-year downturn.The forecast volumes assumed are consistent with current expectation of 

investor appetite for leased aircraft product and the growth trends experienced so far in 2004. Higher syndication 

volumes also have the benefit of driving management fee growth as the size of the portfolio increases. 

The Rail business’ 2004 Forecast Net Revenues are driven by the purchase and syndication to investors of several 

railcar portfolios.Two of these transactions have already been completed and another has been identified and is 

currently in the process of being finalised. 2005 Forecast Net Revenues are also assumed to be driven principally 

by this purchase-and-syndication activity at a level which reflects Babcock & Brown’s current view of the 

availability of suitable railcar stock and investor demand for the assets. 

The majority of the Electronics business’ Forecast Net Revenues in 2004 are expected to be achieved from the 

sale of equipment owned by existing investment partnerships managed by BBEM.The remaining revenue is 

assumed to be generated by business initiatives launched during this year. Net Revenues from trading activities in 

2005 are forecast to remain at 2004 levels. Net Revenues from new business areas are assumed to grow slightly 

between 2004 and 2005. 

75

SECTION 3 


STRUCTURED FINANCE 

Overview 

The Structured Finance Group principally comprises the following three Business Units: 

Special products Finance leasing Capital markets 

• Specialised structured finance • Lessor/lessee advisory 

• Hedging services 

products 

• “Big ticket” finance lease 

arrangement 

• Debt placement for lease advisory 

clients 

• Restructuring advisory 

• Derivatives 

• Securitisation 

• Structured finance products 

involving capital markets 

instruments 

Locations 

Contribution to Group 

Net Revenue 

Australia, US, Europe 

32% 

23% 

2003A 

2004F 

Historically the Structured Finance Group has undertaken activities that are principally advisory in nature.The 

expertise and knowledge gained through these activities plays an extensive role in assisting in the structuring and 

execution of transactions in other parts of Babcock & Brown, providing a key competitive advantage in many of 

the firm’s other activities. In this regard, the team devotes significant time to the development of transaction 

structures, financing structures and the resolution of tax, accounting and other structural problems for Babcock & 

Brown’s other Business Groups. 

The business operates on a global basis with key activities being centred in Australia, the US and Europe. 

Background 

The Finance Leasing advisory and arrangement practice has existed since Babcock & Brown’s founding in 1977. 

The structured financing expertise and relationship networks developed as this business grew spawned the Special 

Products business, as well as most other Business Groups within Babcock & Brown. 

The Capital Markets business was established in 2002 primarily to support the activities of the other Business 

Groups by expanding the range of financing solutions available through the use of capital markets instruments. 

Special Products 

Overview 

The Special Products business focuses on developing innovative investment products and strategies to enable its 

clients to generate incremental after-tax returns, lower after-tax funding costs and/or enhanced accounting 

attributes. 

In some cases the products have applications for multiple clients and in others the products are custom-designed 

solutions to address specific issues of particular clients.The Special Products business’ clients are principally large 

multi-national companies or other entities with sophisticated financing needs. 

Often the type of transactions generated by the Special Products team involve the tax and accounting rules 

of several different jurisdictions and the use of large portfolios of debt, equity, hybrid securities and other 

financial assets. 

76


In addition to designing and marketing transactions, the Special Products team also devotes significant time to 

assisting Babcock & Brown’s other Business Groups, providing them with a significant competitive advantage in 

their business activities. Examples of these types of transactions comprise rail and aircraft operating leases, 

cross-border, municipal and finance leasing and life insurance policy securitisation products. 

The Special Products business’ focus is generally on the completion each year of a small number of large-size, 

high-value-added transactions.Typically, transaction sizes are US$500 million to US$1 billion or more in value, 

with four to ten transactions being completed over a typical year.There is a high level of repeat business from 

clients within this market segment. 

The typical fee profile is an up-front fee payable at closing, with periodic fees being payable, contingent on the 

continued effectiveness of the product. 

Case Study Life Settlements 

A Life Settlement is the sale to a third party of an existing life insurance policy for more than its cash 

surrender value but less than its net death benefit. It is commonly used as a means for an insured person 

to obtain cash from their policies without incurring policy-surrender penalties levied by many life insurers. 

Babcock & Brown was approached in early 2000 by Peachtree Settlement Funding (Peachtree), a company 

that specialises in the financing of high-credit-quality consumer receivables, about raising capital for their 

entry into the Life Settlements business. Babcock & Brown was attracted to the sector given its relative 

immaturity and strong growth potential, and decided to enter into a joint venture with Peachtree. 

Historically the Life Settlements business was predominantly financed through high net worth retail 

investors. Babcock & Brown worked with Peachtree to develop an origination platform and financing 

paradigm that was both institutionally viable and scaleable to the investment sizes that institutional 

capital would require. 

The Babcock & Brown/Peachtree platform was first utilised for a debt facility that was provided by a 

major European bank in early 2001. This facility provided for a term loan to purchase the policies and to 

pay up-front fees (to Babcock & Brown and Peachtree), and a liquidity facility to pay ongoing premiums 

and expenses until the policies mature. This facility was fully utilised by mid-2003. 

In early 2003, Babcock & Brown was seeking new financing parties to invest in the Life Settlements 

market. Coincidentally, many German fund providers were looking to expand their product base, and had 

identified Life Settlements as an attractive investment for German investors due to the high credit 

quality, relatively high return, and favourable tax treatment of life insurance proceeds in Germany. 

Seeking to leverage Babcock & Brown’s ongoing relationship with HVB, Babcock & Brown and Peachtree 

chose to work with HVB FondsFinance to finance policies originated through the Babcock & Brown/Peachtree 

platform. HVB FondsFinance raises capital for such funds through its German retail network. 

HVB FondsFinance raised approximately US$260 million in a retail investment fund which went to 

market in late 2003, well above its original target of US$50 million. This will allow the fund to purchase 

life insurance policies with a total face value of approximately US$550 million and it is expected to be 

fully invested by 30 June 2005. Babcock & Brown, Peachtree, and HVB FondsFinance are currently 

planning a second fund which HVB FondsFinance expects to raise in the retail market during the first 

quarter of 2005. 

77

SECTION 3 


Key drivers 

The key driver of this business is the creativity and expertise of the Special Products team, which comprises a 

core team of senior professionals, with average experience in the structured finance industry of in excess of 

17 years. A significant portion of activities involve cross-jurisdictional elements. 

A key distinguishing characteristic of Babcock & Brown in this market has been its ability to present a client with 

a unique and well developed transaction structure, together with the ability to arrange the funding associated 

with such structures on a multi-jurisdictional basis if so required. 

Key risks 

Changes in accounting, tax law and other regulations are the principal areas of risk to products created by the 

Special Products team. Such changes, however, also provide significant additional structuring and product creation 

opportunities.Traditionally, most products have had a lifecycle of up to five years with new products replacing 

previous ones on a regular basis.The ability to create new products to address the prevailing market conditions 

and regulatory environment is therefore a critical part of this business, and an area in which Babcock & Brown 

has been consistently successful over the long term. 

Finance Leasing 

Finance Leasing is Babcock & Brown’s longest-standing Business Unit with a 27-year operating history. Its core 

activities are lease advisory work (for both lessees and lessors) and the arrangement of complex leasing 

transactions, including the placement of tax-enhanced equity and secured debt.The Business Unit is focused 

primarily on “big-ticket” leasing such as aircraft, power-related assets and rail. 

Aerospace Finance Leasing 

Overview 

The aerospace sector is a key area of focus for the Finance Leasing business. Babcock & Brown’s activities in this 

area revolve principally around finance leasing (primarily “leveraged leasing”) of aircraft; and include: 

• Financial advisory services to aircraft lessors and lessees 

• Private placement of US tax lease equity in leveraged-lease financings and secured long-term debt financing 

of commercial aircraft for both major and regional US airlines and international carriers 

• Financial advisory services in connection with lease restructurings, bankruptcies and private-equity capital 

placements 

Babcock & Brown has established a reputation as the leading advisor and arranger of commercial aircraft privately 

placed lease financings. More recently, it has also become involved as an advisor in several major restructurings, 

and Chapter 11 filings including advising United Airlines, the US’ second largest international carrier. 

In addition to these core activities, the Group has begun acquiring corporate jet aircraft for short-term resale 

typically after adding value through refurbishment.This activity has been established in conjunction with a 

leading broker of corporate jet aircraft with whom Babcock & Brown has a long-established relationship.This 

activity is similar to the asset trading activities of BBAM, Babcock & Brown’s aircraft operating leasing business. 

78


Case study United Airlines financing and bankruptcy restructuring advisory 

Babcock & Brown began to develop a relationship with UAL in 1999 and 2000, working with them on 

several cross-border financings and lease restructurings using techniques developed by Babcock & Brown 

that generated significant savings for UAL. Following a successful financing of a 777 aircraft for UAL in 

2001, Babcock & Brown was hired by UAL to assist in structuring and negotiating a lease financing of nine 

Airbus A320s and emerged as UAL’s primary lease advisor. Later in 2002, Babcock & Brown was engaged 

to assist UAL in restructuring its privately-financed secured debt and leasing transactions. 

UAL filed for protection under Chapter 11 of the US Bankruptcy Code in December 2002. Babcock & 

Brown was retained as financial advisor in connection with the restructuring of all of their financings 

covering over 500 aircraft. Pursuant to the UAL mandate, Babcock & Brown’s key responsibilities included: 

• Developing a comprehensive strategy to achieve targeted financial cost savings 

• Identifying issues and potential savings for each type of financing including US leases, cross-border 

(French, German and Japanese) leases, private and public secured debt 

• Establishing current valuations for each aircraft type in the UAL fleet 

• Conducting market-based auctions for private secured debt financing 

• Assisting in negotiations with all financing parties 

• Organising detailed information and performing multiple analysis 

Babcock & Brown has to date been retained for approximately 21 months on the assignment. 

Key drivers 

Over the last two years the market for aircraft finance leasing has declined substantially.This reflects the substantial 

downturn during this period in the international aviation and tourism markets driven by recession, terrorist acts, 

the Iraq war and SARS.This has been particularly severe in the US for major airlines who have suffered major 

operating losses, deteriorating balance sheets and bankruptcies. For smaller low-cost and regional operators 

conditions have remained relatively stable, although financing capacity in this sector is currently severely strained. 

In addition, fuel prices have risen dramatically and intense competition from low cost carriers has driven air fares 

lower even as passenger load factors have recovered along with the economic rebound. One ancillary impact of 

the decline in the US aviation market has been a simultaneous decline in the credit quality amongst airlines. As a 

result many of the traditional participants in lease equity and secured debt, notably banks and industrial credit 

companies, have also withdrawn from the industry, which along with further rationalisation of the US banking 

industry through mergers and acquisitions has resulted in a significant reduction in available financing for the 

aviation market in the US. 

Major carriers outside the US have not been as adversely affected and have significant aircraft deliveries to 

finance over the next several years.These international carriers continue to have access to their traditional 

financing sources, principally export credit agencies, banks and operating lessors. 

Key risks 

The key risk to the business is that the airline industry, especially in the US, does not rebound profitably and the 

finance markets remain virtually closed to most of the major US carriers. Countering this, to some extent, may 

be an increased number of bankruptcies which may precipitate additional bankruptcy-related advisory 

assignments and asset trading opportunities. 

79

SECTION 3 


Other 

Overview 

The Finance Leasing business also specialises in the following areas: 

• Rail 

• Shipping 

• Manufacturing 

• Media and telecommunications 

• Lease securitisations 

• Municipal financing 

• Real estate 

Babcock & Brown has been a market leader in US tax leasing arrangements. As a result of consistently creating 

successful financing solutions for clients Babcock & Brown has enjoyed a high level of repeat business. 

Until recently, the business has been almost exclusively advisory in nature, with the major focus being advising 

either the equity investor (the lessor), or, more typically the lessee, who usually drives the finance leasing 

transactions. In the latter case Babcock & Brown would advise the lessee on transaction structuring, arrange debt 

financing and place the lease equity on behalf of its client. In both cases, Babcock & Brown would generally be 

paid a success-based fee based on the size of the transaction. Like other areas within Babcock & Brown, the 

Finance Leasing business is principally focused on more complex financing transactions which require innovative 

solutions and strong structured finance execution expertise. 

Following a recent proposed change to US tax laws, the market for US domestic tax-exempt and US 

cross-border leasing products has been effectively shut down, reducing a significant source of historical revenue 

for the Business Unit. Sections of the Finance Leasing business have therefore been significantly restructured in 

response to this development through a combination of staff redeployment and reductions.This process is now 

virtually complete and the Business Unit is focused on developing new areas of business to replace this lost 

revenue. 

Key drivers 

Expenditure on “big-ticket” capital equipment and a preference by end-users to lease rather than acquire assets 

are the fundamental drivers of this business. In recent years market conditions have been challenging due to lower 

levels of capital expenditure in the US, combined with a low interest rate environment which encourages 

debt-funded acquisition of assets rather than leasing. 

Key risks 

Since the Finance Leasing business is focused on sophisticated tax leasing solutions, its activities have the potential 

to be more significantly impacted by changes in tax law and accounting regulations. As discussed, recent changes 

to US tax law have resulted in the Finance Leasing business suspending activities in certain areas, particularly US 

domestic tax-exempt and cross-border leasing. 

Capital Markets 

The Capital Markets business was established in 2002 to fulfil the following roles: 

• Add value to Babcock & Brown’s principal activities by providing derivatives, debt capital markets, 

securitisation and rating agency expertise to all other Business Groups 

• Originate transactions as principal or create products for third-party clients through the use of securitisation 

and derivatives and other capital markets instruments 

• Invest in asset-backed securities and other capital market opportunities where appropriate by focusing on 

asset classes where Babcock & Brown has expertise or a comparative advantage 

The Capital Markets business has, to date, been principally focused on supporting other Babcock & Brown 

Business Groups. It has, however, begun to develop products for external clients and invest in asset-backed 

securities.These activities, whilst still in their infancy, are actively being pursued. 

80


Recent transactions executed by the Capital Markets business include: 

• Arrangement and structuring of an $170 million bond repackaging of a participation in a 20-year project 

finance syndicated loan. (See further case study on the Redbank Bond Repackaging below) 

• Securitisation of the second instalment due from the Prime Infrastructure IPO.This involved obtaining a 

strong investment grade credit rating for a debt offering secured against the second instalment and placing 

this debt security with a capital markets investor 

• Securitisation of two, 20-year, fixed rate leases to a quasi government agency into a 20-year floating rate 

note.This involved bidding as principal to acquire the buildings and leases from the government.The 

Capital Markets team obtained strong investment grade credit ratings from the rating agencies for the 

floating rate note, sourced and priced the required interest rate swap and then placed the floating rate note 

to capital markets investors 

• Structuring and execution of an efficient interest rate hedging strategy for the debt raised for the acquisition 

of DBCT 

Case study Redbank bond repackaging 

The Capital Markets business has extensive financing experience in the public and private US markets, 

Euromarkets and the Australian capital markets. This experience was applied to execute a repackaging of 

a $170 million participation in a $280 million 20-year, fixed rate unrated project finance loan for the 

Redbank power station (Redbank) located in the Hunter Valley in New South Wales, Australia. 

When a UK bank withdrew from project financing globally it was instructed to sell its $170 million 

participation in the senior debt of Redbank which still had a remaining term of 20 years. This long 

maturity meant that it was very difficult to sell its participation into the loan syndication market at an 

acceptable price. After being mandated by the UK bank, the Capital Markets business evaluated the 

different markets and priced the various financing alternatives available to place the loan participation 

including the local Australian domestic capital markets, executing a Eurobond in the US Private 

Placement market. 

After fully examining the possible execution for each financing alternative, the Capital Markets business 

advised the UK bank that its most efficient alternative to exit its participation was through a domestic, 

monoline guaranteed capital markets issue (i.e. bond repackaging). The successful execution of the bond 

repackaging required: 

• Achieving strong investment grade ratings for the underlying $280 million, 20-year Redbank project 

finance loan. To obtain the required ratings certain key loan terms had to be amended requiring the 

co-operation of both equity investors in Redbank and the other Redbank senior lenders 

• Working with a monoline insurer and its credit processes so as to obtain a AAA/Aaa guarantee for 

the bond repackaging 

• Restructuring the UK bank’s interest rate hedges so as to achieve the targeted hedging outcome for 

the bond repackaging, and 

• Working with an international investment bank in selling the bonds issued to capital markets 

investors domestically and globally 

Through utilising the Capital Markets teams global capital markets experience, combined with its 

derivative expertise and knowledge of the rating agency process, Babcock & Brown was able to achieve 

the optimal outcome for the UK bank’s sale of its participation in the Redbank senior debt. 

81

SECTION 3 


Future growth 

Principal investment activities 

The Structured Finance Group has historically been predominantly focused on advisory services and creating 

financial products for investor clients. 

Parts of the Structured Finance Group have begun to expand into investment activities, such as the Finance 

Leasing business’ corporate jet aircraft trading activities and the Special Products business’ assumption of a 

principal role in select transactions and its Life Settlements activities, where it acts as a warehouse-debt funding 

provider. 

Post-IPO, Babcock & Brown will have both additional capital and an increased tax base that could facilitate its 

transitioning to a more active role as a principal in structured finance transactions, particularly as an investor in 

products and funds developed by Babcock & Brown. 

Product innovation 

The ability to develop innovative financing solutions is critical to the Structured Finance Group’s continued 

success and an important element of maintaining Babcock & Brown’s competitive advantage in other areas.The 

Structured Finance Group is continuously responding to changes in market conditions, regulatory environments 

and clients’ needs to create new products and investment structures. 



Net Revenue 

– Advisory 123,103 86,082 80,746 

– Investment management 1,191 222 222 

– Principal investment 278 10,221 16,160 

Net Revenue 171,784 156,998 124,573 96,524 97,127 



NOTES 










Historicals 


Net Revenues declined 20.7% from $157.0 million to $124.6 million as a strong performance by the Special 

Products business was offset by significant declines in the Finance Leasing business. 

Fees received on new investment products augmented the trailing fee streams from investment products 

established in prior years to drive the increase in Net Revenue in the Special Products area. 

The primary drivers of the declining Net Revenue from the Finance Leasing business’ aerospace activities included: 

• Continued softness in the airline industry as a result of the Iraq War and the impact of SARS on 

international travel which reduced demand for new aircraft 

82


• Deferral or cancellation of equipment orders due to continued industry overcapacity issues 

• Continued decline in airline credit quality which reduced the availability of long-term debt and equity 

funding, an essential ingredient to fund leveraged finance leases 

Following a record year in 2002, US cross border leasing activity was significantly curtailed in 2003 due to 

proposed changes to US tax law resulting in the Finance Leasing business’ Net Revenue declining by almost 

50%. As a result of these changes, sections of this Business Unit underwent significant restructuring early in 2004 

and are in the process of rebuilding their business by focusing on new products and business initiatives that 

leverage the structured finance expertise and relationships of the remaining team members. 


Net Revenue declined 8.6% from $171.8 million to $157.0 million due to a decline in both the Special Products 

and Finance Leasing businesses. 

The decline in Special Products Net Revenue from 2002 to 2001 was primarily the result of a large non-recurring 

fee being received in 2001 due to the pre-payment of a multiple-year fee stream on an investment product. 

The decline in the Finance Leasing business’ Net Revenue was principally due to more difficult conditions for its 

aerospace activities, including: 

• Worsening conditions in an already soft airline industry precipitated by the events of 11 September 2001 

• Deferral or cancellation of equipment orders due to industry overcapacity 

• Declining airline credit quality which reduced the availability of long-term debt and equity capital to fund 

leveraged finance leases 

Forecasts 

In excess of 75% of the Forecast Net Revenue for the Special Products business in 2004 is estimated to come 

from annuity-like trailing income and management fees associated with investment products developed by the 

Business Unit in prior years or from the generation of fees associated with previously funded life insurance 

securities. Such revenue streams are also forecast to be an important contributor to the business in 2005.These 

revenues have not been included in Net Revenues from Investment Management in the previous financial 

summary as they only occur for a fixed period of time in line with the respective product lifecycle.The 

remainder of the Forecast Net Revenue is assumed to be derived from the business’ core activity of developing 

large-scale structured investment products, an area in which the business has a strong pipeline of transactions at 

advanced stages of development. 

The Finance Leasing business is currently on track to increase its aerospace-related revenues in 2004 as the 

business benefits from fees from restructuring mandates and improvements in its international aerospace lease 

advisory activities. Aerospace lease advisory revenues have, however, been forecast to decline in 2005 reflecting the 

continued soft conditions in the North American aircraft finance leasing market and the lower visibility of 

revenues over a 15-month period given the relatively short lead times associated with these types of transactions. 

The Finance Leasing business is also in the process of rebuilding its non-aerospace activities following the 

effective shut-down of the US tax-exempt leasing market at the end of 2003. Revenues forecast for 2004 are 

from transactions that the Business Unit has been mandated to execute, together with revenue relating to 

transactions entered into prior to 2004 but which have yet to be brought to account due to contingencies in the 

fee arrangements.These contingencies which relate to approximately $6 million of the Forecast Net Revenue for 

2004, which will be earned unless certain US tax legislation is passed in this congressional session which has a 

retroactive impact on the transactions. 2005 revenues from non-aerospace activities are not forecast to increase 

above the forecast for 2004. 

The Capital Markets business has significantly improved its revenues in 2004 and is forecast to achieve continued 

growth in revenue in 2005 from a number of product initiatives it is already pursuing. 

83

SECTION 3 


CORPORATE PRINCIPAL INVESTMENT AND 

FUNDS MANAGEMENT 

Overview 

The Corporate Principal Investment and Funds Management Group has historically been an opportunistic 

activity of Babcock & Brown.The formation of a separate Business Unit in Australia is a recent development. 

The business has the following areas of activity: 

Corporate principal investment 

• Undertaking principal investments in areas not 

covered by Babcock & Brown’s other business 

segments 

• Working with other Business Groups to execute 

transactions involving corporate vehicles, particularly 

in the public arena 

Funds management 

• Overseeing Babcock & Brown’s interests in 

third-party fund managers 

Locations 


Australia 

10% 

9% 

2003A 

2004F 

Background 

Babcock & Brown acquired its first significant portfolio of principal investments as part of its acquisition of AIDC 

in 1997. Babcock & Brown subsequently took an opportunistic approach to investing in corporate assets, focusing 

substantially on property and infrastructure-related businesses with significant asset-backing. 

Babcock & Brown’s acquisition of a substantial stake in AUSDOC (see case study below) marked its first 

significant investment in a company whose value was in its operations rather than hard assets. A dedicated team of 

professionals has been formed to focus on corporate principal investments.The team is also responsible for 

Babcock & Brown’s sponsorship of emerging fund managers, another investment activity that has largely been 

developed on an opportunistic basis leveraging off Babcock & Brown’s extensive relationships. 


Corporate Principal Investment 

The Corporate Principal Investment Group originates, structures and participates in investments in both publicly 

listed and private enterprises. Investments are generally focused on small-to-mid-capitalisation listed companies 

and similarly sized private enterprises which are priced well below intrinsic value. Babcock & Brown’s 

investments in these companies may take the form of either equity or debt. 

The Corporate Principal Investment team seeks to take an active role in working with management and other 

key stakeholders to realise value in its investments.The Corporate Principal Investment Group also undertakes 

corporate advisory mandates on a selective basis but usually only in conjunction with an investment transaction, 

or for the purposes of building or cementing a relationship with a valued partner. 

84


Representative transactions 

Initial 

investment 

Company Description date 

Commander Babcock & Brown acquired a voting interest in 19.9% of the shares in a 

2003 

publicly listed business communications company specialising in voice, data 

and internet business systems 

PrimeLife 

ERG 

AUSDOC 

MTM 

Carillon 

Babcock & Brown acquired 19.9% of one of Australia’s largest listed 

retirement and aged care businesses 

Babcock & Brown provided a bridge facility to a debt-for-equity swap 

transaction for this listed developer and supplier of transit industry fare 

management and software systems, and smart cards 

Babcock & Brown acquired shares in an undervalued listed company with 

diverse activities.The company was ultimately acquired at a significant premium 

to the average Babcock & Brown purchase price (see case study below) 

Babcock & Brown made a public takeover offer for the listed MTM 

Entertainment Trust in 2001. Major assets included four IMAX theatres and 

other retail/tourism assets 

Babcock & Brown acquired an undervalued listed company with diverse 

assets (see case study below) 

2003 

2002 

2001 

2001 

2000 

Case study AUSDOC 

AUSDOC was a publicly listed Australian company with four operating divisions, Freightways, 

Information Management, Express Services and DX/GoMail providing services including time-sensitive 

couriers, express freight, records management and document exchanges. Babcock & Brown’s investment 

thesis was predicated on the Freightways and Information Management businesses, which accounted for 

a majority of total earnings, being good and eminently saleable businesses whose intrinsic value was 

being temporarily ignored by the market due to poor performance and negative sentiment surrounding 

the Express Services and DX/GoMail businesses. 

In August 2001, Babcock & Brown commenced buying shares in AUSDOC at a time when market 

sentiment towards the company was near an all-time low. Babcock & Brown and its clients built up 

holdings in AUSDOC from August to December 2001 at an average entry price of approximately $1.50. 

Following an approach to the AUSDOC Board by Babcock & Brown and the requisitioning of a meeting of 

all AUSDOC shareholders by Babcock & Brown, the Board ultimately put the company and its component 

businesses up for sale. This culminated in an all-cash takeover bid for the company by ABN AMRO Capital 

at $2.15 per share, which was announced in June 2002 and subsequently closed successfully. 

Babcock & Brown and its clients sold their holdings at various stages during this process. Most investors 

sold their shares after the takeover bid was announced but prior to its successful completion at 

approximately $2.10 per share. Babcock & Brown’s clients earned pre-tax IRRs in excess of 50%, net of 

fees paid to Babcock & Brown. 

85

SECTION 3 


Case study Carillon 

Carillon Development Limited (Carillon) was a small, publicly listed Australian company with a portfolio 

of diversified assets including a self-storage business, a chain of stationers, a share-investment portfolio 

and a series of development property investments. 

Carillon’s shares traded infrequently and at a significant discount to intrinsic value. The company’s 

corporate structure was complex, with the controlling stake held in a series of cascading public and 

private unlisted companies, controlled by a family. The family was a willing seller but required the 

transaction to be structured efficiently from a capital gains tax perspective. A number of parties 

interested in acquiring the company had approached the controlling shareholder but were unable to 

structure a transaction that met its tax requirements, while complying with the Corporations Act. 

Babcock & Brown was able to design an innovative acquisition structure which met both the vendor’s 

requirements and those of the Corporations Act. In July 2000, Babcock & Brown made a $58 million cash 

takeover offer and gained full ownership in October 2000. Babcock & Brown’s bid was more than 60% 

higher than the last pre-bid trade while still being well below intrinsic value. Babcock & Brown was able 

to acquire the company at this discount as its acquisition structure delivered sale proceeds to the vendor 

family in a capital gains tax efficient manner. 

Babcock & Brown financed the transaction with bank debt and its own funds, which were both repaid 

within six months with proceeds from the liquidation of the company’s share portfolio and the sale of 

operating businesses. This left Babcock & Brown with the excess cash in the company, and property. 

Funds Management 

The Group’s Funds Management activities are focused on partnering with high quality fund managers in niche 

sectors, as opposed to forming vehicles in which Babcock & Brown will take an active management role, such as 

Prime Infrastructure. 

Babcock & Brown has taken an opportunistic approach to developing its business in this area by investing modest 

amounts of capital to seed funds and then assisting the fund managers to raise additional capital, from Babcock & 

Brown’s private investor clients. 

Examples of funds that Babcock & Brown has co-founded are listed below: 

Alpha Funds Management 

Babcock & Brown is a co-founder and co-owner of Alpha Funds Management, a wholesale equities fund with 

investments in listed Australian companies. Alpha had approximately $3.0 billion of funds under management as at 

30 June 2004 and has outperformed its benchmark index since inception in October 1998. 

Optimal Japan Fund (OJF) 

In 1999, OJF was launched as a hedge fund to invest in Japanese-listed equities, taking both long and short 

positions. As of 30 June 2004 Optimal Fund Management managed approximately US$434 million. OJF has 

returned an annualised 13%, net of fees, since inception versus an annualised decline of more than 6% for the 

benchmark Topix index over the same period. OJF’s performance consistently ranks at or near the top of its 

category of hedge funds. 

86


Everest Babcock & Brown Absolute Return Funds I and II 

In 2003, Babcock & Brown formed a joint venture with Everest Capital Limited to launch a series of absolute 

return funds (also known as hedge funds). $210 million was raised for Fund I which closed in October 2003, and 

Fund II closed in June 2004 with $259 million in funds under management.The underlying funds include some 

of the world’s most accomplished absolute return fund managers. 

ALPHA 

$3.5 

OPTIMAL 

$500 

EVEREST BABCOCK 

& BROWN ABSOLUTE 

RETURN FUND 

Funds Under Management ($bn) Funds Under Management ($m) Funds Under Management ($m) 

$500 

488 

$3.0 

3.0 

$400 

434 

$400 

$2.5 

2.5 

$2.0 

$300 

315 

$300 

$1.5 

$200 

$200 

218 

$1.0 

$0.5 

0.4 

1.2 

$100 

106 

127 

$100 

$0 

$0 

12/01 12/02 12/03 06/04 12/01 12/02 12/03 06/04 

$0 

12/03 06/04 

Future growth 

Expand investment activities in target sectors 

Babcock & Brown continues to see attractive opportunities to expand its corporate investment activities within 

the Australian market.With acquisitions like PrimeLife and AssetInsure, the Corporate Principal Investment 

Group has already begun to take longer-term positions where Babcock & Brown believes significant value can be 

built over a three to five year timeframe by growing businesses organically and/or through consolidation and 

where there are other profit-generating opportunities or strategic benefits for the Group from the relationship. 

The Corporate Principal Investment Group will also seek to increase the size of its investments to increase the 

absolute size of its profits. 

Develop co-operative initiatives with other Business Groups 

The success of transactions such as the TAHL acquisition (see case study in Real Estate Section) highlights the 

benefit of Group co-operation.The Corporate Principal Investment Group has worked successfully with the Real 

Estate and Infrastructure and Project Finance Groups to develop and execute transactions in the past, and is 

seeking to extend this co-operative model to the other Business Groups within Babcock & Brown.Working 

more closely with the Structured Finance Group could, for instance, result in the development of financing 

structures that provide Babcock & Brown with a funding advantage and hence a potential pricing advantage in 

the acquisition of certain asset-intensive businesses. 

Measured expansion into overseas markets 

The Corporate Principal Investment Group’s activities have to date been focused on Australia. Primarily through 

co-operative ventures with the other Business Groups, the Corporate Principal Investment Group has recently 

begun to evaluate investments in other jurisdictions. 

Funds management growth 

The Corporate Principal Investment Group will continue to focus on developing its funds management business. 

Babcock & Brown is currently working on a number of initiatives including a wholesale private equity fund. 

87

SECTION 3 




Net Revenue 

– Advisory 4,263 14,127 6,340 


– Principal Investment 28,197 20,222 17,139 

Net Revenue (996) 12,439 38,655 38,328 29,120 



NOTES 










Historicals 


Net Revenue increased 211% from $12.4 million to $38.7 million driven principally by investment gains on 

several of the Group’s holdings. 


Net Revenue increased from a loss in 2001 to $12.4 million in 2002 in the Corporate Principal Investment 

Group’s second full year of operation as a stand-alone Business Unit. 2002 revenues were driven by investment 

gains, as well the share of profits from the Group’s stakes in various fund managers.The loss in 2001 was 

principally the result of write-downs of non-Australian Internet investments.These activities have been 

discontinued. In contrast, Australian activities generated Net Revenue of $5.1 million in 2001. 

Forecasts 

Forecast Net Revenue is assumed to be derived from both the realisation of existing investments and new 

transactions generated during the Forecast Period. In addition, the business will continue to generate management 

fees and other participation interests from its funds management investments. 

It is important for potential investors to note that the Corporate Principal Investment business is still in an early 

growth phase and its investment portfolio currently consists of a small number of concentrated positions.Although 

Babcock & Brown believes that these investments will produce attractive returns for the Group’s shareholders and 

co-investors alike in the medium-to-long term, the outcome and timing of sale of these investments and other fees 

associated with them are more difficult to predict than for some of the Group’s other activities. 

Furthermore, the Corporate Principal Investment Group has a highly opportunistic approach to investing. It is 

consequently difficult to forecast the specific types of transactions in which the Group will deploy capital. However, 

all transactions must meet the Group’s risk-adjusted return expectations before an investment will be made. 

88

SECTION 4 

BOARD, MANAGEMENT AND CORPORATE GOVERNANCE 

4.1 BOARD OF DIRECTORS 

The current Board of Directors comprises three independent Non-Executive Directors and four Executive 

Directors.The Chairman of the Board, Jim Babcock, is an Executive Director.The Board has an intention to 

appoint up to a further two Non-Executive Directors within six months of listing.These persons are expected to 

be drawn from international locations with a skill set and experience that will be relevant to the operations of 


Details of each of the Director’s positions and their biographies are provided below. 

James Babcock 

James Fantaci 

Phillip Green 

Ian Martin 

Executive Chairman 

Co-founded Babcock & 

Brown in 1977. Prior to 

founding Babcock & 

Brown, Jim practised 

corporate and tax law. Jim is 

a graduate of Harvard 

College and Harvard Law 

School where he was a 

member and officer of the 

law review. He is based in 

the San Francisco office. 

Executive Director 

James Fantaci has 

geographic responsibility 

for North America and 

coordinates the Group’s 

Operating Leasing activities 

worldwide. He joined 

Babcock & Brown in 1982. 

Prior to joining Babcock & 

Brown, Jim was Senior Vice 

President of the New York 

office of Matrix Leasing 

International and prior to 

that he served as Assistant 

Treasurer of the Bank of 

New York. Jim attended the 

New School for Social 

Research and graduated 

from Brooklyn College with 

a degree in Economics. 

He is based in the New 

York office. 

Managing Director 

Phillip Green joined 



Brown, Phil worked as a 

Senior Manager with 

Arthur Andersen where he 

specialised in taxation. Phil 

is also chairman of 

Environmental 

Infrastructure Limited and a 

director of PrimeLife 

Corporation Limited, Prime 

Infrastructure Management 

Limited and Thakral 

Holdings Limited. Phil holds 

Bachelor of Commerce and 

Bachelor of Laws degrees 

from the University of New 

South Wales. He qualified as 

a Chartered Accountant in 

1981 and was admitted as a 

solicitor in NSW in 1978. 

He is based in the Sydney 

office. 

Non-Executive Director 

Ian Martin has over 20 years 

experience in investment 

management and investment 

banking. He is a former 

CEO of the BT Financial 

Group and Global Head of 

Investment Management 

and Member of the 

Management Committee of 

Bankers Trust Corporation 

(a global investment bank 

which was acquired by 

Deutsche Bank in 1999). 

Early in his career he also 

spent eight years as an 

economist with the 

Australian Treasury, 

Canberra. He was inaugural 

Chairman of the Investment 

and Financial Services 

Association. Ian holds an 

Honours Degree in 

Economics from the 

University of Adelaide and 

an Advanced Diploma from 

the Australian Institute of 

Company Directors. 

90


Elizabeth Nosworthy 

Martin Rey 

Michael Sharpe 


and Deputy Chairman 

Elizabeth Nosworthy was a 

partner in an Australian 

national law firm before 

pursuing a career as a 

full-time non-executive 

director. She has held a 

range of directorships in 

both the private and the 

public sectors. Elizabeth is 

currently Chairman of 

Commander 

Communications Limited 

and Stanwell Corporation 

Limited, and a director of 

GPT Management Limited 

and Ventracor Limited. She 

is an Adjunct Professor of 

Law at the University of 

Queensland and a Council 

Member of the National 

Gallery of Australia. 

Elizabeth was awarded the 

AICD (Qld Division) 2001 

Gold Medal Award for 

Outstanding Director. 

Elizabeth has a Bachelor of 

Arts and a Bachelor of Laws 

from the University of 

Queensland and a Masters 

of Laws from the London 

School of Economics. 

Executive Director 

Martin Rey has geographic 

responsibility for continental 

Europe and coordinates a 

variety of European business 

activities. He joined 



Brown, Martin held a 

variety of senior 

management positions at 

HVB, most recently 

Executive Divisional Board 

Member, Corporate 

Banking. Martin earned a 

law degree at Rheinische 

Friedrich-Wilhelms 

University in Bonn and 

studied business at the 

University of Hagen. 


Michael Sharpe is a director 

of the Australian Stock 

Exchange Limited. During his 

career he has served as 

Chairman of the International 

Accounting Standards 

Committee; President of the 

Institute of Chartered 

Accountants in Australia; 

Senior Audit Partner of the 

firm now known as 

PricewaterhouseCoopers; a 

trustee of many of the largest 

superannuation funds in 

Australia, including State 

Super (NSW) and Military 

Super; Chairman of many 

companies and an advisor to 

Government, including 

appointment as Independent 

Auditor of the Australian 

National Audit Office, the 

NSW Premier’s Accounting 

Advisory Panel and a member 

of the Takeovers Panel. 

Michael is also an Officer of 

the Order of Australia (AO), 

Fellow Chartered Accountant 

and Fellow of the Australian 

Institute of Company 

Directors. He holds a 

Bachelor of Economics 

Degree and an Honorary 

Doctorate in Economics from 

the University of Sydney. 

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4.2 EXECUTIVE COMMITTEE 

Babcock & Brown’s management team has extensive experience in a variety of areas relevant to Babcock & 

Brown’s underlying businesses.The Group’s global activities will be managed by the Executive Committee which 

will consist of the Executive Directors and the Executives listed below.The Executive Chairman and Managing 

Director will lead this committee.The Executive Committee will perform the following roles: 

• Provide strategic direction for the Group’s activities 

• Have delegated authority to deploy capital 

• Oversight of Group operations and administration 

The biographies of the Executive Committee are listed below. 

Executive Directors – see biographies in Board of Directors Section 

Daniel Brickman coordinates the Group’s Structured Finance activities worldwide. He joined Babcock & Brown 

in 1986. Prior to joining Babcock & Brown, Dan was Vice President and Manager of leveraged leasing for the 

Chrysler Capital Corporation. Dan is a graduate of Denison University. He is based in the Greenwich office. 

Tim Duncan has geographic responsibility for the UK and coordinates a variety of European business activities. 

He joined Babcock & Brown in 1990. Prior to joining Babcock & Brown,Tim was an in-house solicitor at Bank 

of America International Limited and then at Security Pacific National Bank, specialising in asset finance.Tim 

graduated from Aston University with a Bachelor of Science in Business Studies/Law and is a qualified solicitor. 

He is based in the London office. 

Peter Hofbauer manages the Australian Infrastructure and Project Finance team and coordinates the Group’s 

infrastructure and project finance activities worldwide. He joined Babcock & Brown in 1989 and has worked in 

both the Sydney and London offices of Babcock & Brown. Prior to joining Babcock & Brown, Peter worked 

with Price Waterhouse and Partnership Pacific Limited/Westpac Bank. Peter is a director of Prime Infrastructure 

Management Limited and Environmental Infrastructure Limited. Peter holds a Bachelor of Business degree from 

Swinburne University. He is a member of the Institute of Chartered Accountants and the Taxation Institute of 

Australia. He is based in the Sydney office. 

Michael Maxwell manages the Australian and European Real Estate teams and coordinates the Group’s real estate 

activities worldwide. He joined Babcock & Brown in 1992. Prior to joining Babcock & Brown, Michael was an 

executive director of Morgan Grenfell Australia Limited where he specialised in both domestic and cross-border 

corporate finance transactions. He began his career as a corporate lawyer with Mallesons Stephen Jaques. Michael 

is a director of Grand Hotel Group Limited. Michael holds a Bachelor of Economics and Bachelor of Laws 

degree from the University of Sydney. He is based in the Sydney office. 

David Ross is the Group Chief Operating Officer. He joined Babcock & Brown in 2004. Prior to joining 

Babcock & Brown, David was with Lend Lease Corporation for over 10 years where he held positions as CEO of 

General Property Trust, CEO of Lend Lease,Asia Pacific and Global and US CEO, Real Estate Investments. David 

holds a Bachelor of Commerce degree from the University of Western Australia. He is based in the Sydney office. 

Robert Topfer coordinates the Group’s Corporate Principal Investment and Funds Management activities 

worldwide. He joined Babcock & Brown in 2000. Prior to this Robert was a founding partner of the law firm 

Atanaskovic Hartnell and prior to that a partner of Allen Allen & Hemsley. Robert is also a director of 

Commander Communications Limited, ERG Limited and PrimeLife Corporation Limited. Robert holds a 

Bachelor of Law and Arts from the Australian National University. He is based in the Sydney office. 

Richard Umbrecht manages the US Special Products team and coordinates the Group’s Special Products activities 

worldwide. He joined Babcock & Brown in 1995. Prior to joining Babcock & Brown, Rich was a tax partner at 

Morgan, Lewis & Bockius where he specialised in domestic and international leasing and asset-based finance 

transactions. Rich received his B.S. in Economics and Management from Widener University and his J.D. from 

Villanova University Law School where he also held a position as an adjunct professor in the Graduate Tax 

Program. He is based in the United States. 

92


Steven Zissis manages Babcock & Brown Aircraft Management. He joined Babcock & Brown in 1990. Prior to 

joining Babcock & Brown, Steven was a Vice President of Citibank, where he was also a founder and manager of 

the Portfolio Acquisition and Divestiture team. Steven graduated with a B.A. in Finance and International Studies 

from Rhodes College. He is based in the San Francisco office. 

4.3 OTHER SENIOR MANAGEMENT 

In addition to the members of the Executive Committee a number of other Key Executives have been designated 

as managers of some of the Business Units referred to in the organisational chart in Section 3. 

Michael Garland manages the US Infrastructure and Project Finance team. He joined Babcock & Brown in 

1986. Prior to joining Babcock & Brown, Michael was Director of the State of California Energy Assessments 

Office where he was responsible for the implementation of the state government’s environmental and energy 

policies. Michael also coordinated and oversaw the design, construction, financing, and operation of California 

State energy facilities. Michael is a graduate of the University of California at Berkeley. He is based in the 

San Francisco office. 

Michael Herman manages Babcock & Brown Electronics Management. He joined Babcock & Brown in 2002. 

Prior to joining Babcock & Brown, Michael was President of Comdisco’s leasing division and before that he was 

General Manager and National Sales Manager of GE Capital’s Commercial Equipment Finance group. Prior to 

that, Michael was EVP National Sales & Marketing manager for Equitable Life Leasing and Equitable Loans 

Leasing. Michael is a graduate of Arizona State University where he earned his degree in finance and economics 

with a minor in business law. He is based in the San Diego office. 

Ted Lachowicz manages the US Structured Finance team. He joined Babcock & Brown in 1994. Prior to joining 

Babcock & Brown,Ted was a Managing Director of D’Accord Financial Services and prior to that he held 

management positions at Ryder Truck Rental, Peat Marwick Mitchell and Westinghouse Corporation.Ted holds 

aB.S. in accounting from Syracuse University and is a Certified Public Accountant. He is based in the San 

Francisco office. 

Willy C. M. Lim manages the Asian Infrastructure and Project Finance team. He joined Babcock & Brown in 2001. 

Prior to joining Babcock & Brown,Willy was a partner and Managing Director of Fieldstone Private Capital Group 

with responsibility for managing the Group’s operations in Asia.Willy has an economics degree from the University 

of Malaya in Kuala Lumpur, Malaysia. He splits his time between our Hong Kong and Kuala Lumpur offices. 

Antonino Lo Bianco manages the European Infrastructure and Project Finance team. He joined Babcock & 

Brown in 1993. Prior to joining Babcock & Brown, Antonino worked with Nomura International plc as a 

member of its Italian Corporate Finance Group. Antonino is a graduate in Business Administration from Bocconi 

University in Milan. He is based in the Milan office. 

Eric Lucas manages the Japanese Real Estate team. He joined Babcock & Brown in 1987. Prior to joining 

Babcock & Brown, Eric worked in Tokyo at the international law firm of Anderson Mori and Rabinowitz. 

In 1987, he joined Babcock & Brown at its Japanese joint venture, Nomura Babcock & Brown, where he worked 

as its representative until 1992. After several years in the San Francisco office of Babcock & Brown, in 1998 Eric 

returned to Tokyo to establish Babcock & Brown’s Japanese office. Eric received his law degree from the 

University of Melbourne in Australia. He currently splits his time largely between the Tokyo and Sydney offices. 

Paul Marini manages Aerospace Finance Leasing team. He joined Babcock & Brown in 1990. Prior to joining 

Babcock & Brown, Paul was a Managing Director at Lehman Brothers and was primarily responsible for the 

firm’s airline and asset finance activities. Paul received his B.A. in Economics from Santa Clara University and his 

M.B.A. from the University of California at Berkeley. He is based in the Greenwich office. 

Victoria McManus manages Babcock & Brown Rail Management. She joined Babcock & Brown in 1999. Prior 

to joining Babcock & Brown,Victoria headed the Rail Division of The CIT Group, which specialised in rail 

equipment finance and operating leasing. Prior to that,Victoria specialised in cross-border leasing of aircraft. 

Victoria is a graduate of Brooklyn College in New York. She is based in the New York office. 

Karl Oberrauch manages Italian Special Products and the Italian Real Estate team. Karl joined Babcock & Brown 

in 1993. Prior to joining Babcock & Brown, Karl was an Executive Director at Nomura International plc where 

he managed the Italian Corporate Finance Group. Karl is a graduate of the Columbia Business School and is a 

Chartered Accountant in Italy. He is based in the Milan office. 

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Michael Larkin is the Group Chief Financial Officer. He joined Babcock & Brown in 2004. Prior to joining 

Babcock & Brown, Michael was Group Financial Controller for Lend Lease Corporation. Michael holds a 

Bachelor of Commerce degree from the University of New South Wales and is a member of the Institute of 

Chartered Accountants and the Taxation Institute of Australia. He is based in the Sydney office. 

4.4 CORPORATE GOVERNANCE 

Babcock & Brown recognises the importance of good corporate governance and is committed to complying with 

a Code of Conduct and other appropriate Corporate Governance Policies.The corporate governance framework 

for the Group is underpinned by the ASX Principles of Good Corporate Governance and Best Practice 

Recommendations (ASX Guidelines). 

Babcock & Brown has, however, departed from the ASX Guidelines by appointing Jim Babcock as the Group’s 

Executive Chairman, which it believes is in the best interests of the Group given Jim’s skills, expertise, reputation 

in the Group’s areas of business, and relationships with the Group’s clients, Directors and Executives.The Group 

currently does not have a majority of independent directors though as indicated it intends to appoint two 

additional Non-Executive Directors to the Board. 

The administrative organisational structure and systems provide Babcock & Brown with a platform which is 

designed to allow the intellectual capital of the Group to continue to create entrepreneurial value for 

Shareholders while ensuring that appropriate reporting and corporate governance standards are met. 

Babcock & Brown is committed to delivering strong returns and shareholder value while also promoting 

shareholder and general market confidence in the Group.The Babcock & Brown Code of Conduct provides a 

guide to Directors, Executives and contractors as referred to in Section 4.8.3. 

4.5 THE BOARD 

The Board of Directors is responsible for guiding and monitoring Babcock & Brown on behalf of the 

Shareholders by whom they are elected and to whom they are accountable. 

It is a policy of the Group that the Board should be comprised of a majority of non-executive directors, with a 

broad range of skills, expertise, and experience from a diverse range of backgrounds.The Directors appoint the 

Chairman and Deputy Chairman of the Board. 

The Board will meet formally at least six times a year and as frequently as may otherwise be required to deal 

with urgent matters. 

The responsibility for the operation and administration of Babcock & Brown is delegated by the Board to the 

Executive Chairman, the Managing Director and the management team.The Executive Chairman is solely 

responsible for, among other things, chairing board meetings, shareholder meetings and various committee 

meetings.The Managing Director has primary responsibility to the Board for the affairs of the Group; however, 

the Managing Director works in collaboration with the Executive Chairman to develop and implement 

corporate and strategic initiatives and otherwise carry out the day-to-day management of the Group.The 

Managing Director and Executive Chairman together represent the views of the Board to Shareholders, the 

general public, governmental regulators and other stakeholders. 

The Board Charter sets out a detailed definition of the term “independence” as applied to the Directors. As the 

current Chairman is an Executive Director, the Board has appointed Elizabeth Nosworthy as Deputy Chairman. 

In accordance with certain conditions in the Board Charter, a Director of the Group is entitled to seek 

independent professional advice, including legal, accounting and financial advice, at the Group’s expense on any 

matter connected with the discharge of his or her responsibilities. 

Whilst at all times the Board retains full responsibility for guiding and monitoring Babcock & Brown, in 

discharging its stewardship, it makes use of sub-committees and other specialist committees who are able to focus 

on a particular responsibility and provide informed feedback to the Board. 

94 

To this end, the Board has established an Audit and Risk Management Committee, a Remuneration Committee 

and a Nomination and Governance Committee. Each committee will have a majority of independent directors.


4.5.1 Audit and Risk Management Committee 

The role of the Audit and Risk Management Committee is to advise on internal controls and appropriate 

standards for the management of Babcock & Brown.The Committee also confirms the quality and reliability of 

the financial information prepared, working on behalf of the Board with the external auditor.The Committee 

reviews non-audit services provided by the external auditor to confirm that they are consistent with maintaining 

external audit independence. 

The Audit and Risk Management Committee provides advice to the Board and reports on the status of the 

business risks to Babcock & Brown through its risk management processes aimed at ensuring risks are identified, 

assessed and properly managed. 

The Committee consists of between three and six Non-Executive Directors, all of which must be independent. 

Michael Sharpe will chair the Committee. 

4.5.2 Remuneration Committee 

The Remuneration Committee is responsible for ensuring that the Directors, Executive Chairman, Managing 

Director and senior management are remunerated fairly, and for overseeing the remuneration and human 

resources policies and practices of the Group. 

The Committee consists of at least three Directors, a majority of whom must be independent Non-Executive 

Directors. Ian Martin will chair the Committee. 

4.5.3 Nomination and Governance Committee 

The Nomination and Governance Committee is responsible for advising the Board on the composition of the 

Board and its Committees, reviewing the performance of the Board, its Committees, and individual Directors, 

and advising the Board on appropriate corporate governance standards and policies. 

In making recommendations to the Board regarding the appointment of Directors, the Committee periodically 

assesses the appropriate mix of skills, experience and expertise required on the Board and assesses the extent to 

which the required skills and experience are represented on the Board. 

The Committee may obtain information from, and consult with, management and external advisors, if it 

considers appropriate. 

The Committee consists of at least three Directors, a majority of whom must be independent Non-Executive 

Directors.The Executive Chairman of the Board will chair the Committee. 

4.5.4 Board Charter 

The Board has adopted a charter that sets out the principles for the operation of the Board and describes the 

functions of the Board, which include: 

• Developing, approving and monitoring implementation of corporate strategy, financial plans and 

performance objectives 

• Reviewing and approving annual business plans, operating and capital budgets 

• Approving and monitoring the progress of major capital expenditure projects, funding programs, acquisitions 

and divestments 

• Appointing and managing the employment of the Managing Director, and monitoring and managing the 

performance of other senior Executives 

• Reviewing and ratifying systems of audit and risk management and internal control, codes of conduct and 

regulatory compliance 

• Appointing and monitoring performance of external auditors 

• Participating in strategic planning 

• Developing and monitoring adherence to appropriate principles of corporate governance 

• Supervising public disclosure of all matters required to be publicly disclosed 

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• Evaluating the performance of all members of the Board, reviewing and approving the remuneration of 

Directors and selecting and appointing new Directors to the Board 

4.6 NON-EXECUTIVE DIRECTOR REMUNERATION 

Non-Executive Directors are paid an annual fee for their service on the Board and all Committees of the Board 

within the maximum aggregate sum for such Directors approved from time to time by Shareholders.The current 

maximum aggregate sum is $1.5 million per annum, which is intended to provide the Board with scope to appoint 

new Directors in the future. It is not intended to distribute this full amount by way of fees in the current year. 

4.7 EXECUTIVE RETENTION AND REMUNERATION 

4.7.1 Remuneration approach 

Remuneration practices have been structured to be competitive and to ensure that the Group can attract and 

retain the talent needed to achieve both short and long term success, while maintaining a strong focus on 

teamwork, individual performance and the interests of Shareholders. 

Total remuneration will be delivered through base salary, an annual performance bonus and, for Executives, 

through the equity incentive plan and Employee Trusts (see further below). Group and individual performance 

will be the key drivers of total remuneration. Consequently, for more senior Executives, base salary will continue 

to be positioned to provide a small proportion of their total remuneration opportunity.The combination of 

annual performance bonus and equity incentives will deliver the majority of these Executives potential total 

remuneration opportunity. 

4.7.2 Annual bonus pool 

The Remuneration Committee of the Board will be responsible for setting the framework of measures for 

determining the annual bonus pool each year. 

The Group’s financial performance will be the key determinant for the annual bonus pool.The Remuneration 

Committee will also consider the market and business environment and other factors deemed relevant. Key 

determinants of financial performance will include: 

• Return on net equity 

• Profit before bonus and tax 

In addition, the Remuneration Committee will consider the annual bonus pool impact on the level of Total 

Annual Remuneration (i.e. total fixed remuneration plus total annual bonus pool including the present value of 

Bonus Deferral Rights (see Section 4.7.5 for details)), with a guideline that Total Annual Remuneration should be 

approximately 50% of total Net Revenues and will not exceed 55%. 

Total Annual Remuneration would only materially exceed 55% of total Net Revenues at very low levels of Net 

Revenue and therefore profit due to fixed remuneration and any need to provide for a minimum level of bonus 

to reward and retain particular key Executives who have performed and are key to the future value of the Group. 

Bonuses will be paid during the first quarter following the end of the relevant year at or about the time of the 

release of the annual financial results. 

4.7.3 Ringfenced Assets and Fees 

Historically, Babcock & Brown has agreed with certain Executives that certain percentages of the Net Revenue 

from the proceeds of realisation of identified assets (Ringfenced Assets) and fees from identified transactions 

(Ringfenced Fees) would be allocated to those Executives as part of their remuneration. 

In the case of Ringfenced Assets, an estimate of the liability has been created in the accounts of Babcock & 

Brown. In contrast, Ringfenced Fees are not booked in the accounts until received at which time a liability equal 

to the relevant percentage payable to the Executive is created. 

96 

Liabilities to Executives in respect of Ringfenced Assets and Ringfenced Fees have been included in the Forecasts 

as part of the forecast bonus pool. Notwithstanding that additional liability, the amount of the annual bonus pool 

will not (except in the circumstances referred to below) be increased to meet any such additional liabilities.


As these liabilities represent a first call on Net Revenue, in circumstances of low profitability, these payments 

could result in a need to increase the bonus pool to a level greater than it would otherwise be as described in 

4.7.2. In the Forecasts, these liabilities are assumed to be met without increasing the bonus pool, and, in any 

event, results from the date of the Restructure to 31 December 2004 are covered by the minimum allocation to 

Shareholders referred to in Section 5.3.2.4. 

4.7.4 Bonus Pool transitional arrangements for 2004 and 2005 

Transitional arrangements will be applicable in the determination of the bonus pool for 2004 and 2005. 

In 2004 the bonus pool will be adjusted to ensure that the consolidated net profit after tax of the Group for the 

period from 1 October 2004 to 31 December 2004 is as set out in Section 5.3.2.4. 

In calculating the bonus pool for 2005, the total Net Revenue for that year will exclude interest for one year on 

capital not invested by the end of 2005 calculated at the rate achieved by Babcock & Brown on the Group’s cash 

available for investment at 31 December 2005.This reduction will be made to reflect the fact that the bonus pool 

should not include interest earned on capital not invested by the end of 2005. 

4.7.5 Bonus deferral 

To further align key employees with the long term performance of the Group, Executives who receive bonuses 

above a threshold will have 25% of the excess above this level paid in the form of Bonus Deferral Rights (see 

Section 8.10.4) which will entitle the holder to a Share in Babcock & Brown (or cash in lieu thereof at the time 

of vesting at the discretion of the Board).The number of rights granted will be determined by dividing the 

amount of the deferred portion of the bonus by the market value of Babcock & Brown Shares at the time of the 

bonus determination.The exercise price of these rights will be zero and the Rights will fully vest after four years 

of continued employment. 

This policy will commence in relation to the 2005 bonus pool and will not apply to the 2004 bonus pool. 

4.7.6 Equity incentive plan 

There will be two types of award structures employed by Babcock & Brown: 

• Executive Share Options:The exercise price on each option will be based on the market value of Shares at 

the time of grant 

• Performance Rights:These will entitle the employee to one Share in Babcock & Brown upon vesting 

Vesting of Executive Share Options and Performance Rights will be subject to performance hurdles, notably the 

Total Shareholder Return ranking equalling at least the 51st percentile of all ASX 200 companies over a 

three-year period (whereupon 50% of awards will vest) with 100% vesting for a performance ranking at or above 

the 75th percentile, and proportional vesting on a straight line basis for outcomes in between these thresholds. 

Performance on the unvested component of any award will be retested after four years from the date of grant of 

the Executive Share Options and Performance Rights. 

Except as part of the package for new employees, no awards will be made in 2004 or 2005.The first awards of 

Executive Share Options and Performance Rights will be made in the first quarter of 2006. For further 

information see Section 8.10. 

4.7.7 Employee Trusts 

In order to provide an equity interest to a number of Executives who did not own or had little pre-IPO 

Economic Interest in Babcock & Brown, Babcock & Brown will grant rights to specified Executives to Shares in 

Babcock & Brown.The Group established two Employee Trusts (one for Australian-based Executives and the 

other for all other non-Australian-based Executives) which will hold Shares and Options in Babcock & Brown, 

to be used to satisfy the rights granted to Executives. 

The Employee Trusts will hold 12.5 million Shares and 23.5 million Options over Shares in Babcock & Brown. 

The Shares will be fully paid and the Options will be fully vested.The exercise price of the Options will be the 

Offer Price. BBIPL will contribute the purchase price of the Shares and the fair market value of the Options to 

the Employee Trusts.That amount, which will be subject to revision at the IPO date, will be approximately 

$87.5 million and the Employee Trusts will pay that amount to Babcock & Brown as the subscription price for 

the Shares and the fair market value of the Options. 

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Babcock & Brown will grant rights over specified numbers of Shares to specified Executives.Those rights will 

have a zero exercise price in so far as they relate to Shares held by the Employee Trusts and will have an exercise 

price equal to the Offer Price in so far as they relate to Options held by the Employee Trusts.The rights granted 

by Babcock & Brown will have continued employment at the vesting date (subject to Board discretion in certain 

circumstances) as the only condition of exercise.The vesting date will generally be the day immediately following 

the release to ASX of Babcock & Brown’s half year results for the 2008 year, although certain Executives resident 

in California will have Options which vest progressively over four years. After the IPO, the equity incentive plan 

for Executives will also involve Options and performance rights with the performance hurdles described in 

Section 4.7.6. 

4.7.8 Executive escrow 

The Executive Stakeholders, in respect of themselves or the Shareholder they nominate to hold their Shares, have 

agreed that the pre-IPO Shares they hold will be subject to a voluntary escrow. One third of those Shares will be 

released from escrow on each of the dates of release to ASX of Babcock & Brown’s financial results for the 

periods ended 31 December 2005, 2006 and 2007. 

In addition to the releases referred to above, transfers by Executive Stakeholders of escrowed Shares are permitted 

where the transferee is a family member or a family trust or company and that transferee agrees to be bound by 

the escrow arrangements or where the Executive Stakeholder accepts a takeover bid or is part of a scheme of 

arrangement. In addition, the Board has the right to make certain exceptions to the voluntary escrow provisions 

and, in general would intend to exercise that right to accommodate the desired purchase at the IPO price of 

limited number of shares of either Babcock & Brown or BBIPL by other employees from existing holders of 

Babcock & Brown or BBIPL shares. Finally, Executive Stakeholders are able to grant a security to a bona fide 

lender over their escrowed Shares, up to a maximum of 60% of the IPO Price.The lender may sell the Shares 

free of the escrow arrangements in circumstances of default or otherwise in accordance with the lending 

arrangements. 

Executive Stakeholders who hold shares in BBIPL are subject to the voluntary escrow restrictions described 

above. In addition, while the shares in BBIPL are transferable post-escrow, except for shares transferred in family 

reorganisations, to other Executives, or in connection with the grant of loan securities, BBIPL retains a general 

right of redemption at any time over such transferred shares.The practical effect of these restrictions is to 

encourage the ultimate redemption or conversion of the BBIPL shares into Shares as described in Section 8.4.2. 

Immediately prior to or in conjunction with the IPO, adjustments may be made as between the holdings of 

certain pre-IPO owners.These adjustments may result in different holdings at the BBIPL level and a 

corresponding change at the Babcock & Brown level that will change the percentage holdings of pre-IPO 

owners at both levels. Pre-IPO adjustments (should they occur) will be in addition to the issues made to the 

Employee Trusts in Section 4.7.7.The final holdings (excluding Shares referred to in the next sentence) will be 

subject to the escrow arrangements referred to above. In addition, Executives may purchase Shares through or 

shortly after the Offer and these Shares will be subject to a voluntary escrow ending following the release of the 

2005 annual results. 

In all circumstances, trading by Executive Stakeholders in any Shares after the IPO is governed by the policies referred 

to in Section 4.8.4. 

4.7.9 Senior Executive employment contracts 

A number of key senior Executives have entered into executive service agreements to commence shortly after the 

IPO.These agreements are terminable by either party on three months notice. If any of these Executives should 

leave the Group within three years of the IPO, they will (other than in limited circumstances) be prohibited from 

competing with the Group for 12 months from the date of such departure. Breach of the non-competition 

restraint will entitle the Group to claim a pre-agreed amount (US$4 million or US$1.5 million) from the senior 

Executive in breach. Other Executives have or will be asked to enter into similar service agreements, except that 

they will not be subject to non-competition restraints after the termination of their employment. 

4.8 BABCOCK & BROWN POLICIES 

98 

Babcock & Brown has put in place a number of policies that are in line with the ASX Guidelines.These include 

policies in relation to:


• Employee Investment Policy 

• Continuous Disclosure Policy 

• Code of Conduct 

• Share Trading Policy 

These policies, or summaries of them, will be posted on the Babcock & Brown website at 

www.babcockbrown.com, on or about the time of commencement of trading of the Shares. 

4.8.1 Employee Investment Policy 

The Employee Investment Policy delineates the circumstances in which, and establishes a procedure by which, 

employees of the Group may invest as part of any offer, syndication or sell-down of an investment by, the Group. 

The primary objectives of the policy are to ensure: 

• Babcock & Brown employees invest on a basis which is no more favourable than the market-based 

arm’s-length terms upon which non-employee investors participate in an investment opportunity offered or 

arranged by Babcock & Brown 

• Guidelines are provided for prioritising the opportunity to invest as between different groups of employees, 

under which priority is first given to employees in the relevant Babcock & Brown Business Unit responsible 

for establishing the investment, followed by other employees outside of that Business Unit 

• Any proposed employee investment arrangements are subject to the final review and approval of the 

Independent Directors who are members of the Babcock & Brown Audit and Risk Management 

Committee, so as to ensure that the corporate interests of Babcock & Brown, its Shareholders and 

third party investors are being appropriately considered and protected 

• The dollar aggregate of all employee investment in a particular investment is not expected to exceed 50% 

of the total dollar amount of all third-party investment being sought by Babcock & Brown (including the 

employee investments) 

• Compliance with relevant legal and regulatory regime in the jurisdiction in which the offer is made 

Whilst Babcock & Brown endeavours to ensure that employees are given a reasonable opportunity to invest in 

accordance with its policy, it gives no assurance that employees will in fact be afforded such opportunities. 

4.8.2 Continuous Disclosure Policy 

Babcock & Brown is cognisant of its continuous disclosure reporting obligations and has a policy to enable 

relevant information to be disclosed to the market in a timely manner. 

All relevant information provided to ASX will be immediately posted onto the Babcock & Brown website at 

www.babcockbrown.com, in compliance with the continuous disclosure guidelines of the ASX Listing Rules. 

The Babcock & Brown Company Secretary will act as the ASX Liaison Officer. 

4.8.3 Code of Conduct 

Babcock & Brown has established a Code of Conduct that provides a guide to Directors, Executives and 

contractors for promoting Shareholder and general market confidence in the company by: 

• Ensuring that they observe high standards of corporate and individual behaviour, and 

• Emphasising responsibility for compliance with laws and the company’s policies and ensuring that 

individuals are not disadvantaged for reporting unlawful or unethical conduct 

4.8.4 Share Trading Policy 

The Group has implemented a Share Trading Policy which regulates the manner in which Directors and 

Executives can buy or sell Shares in Babcock & Brown after it is listed. 

The policy specifies trading windows as the only periods during which trading in Shares can occur.These trading 

windows will generally be the eight-week period following the release of the Group’s full year or half year 

results, the Group’s Annual Report, or the offer period in relation to a prospectus.Trading is prohibited despite a 

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100 

window being open if the relevant person is in possession of non-public price sensitive information regarding the 

Group.The Board may authorise the opening of trading windows at other times. 

In the case of an intended sale of any Shares held by a Shareholder who holds Shares to which the voluntary 

escrow restrictions apply (as described in Section 4.7.8), notice must be given to the Group within the first week 

of a trading window of the intended sale.This notice will authorise (but not oblige) the Group to arrange the 

sale of the Shares on behalf of the holder within certain price parameters.This policy is intended to give the 

Group the opportunity to maintain an orderly market. 

4.9 RISK MANAGEMENT 

4.9.1 Introduction 

Management of risk, particularly preservation of capital, has been a primary objective of Babcock & Brown in all 

of its business activities. 

The principal features of Babcock & Brown’s risk management strategy are: 

• Centralised decision-making on all activities involving the commitment of capital 

• Involvement of the Group’s most senior Executives in major decisions 

• Defined limits of authority for Executives to commit capital 

• Strict limits on the maximum capital that can be committed in any one Business Group or operating region 

• Generally quarantining the risks associated with a specific investment within a special purpose vehicle 

• Allocating risks to the parties best able to manage them 

The Audit and Risk Management Committee of the Board will work closely with management to enhance the 

Group’s Risk Management Framework as the Group prepares to expand its activities through the deployment of 

the capital raised in the Offering. 

4.9.2 Risk Management Framework 

The Board is the principal decision-making body for matters involving the Risk Management Framework 

including the commitment of the Group’s capital. All capital commitments above a certain threshold must be 

approved by the Board.The Board has delegated to the Executive Committee authority to commit capital below 

a certain threshold and a select number of senior Executives have the authority to commit capital below this 

threshold in certain defined areas of activity within their scope of expertise. 

A formal submission must be made before any approval to commit capital is given. Legal, accounting, tax and 

general risk management issues are considered as part of the investment approval process. Any submission must be 

given with sufficient notice for the Board, Executive Committee or the responsible Executives (as applicable) to 

consider it prior to approval. 

4.9.3 Risk monitoring 

The Executives responsible for a business or investment position or activity have primary responsibility for 

monitoring the associated risks, including taking the necessary actions to ensure that the Group’s capital is 

preserved. Executives must demonstrate their expertise and experience in an area of activity before they are given 

such risk management responsibility. 

The Audit and Risk Management Committee will monitor the risks across the Group’s portfolio of investment 

positions and business activities and will meet as often as required but at least quarterly. 

4.9.4 Investment structuring 

Babcock & Brown generally structures its investments in a manner to minimise risk to its other investments and 

business activities, and with the aim of transferring specific classes of risks to the parties best able to manage them. 

The majority of Babcock & Brown’s investments are made through special purpose vehicles and funded with debt 

that has no or limited recourse to the wider Group. In this way, if the value of the asset were to fall below the 

amount of debt outstanding, it would have no financial impact on the Group’s other investments and activities.


In analysing an investment or a new area of business activity, Babcock & Brown seeks to segment the risks 

involved and, where possible and cost-effective, to allocate these risks to the parties best able to manage them. 

For instance, the Group may contract with an experienced maintenance provider to ensure that an asset is well 

serviced rather than take the risk that higher than projected maintenance expenses could compromise the value 

or cash flows of an asset. 

4.9.5 Principal risks 

The principal risks that Babcock & Brown assumes in its activities include market, business, credit, regulatory, 

compliance, operational and reputational risks. 

4.9.5.1 Market risks 

Market risk refers to the potential for changes in the market value of the Group’s investment positions or revenue 

streams.There are various types of market risks including exposures associated with interest rates, equity market 

prices, currency rates and the general market values of asset classes in which the Group invests or which it manages. 

Interest rate risk 

Babcock & Brown finances the majority of its investments with significant amounts of debt. If the debt has a 

floating interest rate, an increase in interest rates could impact the value of an equity investment and also increase 

the cost of debt service.To reduce or eliminate this risk, the Group typically diversifies its business activities and 

investments and either employs fixed rate debt, or uses interest rate swaps and other hedging techniques to fix 

interest rates over the life of the investment.The Group is willing to forgo the potential economic benefit that 

could result in a falling interest rate environment to protect its downside risks and the predictability of cash flows 

from an asset by fixing rates. 

Equity market risk 

Babcock & Brown has investments in a number of listed securities and receives management and other fees that 

are directly or indirectly related to the equity market value of a security, either in absolute terms or relative to 

benchmark indices.These investments and fee streams could be adversely affected if general equity market values 

were to decline.The Group does not actively hedge its exposure to the risk of a general decline in equity market 

values, believing that such strategies are not cost-effective. Instead, the Group prefers to actively manage the 

underlying business or asset to ensure that its fundamental value is preserved. Many of the Group’s investments in 

listed securities are also in “event-driven” situations where value is more correlated with the outcome of a certain 

event or series of actions than with general equity market values. 

Currency risk 

The majority of Babcock & Brown’s revenue is derived in currencies other than the Australian dollar, and thus 

exposed to a decline in the values of those currencies relative to the Australian dollar. Since the majority of the 

Group’s expenses are denominated in the same currencies as the associated revenues, only the net income after 

total compensation is exposed to currency fluctuations. Babcock & Brown also expects to reinvest a significant 

portion of revenues in the jurisdictions in which the revenue is generated. Babcock & Brown therefore does 

not believe that it is cost-effective to hedge the Group’s revenue flows. Consistent with the focus on capital 

preservation, Babcock & Brown plans to use various hedging techniques to protect the value, in Australian dollar 

terms, of investments made in non-Australian markets. 

General market values of selected asset classes 

The value of Babcock & Brown’s investment positions and revenue streams may be adversely affected by the 

deterioration of the general market values of asset classes in which it invests, manages assets or conducts other 

activities. Examples of such asset classes include property, infrastructure, aircraft, railcars and semiconductor 

manufacturing equipment. As was the case for general equity market value risk, Babcock & Brown does not 

actively hedge its risk to general declines in the market values of such asset classes, preferring to actively manage 

the fundamental value of the asset and diversify its business mix and investment portfolio, although risk is often 

mitigated by the use of limited or non-recourse debt to finance investments as described in Section 4.9.4. 

4.9.5.2 Business risks 

As Babcock & Brown increasingly invests in operating businesses it exposes itself to general business risks 

associated with operating businesses. Employee issues, competitive pressures, economic and political conditions 

and cycles, as well as extraordinary event risks will all impact on these types of businesses. 

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SECTION 4 


Babcock & Brown does not and cannot hedge against these risks, but seeks to mitigate them through active 

management. Again, these investments tend to be event driven situations where a level of control and active 

management will mitigate against the impact of general business risks. 

4.9.5.3 Credit risks 

Credit risk refers to the loss that Babcock & Brown would incur if a debtor or other counterparty fails to 

perform under its contractual obligations. Babcock & Brown seeks to limit its exposure to such risks as follows: 

• Conducting appropriate due diligence on counterparties before entering into arrangements with them 

• Obtaining collateral with a value in excess of the counterparties’ obligation to the Group – providing a 

“margin of safety” against loss 

4.9.5.4 Regulatory risks 

A number of investment products developed by Babcock & Brown for its clients, or investment structures used by 

the Group or its clients to acquire or invest in assets may be adversely affected by changes in laws or accounting 

and tax policies and regulations.The development of certain infrastructure and property assets require regulatory 

approvals or are reliant upon the continuation of certain policies such as those that encourage the construction 

of sources of renewable energy, or the development of public infrastructure by the private sector. Changes to 

existing laws, regulations or policies could negatively impact Babcock & Brown’s revenues or the value of its 

investments. Babcock & Brown monitors the legal and regulatory environment both through its internal staff and 

a regular dialogue with external advisors, regulatory authorities and other policy-setting bodies. Babcock & 

Brown also takes into account the potential for prospective regulatory change in designing its investment products 

and structures, and is experienced in restructuring products, investments and other transactions to address changes 

in regulations or policies. 

4.9.5.5 Compliance risks 

Babcock & Brown actively manages compliance risks across its businesses. Compliance risks include the risk 

of breaches of applicable laws and regulatory requirements, breaches of obligations contained in investment 

mandates or trust structures, unenforceability of counterparty obligations or the inappropriate documentation 

of contractual obligations. 

Risk Management and Compliance Departments assess compliance risk from a Group perspective and implement 

in consultation with each business the relevant Group compliance policies and procedures to ensure that 

appropriate standards are consistently applied. 

The development of new business initiatives and regulatory and legal changes are key areas of focus in the 

management of compliance risks. 

4.9.5.6 Operational risks 

Babcock & Brown faces operational risks which could lead to reputational damage, financial loss or 

regulatory/compliance risk in the event of an operational failure or error. Responsibility for the management of 

operational risk lies in the first instance with each Business Unit.The Risk Management and Compliance 

Departments assist businesses in identifying, managing and monitoring operational risks. 

Procedures and controls over operational risks are also designed to ensure that investments and transactions are 

appropriately approved and are accurately recorded and properly reflected in internal systems and records on a 

timely basis. 

4.9.5.7 Summary 

In summary, a key part of the Group’s strategy for managing risk is to hire qualified professionals and retain them 

through competitive remuneration and a good working environment. 

4.10 DEEDS OF ACCESS, INDEMNITY AND INSURANCE 

The Group has entered into deeds of access, indemnity and insurance with each Director which confirms the 

Director’s right of access to Board papers and requires the Group to indemnify the Director for liability incurred as an 

officer of the Group, subject to the restrictions imposed by the Corporations Act, and the terms of its Constitution. 

102

103

SECTION 5 


5.1 INTRODUCTION 

This Section contains financial information prepared on three different bases.The basis of preparation and the 

rationale for each is: 

5.1.1 AGAAP Financial Information 

The financial information prepared under AGAAP contained in Section 5.3 (AGAAP Financial Information) 

comprises: 

• AGAAP pro-forma historical statements of financial performance for the years ended 31 December 2001, 

2002 and 2003 at average actual $:US$ exchange rates for the relevant periods and pro-forma Forecasts of 

financial performance for the years ending 31 December 2004 and 31 December 2005 at the forecast 

exchange rates outlined in Section 5.3.2.2 

• Pro-forma statements of cash flows for the years ended 31 December 2002 and 2003 

• A pro-forma statement of financial position as at 31 December 2003 

Babcock & Brown will report its results for the period from the date of the listing to 31 December 2004 on the 

basis of AGAAP. 

5.1.2 Australian IFRS Financial Information 

The financial information prepared under Australian IFRS contained in Section 5.4 (Australian IFRS Financial 

Information) comprises: 

• Pro-forma historical statement of financial performance for the year ended 31 December 2003 at average 

actual $:US$ exchange rates for the period and pro-forma Forecasts of financial performance for the 

years ending 31 December 2004 and 31 December 2005 at the forecast exchange rates outlined in 

Section 5.3.2.2 

• Pro-forma statement of financial position as at 31 December 2003 

A summary of the key differences between the financial information prepared under AGAAP and the financial 

information prepared under Australian IFRS is included in Section 5.4.4. 

Babcock & Brown will report its results for the year ending 31 December 2005 and subsequent periods on the 

basis of Australian IFRS. 

5.1.3 Restated Financial Information 

The restated AGAAP financial information contained in Section 5.2 (Restated Financial Information) comprises: 

• AGAAP pro-forma historical statements of financial performance at a constant $:US$ exchange rate for the 

years ended 31 December 2001, 2002 and 2003 

• AGAAP pro-forma Forecasts of financial performance for the years ending 31 December 2004 and 2005 

using the forecast exchange rates for 2004 outlined in Section 5.3.2.2, including the constant $:US$ 

exchange rate used to restate the AGAAP pro-forma historical statements of financial performance referred 

to above 

• AGAAP pro-forma statement of financial position as at 31 December 2003. 

The Restated Financial Information has been prepared by Babcock & Brown based on the pro-forma AGAAP 

Financial Information referred to above.The Restated Financial Information has been provided to more 

meaningfully reflect the underlying economic performance of Babcock & Brown over the historic and forecast 

periods.The Business Overview in Section 3 is based on the Restated Financial Information.The management 

discussion and analysis contained in Section 5.2.5 has also been prepared using the Restated Financial 

Information. 

104


The AGAAP Financial Information and Australian IFRS Financial Information has been prepared on the basis 

that the Restructure of Babcock & Brown and the IPO and related transactions had taken place on 31 December 

2003.The AGAAP and Australian IFRS pro-forma Forecasts of financial performance have been prepared on the 

basis that the $550 million capital raising as part of the IPO occurred on 30 September 2004. 

Details of the key assumptions on which the AGAAP and Australian IFRS pro-forma Forecasts of financial 

performance are based are contained in Sections 5.3.2.2 and 5.4.2, respectively. 

Quantification of the impact of varying certain of the key assumptions underlying the AGAAP pro-forma 

Forecasts of financial performance is contained in Section 5.3.2.3. 

The financial information contained in this Section is presented in an abbreviated form and does not contain all 

the disclosures that are usually provided in an annual report prepared in accordance with the Corporations Act 

2001. Further detailed historical financial information is contained in the pro-forma financial statements of 

Babcock & Brown contained in Appendix A of this document.The pro-forma financial information prepared 

under AGAAP contained in this Section has been prepared in accordance with the accounting policies set out in 

note 1 of Appendix A. Detailed reconciliations between AGAAP and Australian IFRS are set out in notes 5 and 6 

of Appendix A. 

As noted in Section 2.4, the pre-IPO US Executive Stakeholders will hold their interests in the restructured 

Group through BBIPL rather than in the listed vehicle. Despite the different legal interests, the economic interests 

of the pre-IPO US Executive Stakeholders and all other Shareholders following the IPO are economically 

materially equivalent.The Restated Financial Information is prepared for the entire Babcock & Brown Group. 

The AGAAP Financial Information and the Australian IFRS Financial Information are prepared on a comparable 

basis to the Restated Financial Information but also include a deduction for outside equity interests relating to 

the pre-IPO US Executive Stakeholders.This treatment is consistent with relevant accounting standards. As noted 

in Section 2.5, it is expected that new Shareholders who subscribe for Shares as part of the IPO, will have an 

Economic Interest in the Group of approximately 33.9% following the Restructure. However, because pre-IPO 

US Executive Stakeholders hold at the BBIPL level, the interest of new Shareholders in the listed vehicle will 

amount to approximately 48.4%. 

Ernst & Young has reviewed the pro-forma financial statements contained in Appendix A.The Independent 

Accountant’s Report on these pro-forma financial statements is set out in Section 6. Ernst & Young Transaction 

Advisory Services Limited has reviewed the pro-forma Forecast of financial performance prepared under AGAAP 

and Australian IFRS contained in Section 5.3.2 and Section 5.4.2, respectively.The Independent Accountant’s 

Report on these pro-forma Forecasts of financial performance is contained in Section 6.The Independent 

Accountants’ Reports relate solely to the information referred to above and do not relate to the Restated 

Financial Information contained in Section 5.2 and elsewhere in this Prospectus. 

The pro-forma financial statements and the pro-forma Forecasts of financial performance should be read in 

conjunction with the Independent Accountants’ Reports and investors should note the comments in relation to 

scope and limitations contained in those reports.The pro-forma Forecasts of financial performance should also be 

read together with the assumptions underlying their preparation, as set out in Sections 5.3.2.2 and 5.4.2, the risk 

factors set out in Section 7 and other information contained in this Prospectus. Undue reliance should not be 

placed on the pro-forma Forecasts of financial performance. Refer Section 5.3.2 for important commentary in 

this regard. 

105

SECTION 5 


5.2 RESTATED FINANCIAL INFORMATION 

5.2.1 Basis of preparation 

The Restated Financial Information is derived from AGAAP Financial Information set out in Sections 5.3.1 and 

5.3.2 with the adjustments outlined below.This Section should be read in conjunction with the AGAAP 

Financial Information and related disclosures. 

Adjustments made from the AGAAP Financial Information to arrive at the restated summary of financial 

performance include: 

• A constant $:US$ exchange rate of $0.7220 has been used to prepare the summary statements of financial 

performance for the years ended 31 December 2001, 2002 and 2003.The results for these years were 

initially prepared in US dollars.This adjustment addresses the impact of the appreciation of the Australian 

dollar versus the US dollar (from an average rate of $0.5176 in 2001 to an average rate of $0.7220 assumed 

in the 2004 forecast).The 2005 forecast of financial performance has been restated to the same exchange 

rates assumed in the 2004 forecasts.The Directors believe that this basis provides a more meaningful insight 

into the activities and financial performance of Babcock & Brown given the Group’s practice prior to the 

Offer of managing activities using the US dollar as its benchmark currency 

• Under AGAAP, certain streams of revenue and expense are required to be shown gross on the face of the 

statement of financial performance.The Restated Financial Information is based on Net Revenue which 

represents gross revenue under AGAAP less cost of sales and directly attributable expenses plus net 

contribution from equity accounted and consolidated non-strategic investments, which in Babcock & 

Brown’s view, provides a more meaningful view of the true nature of the Group’s revenue streams.This 

adjustment only relates to the presentation of the Restated Financial Information 

• The Restated Financial Information for the years ended 31 December 2001, 2002 and 2003 is presented to 

the level of profit before tax and bonus.This presentation reflects the move from a private partnership to a 

public company. Following the IPO Babcock & Brown will be structured with a different tax profile and 

with a different remuneration policy than prior to the IPO. Accordingly, while an allowance for bonus in 

accordance with the new remuneration policy has been made in respect of the forecast periods and a tax 

charge is reflected for 2005 (which is the first full year the new tax structure will apply), historical bonuses 

and tax charges have not been reflected in the accounts 

The restated summary of financial position separately identifies assets and liabilities that are directly attributable to 

the five Business Groups and discloses the nature of the remaining assets and liabilities.There are no differences 

between the measurement criteria used to calculate the restated summary of financial position and the AGAAP 

pro-forma statement of financial position at 31 December 2003 set out in Section 5.3.1.3. 

106


5.2.2 Summary restated statement of financial performance 

Year ended 31 December ($000) 8 10 11 2001A 2002A 2003A 2004F 2005F 

Net Revenue by division 

– Real Estate 30,779 25,716 64,198 83,527 117,797 

– Infrastructure and Project Finance 42,744 69,456 84,352 104,111 156,717 

– Operating Leasing 82,036 83,226 79,704 101,619 122,604 

– Structured Finance 171,784 156,998 124,573 96,524 97,127 

– Corporate Principal Investment and 

Funds Management (996) 12,439 38,655 38,328 29,120 

Net Revenue 1 326,347 347,835 391,482 424,109 523,365 

Other revenue (1,263) 600 1,073 

Net corporate interest income/expense 2 (2,780) (1,564) (1,200) 5,759 20,977 

Operating costs 3 (118,894) (148,361) (162,543) (159,845) (178,730) 

Operating profit before bonuses, 

restructuring costs and 

goodwill amortisation 203,410 198,510 228,812 270,023 365,612 

Bonus expense (pro-forma) 4 (127,509) (150,700) 

Operating profit before restructuring 

costs and goodwill amortisation 142,514 214,912 

Restructure costs – business closure 5 (8,300) 

Restructure costs – IPO corporate structure 6 (1,500) 

Operating profit before tax and goodwill 

amortisation 7 132,714 214,912 

Tax 9 (62,324) 

NPAT (before goodwill amortisation) 152,588 

NOTES 

1. Net Revenue represents gross revenue calculated in accordance with AGAAP less cost of sales and directly attributable expenses plus net contribution from 

equity accounted and consolidated non-strategic investments. 

2. Net corporate interest income includes interest income on cash and cash-equivalent balances held by the Group and interest expense on corporate debt 

facilities.The Forecasts assume that net Offer Proceeds of $523 million are raised as at 30 September 2004 and used to extinguish corporate debt and other 

liabilities and provide capital for certain transactions incorporated in the Forecasts, with the balance forecast to be held as cash on deposit. 

3. Operating costs comprise total expenses calculated in accordance with AGAAP but exclude cost of sales, expenses directly related to transactions, expenses of 

consolidated but non-strategic investments, bonuses and restructure costs. 

4. Consistent with Babcock & Brown’s intentions, the forecast bonus for 2004 assumes that the full amount of the bonus pool, calculated in accordance with the 

remuneration policy outlined in Section 4.7, will be paid in cash or cash equivalents.Therefore the full amount of the forecast bonus pool is expensed during 

2004. In 2005 based on constant exchange rates, the total bonus pool is forecast to be $174.5 million consistent with the stated remuneration policy. However, 

of this amount $23.8 million based on constant exchange rates is expected to treated as Bonus Deferral Rights (see Section 4.7.5). As the Bonus Deferral 

Rights relate to equity transactions there is no requirement under AGAAP to recognise an expense for this amount.The forecast AGAAP 2005 bonus expense 

based on constant exchange rates is therefore $150.7 million.Were Babcock & Brown to elect to recognise an expense, the value attributed to the rights would 

be recognised as an expense over the period to the vesting date of the rights consistent with Australian IFRS (see footnote 5, Section 5.4.1.2). In addition, 

consistent with current AGAAP, no amount has been forecast as an expense in the pro-forma Forecast in respect of Shares and Options allocated to the 

Employee Trusts (see Section 4.7.7) in either 2004 or 2005. 

5. Restructure costs – business closure relates to redundancy costs and related expenditure in connection with the effective closure in 2004 of the Group’s US 

cross border leasing activities due to changes in US tax laws and to consequential provisions associated with assigning the lease on the Group’s existing New 

York office space and moving to smaller premises. 

6. Total transaction costs of the IPO and Restructure amount to $28.5 million as set out in Section 8.11. Of this amount, $27 million is directly attributable to 

the capital raising and has been netted off against the Offer Proceeds consistent with AGAAP.The remainder, amounting to $1.5 million has been included as 

an expense in the 2004 Forecast. 

7. Details of the treatment of goodwill under AGAAP in the Forecast Period are set out in footnote 3, Section 5.3.2.1. 

8. As noted above, to facilitate comparison the Restated Financial Information for 2001, 2002 and 2003 is prepared on the basis of a constant $:US$ exchange 

rate of $0.7220, which represents the average $:US$ exchange rate assumed for the 2004 Forecasts.The 2005 forecast has been restated using various of the 

exchange rates assumed in the 2004 Forecasts. 

9. A forecast tax charge has only been included for 2005 as this is the first full year in which the new corporate and tax structure will apply. 

10.As discussed in note 7 above, the Restated Financial Information excludes amortisation of goodwill resulting from the Restructure immediately prior to the 

IPO.The Restated Financial Information also excludes other AGAAP accounting impacts relating to the Restructure. 

11.A reconciliation of the restated statements of financial performance to the AGAAP pro-forma summary of financial performance set out in Section 5.2.2 has 

not been provided as the only net difference relates to the restatement of the relevant income or expense amount from the historical and the forecast average 

exchange rates to the constant exchange rates assumed. 

107

SECTION 5 


5.2.3 Net Revenue by earnings type 

Year ended 31 December 2003 ($000) 2001A 2002A 2003A 2004F 2005F 

Advisory 172,106 174,273 169,561 

Investment Management 118,561 143,339 185,946 

Principal Investment 100,815 106,497 167,858 

Net Revenue 1 326,347 347,835 391,482 424,109 523,365 

NOTE 

1. Net Revenue represents gross revenue calculated in accordance with AGAAP less cost of sales and directly attributable expenses plus net contribution from 


5.2.4 Summary statement of restated financial position 

As at 31 December 2003 ($000) Assets Liabilities Net 

Operating Leasing 

BBAM 590,283 583,073 7,210 

BBRM 560 – 560 

BBEM 4,720 – 4,720 

Total Operating Leasing 595,563 583,073 12,490 


Renewable Energy 58,650 28,102 30,548 

Power 18,328 – 18,328 

Prime Infrastructure 29,885 – 29,885 

Public Private Partnerships 7,318 – 7,318 

Total Infrastructure 114,181 28,102 86,079 

Real Estate 

BBRE 127,814 70,357 57,457 

Other Australian Real Estate 81,890 20,074 61,816 

Japanese Real Estate 42,385 17,307 25,078 

European Real Estate 345,846 342,966 2,880 

Total Real Estate 597,935 450,704 147,231 

Corporate Principal Investment and Funds Management 

Corporate Principal Investments 92,674 12,468 80,206 

Funds Management 18,008 – 18,008 

Total Corporate Principal Investments and Funds Management 110,682 12,468 98,214 

Structured Finance 4,049 12,606 (8,557) 

Investment portfolio before outside equity interest 1,422,410 1,086,953 335,457 

Outside equity interest (37,782) 

Net investments portfolio 297,675 

108


As at 31 December 2003 ($000) Assets Liabilities Net 

Cash and cash equivalents 486,771 

Working capital (excluding cash) (115,761) 

Deferred tax assets 66,549 

Deferred tax liability (3,109) 

Property, plant and equipment 19,539 

Other 21,197 

Total net tangible assets 772,861 

Goodwill 725,733 

Total net assets per AGAAP Financial Information 1 1,498,594 

NOTE 

1. Represents net assets in the AGAAP pro-forma statement of financial position in Section 5.3.1.3 ($1,536 million) less outside equity interests other than BBIPL 

($37 million). Certain assets and liabilities are reflected at different amounts in the table above than in the AGAAP pro-forma statement of financial position in 

Section 5.3.1.3 due to different classification of items in the above analysis. 

5.2.5 Management discussion and analysis 

A detailed discussion of the historical results and forecast performance of each of the Business Groups, based on 

the Restated Financial Information, is included in the Business Overview in Section 3.The discussion below 

provides a high level overview for the business as a whole. 

5.2.5.1 Historical Financial Information 

Revenue 

The Group increased its Net Revenue by 6.6% and 12.6% in 2002 and 2003 respectively.This was achieved 

despite challenging operating conditions in several of its key business segments including: 

• The global aircraft industry experienced one of its most severe downturns during this period due to the 

impacts of a slowing global economy, the events of September 11 2001, the SARS outbreak in 2002 and the 

2003 Iraq War.This negatively impacted the Group’s aircraft operating and finance leasing businesses 

• Low interest rates worldwide have favoured the debt-financed acquisition of assets over leasing to the 

detriment of the Group’s traditional lease advisory and operating leasing businesses 

• Changes in US tax laws resulted in the effective shut-down of the US cross-border leasing market which 

had historically been one of the Group’s most profitable activities 

The diversity of the Group’s operations allowed it to continue to grow revenue despite these challenges. Many of 

the Group’s investment focused areas were able to take advantage of the difficult economic environment to 

acquire assets at attractive valuations, financed with low interest debt.The demand for high-yielding income assets 

in a low interest rate environment also favoured several of the Group’s investment management activities which 

focus on the acquisition or development of assets with long term cash flow streams to package for private 

syndication or investment funds. 

In general terms, 2001-2003 was characterised by the following trends: 

• Strong growth in the investment focused Real Estate, Infrastructure and Project Finance and Corporate 

Principal Investment and Funds Management Groups 

• Modest decline in the Operating Leasing Group, driven principally by difficult conditions in aircraft 

operating leasing 

• Significant decline in the Group’s advisory focused Structured Finance Business Group 

For the Group overall, declining revenues in certain Business Units were more than compensated for by revenue 

increases in others, thereby contributing to the Group’s growing revenues. 

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SECTION 5 


Expenses 

Babcock & Brown’s recurring operating expense base was reduced in the first-half of 2004 as the Finance Leasing 

Business Unit was restructured to address the effective shut-down of the US cross-border leasing market and 

slowdown in domestic US finance leasing market. Non-bonus compensation expenses had previously increased 

(from 2001 to 2003) as the Group expanded its Structured Finance activities to meet record activity in the sector 

(particularly in US cross-border leasing), and entered into new business areas with the hiring of experienced 

professionals in Electronics and European Rail Operating Leasing and Asian Infrastructure and Project Finance. 

5.2.5.2 Forecast Financial Information 

The assumptions underlying the AGAAP pro-forma forecasts of financial performance are contained in 

Section 5.3.2.2. A detailed discussion of the nature of and trends in underlying Forecast Net Revenue for each 

Business Segment is contained in Section 3. 

5.3 AGAAP FINANCIAL INFORMATION 

5.3.1 Historical pro-forma financial information – introduction 

The information in this Section reflects pro-forma historical financial information for Babcock & Brown prepared 

under AGAAP.The information has been extracted from the audited consolidated financial statements of BBH for 

the years ended 31 December 2001, 2002 and 2003 which were prepared under USGAAP.These USGAAP 

financial statements have been restated to AGAAP and foreign currency denominated amounts have been translated 

into Australian dollars at the average rate for the particular period. Further pro-forma adjustments have been made 

to reflect the Restructure and IPO of the Babcock & Brown Group to arrive at the pro-forma historical financial 

information.These adjustments are summarised below and detailed in notes 2, 3 and 4 of Appendix A. 

5.3.1.1 Pro-forma summary of historical financial performance 

The pro-forma results of operations have been presented to the level of operating profit before tax and bonus. 

Due to the different tax profile and different remuneration policy of the Group following the IPO, historical 

bonus and tax charges have not been reflected in the pro-forma summary of historical financial performance 

under AGAAP or the pro-forma financial statements of the Babcock & Brown Group included in Appendix A. 

The pro-forma summary of historical financial performance set out below has been derived from the audited 

consolidated statements of financial performance of BBH for the years ended 31 December 2001, 2002 and 2003 

adjusted to: 

• Restate the historical results from USGAAP to AGAAP 

• Exclude the results of entities historically controlled by BBH but which will not form part of the Babcock 

& Brown Group following the IPO 

• Include the results of entities historically excluded from the consolidated results of BBH which will form 

part of the Babcock & Brown Group following the IPO 

• Exclude the impact of gains and losses on hedges in relation to the Group’s Australian operations and 

earnings, entered into during the historical period when the US dollar was the main operating currency of 

the Group 

• Exclude the impact of historic outside equity interests which are eliminated under the new structure and 

recognise outside equity interests applicable to the pre-IPO US Executive Stakeholders interests in BBIPL 

Further details of these pro-forma adjustments are provided in note 3 of Appendix A. 

The detailed presentation of pro-forma historical financial performance is set out in Appendix A.The summary 

presentation set out below is designed to show the reconciliation of key line items in the pro-forma historical 

financial performance set out in Appendix A to line items included in the summary restated statement of financial 

performance set out below and also to highlight the differences between these line items based on the average 

$:US$ exchange rate used in the table below and the constant $:US$ exchange rate of $0.722 used for the 

historical period in the summary restated statement of financial performance. 

110


PRO-FORMA STATEMENT OF FINANCIAL PERFORMANCE 

Year ended 31 December ($000) 2001A 2002A 2003A 

$:US$ exchange rate 0.5176 0.5440 0.6529 

Revenue from external parties 1,912,981 1,563,539 1,494,286 

Income from equity accounted investments 614 2,700 11,198 

Less: cost of sales (1,284,625) (957,192) (872,961) 

Less: direct transaction costs (172,366) (139,393) (190,865) 

Less: outside equity interests excluding BBIPL (1,368) (7,993) (8,731) 

Net Revenue 1 455,236 461,661 432,927 

Corporate interest revenue 9,292 7,355 6,465 

Other (1,762) 796 1,188 

Corporate interest expense (13,171) (9,430) (7,792) 


Profit from ordinary activities before bonus expense, 

income tax expense attributable to members and BBIPL 

Outside Equity Interest 1 283,745 263,470 253,036 

BBIPL outside equity interest 2 (85,124) (79,041) (75,911) 

Profit from ordinary activities before bonus expense and 

income tax expense attributable to members 198,621 184,429 177,125 

1. Reconciliation of gross revenue 

Revenue from external parties 1,912,981 1,563,539 1,494,286 

Interest revenue 9,292 7,355 6,465 

Other (1,762) 796 1,188 

Total per AGAAP Financial Information 1,920,511 1,571,690 1,501,938 

2. Reconciliation of expenses from ordinary activities excluding 

borrowing costs and bonuses 

Costs of sales 1,284,625 957,192 872,961 

Direct transaction costs (excl. interest expense) 134,700 107,615 154,205 

Operating costs (excl. interest expense) 165,850 196,912 179,751 

Total per AGAAP Financial Information 1,585,175 1,261,719 1,206,917 

3. Reconciliation of borrowing costs 

Interest expense included in direct transaction costs 37,666 31,778 36,660 

Corporate interest expense 13,171 9,430 7,792 

Total per AGAAP Financial Information 50,837 41,208 44,452 

NOTES 

1.The difference between Net Revenue, operating costs and profit from ordinary activities before bonus expense and income tax expense attributable to members 

and BBIPL outside equity interest set out above and the equivalent amounts in the Restated Financial Information in Section 5.2.2, relates solely to the 

translation of underlying US$ numbers at the average rate for the period (as set out above) rather than the constant US$:$ exchange rate of $0.7220 used in the 

preparation of the Restated Financial Information. 

2.As noted in Section 2.5, the interests of the pre-IPO US Executive Stakeholders will be held directly in BBIPL under the new structure. Under AGAAP in the 

consolidated financial statements of Babcock & Brown, these interests will be treated as an outside equity interest. 

111

SECTION 5 


NET REVENUE BY BUSINESS GROUP 

Year ended 31 December ($000) 2001A 2002A 2003A 


Revenue 

– Real Estate 42,935 34,131 70,994 

– Infrastructure and Project Finance 59,626 92,186 93,283 

– Operating Leasing 114,435 110,461 88,142 

– Structured Finance 239,630 208,375 137,761 

– Corporate Principal Investment and Funds Management (1,390) 16,508 42,747 

Net Revenue 455,236 461,661 432,927 

Other revenue (1,762) 796 1,188 

5.3.1.2 Pro-forma statement of cash flows 

Consistent with the reporting level used for the pro-forma historical statement of financial performance, the 

pro-forma historical statement of cash flows excludes the impact of historical bonuses and tax payments as this 

information is not considered meaningful.The pro-forma statement of cash flows below is presented in summary 

format and assumes that the following transactions have taken place: 

• The payment of dividends and distributions to the pre-IPO owners as part of the Restructure amounting 

to approximately $128 million 

• The raising of approximately $18 million from existing Executive Stakeholders immediately prior to 

the IPO 

• The raising of $550 million of new capital as part of the IPO 

• The repayment of debt amounting to approximately $120 million from the proceeds of the IPO and 

$20 million from existing cash resources 

• Transaction costs associated with the IPO and capital raising estimated at $27 million 

A detailed pro-forma statement of cash flows is presented as part of the pro-forma financial statements in 

Appendix A. 

112


Year ended 31 December ($000) 2002A 2003A 

Cash flows from operating activities 

Fees received 411,790 323,354 

Rental income received 72,355 100,250 

Payments to vendors and employees (268,185) (252,656) 

Other net operating cash flows 18,564 (9,750) 

Net cash flows from/(used in) operating activities 234,524 161,198 

Cash flows from investing activities 

Proceeds from sale of transportation equipment 985,707 739,762 

Proceeds from sale of real estate 45,250 108,328 

Proceeds from sale of subsidiaries and affiliates 26,317 143,094 

Purchase of transportation equipment (1,256,473) (789,673) 

Purchase of real estate (95,271) (17,898) 

Purchase of investment in associates (28,941) (178,757) 

Purchase of property, plant and equipment (1,526) (6,979) 

Payments received on notes receivable 150,160 115,410 

Notes receivable funding) (157,126) (74,459) 

Assets under development) (41,525) (40,571) 

Dividends and distributions received from associates 35,633 23,245 

Net proceeds from other investing activities 35,287 22,904 

Net cash flows from/(used in) investing activities (302,508) 44,406 

Cash flows from financing activities 

Net movement in borrowings 474,963 (141,919) 

Proceeds from issuance of ordinary capital 29,118 628,849 

Capital redemption payments (20,678) (36,969) 

Distributions paid to equity holders (245,523) (405,351) 

Net movement in outside equity interests (8,343) (32,219) 

Net cash flows from/(used in) financing activities 229,537 12,391 

Net increase/(decrease) in cash held 161,553 217,995 

113

SECTION 5 


5.3.1.3 Pro-forma statement of financial position 

In any acquisition, AGAAP requires that (i) all assets and liabilities be carried at fair value and (ii) the difference 

between the fair value of the assets and liabilities acquired and the consideration paid be treated as goodwill. 

In the Babcock & Brown Restructure, for accounting purposes, the owners of the Group prior to the IPO are 

deemed to subscribe for Shares in Babcock & Brown at the IPO price and this amount is treated as the deemed 

consideration.The difference between this deemed consideration and the fair value of the underlying assets and 

liabilities as at 31 December 2003 is reflected as the pro-forma goodwill amount.The pro-forma statement of 

financial position has therefore been derived from the statement of financial position of BBH at 31 December 

2003 adjusted to reflect: 

• The transactions required to give effect to the restructured Babcock & Brown Group (see Section 8.3) 

including the recognition of: 

– all assets and liabilities at fair value at 31 December 2003 

– deferred tax balances consistent with the new structure, and 

– goodwill inherent in the Group 

• The payment of dividends and distributions to the pre-IPO owners as part of the Restructure amounting to 

approximately $128 million 

• The raising of approximately $18 million from existing Executive Stakeholders immediately prior to 

the IPO 


• The repayment of debt amounting to approximately $120 million from the proceeds of the IPO and 

$20 million from existing cash resources 

• Transaction costs associated with the IPO and capital raising estimated at $27 million 

• The reflection of an outside equity interest representing the interests of the existing US Executive 

Stakeholders held through BBIPL (see Section 2.5) 

Further details of these pro-forma adjustments are set out in note 4 of Appendix A. 

As at 31 December ($000) 

2003A 

Assets 

Cash and short-term trading securities 570,733 

Fees receivable from financing transactions 47,202 

Other receivables 64,468 

Notes receivable 164,430 

Investments in financial assets 58,651 

Investments accounted for using the equity method 161,776 

Transportation equipment 503,498 

Real estate 388,671 

Semiconductor equipment 4,720 

Plant, property and equipment 19,539 

Assets under development 65,565 

Other assets 28,968 


Intangible assets 725,733 

Total assets 2,872,545 

114


As at 31 December ($000) 

Liabilities 

2003A 

Accounts payable and accrued liabilities 244,848 

Deposits held 48,431 

Deferred income 32,097 

Interest bearing liabilities 

Transportation equipment notes payable 505,888 

Real estate notes payable 341,617 

Other notes payable 131,595 

Shareholder dividend payable 12,981 

Current tax liabilities 7,524 

Deferred tax liabilities 5,150 

Other liabilities 6,038 

Total liabilities 1,336,169 

Net assets 1,536,376 

Equity 

Contributed equity 1,048,999 

Outside equity interest 

BBIPL 449,595 

Other minorities 37,782 

Total equity 1,536,376 

Investors should note that the actual statement of financial position (and in particular the amount of goodwill) 

that arises following the Restructure will be based on actual assets and liabilities held at the date of the 

Restructure and their respective fair values at that date.The actual statement of financial position and actual 

amount of goodwill may therefore be significantly different than the position set out above. 

5.3.2 Pro-forma forecast financial information under AGAAP – introduction 

The Director’s pro-forma forecast summary of financial performance prepared under AGAAP for the years 

ending 31 December 2004 and 2005 set out in Section 5.3.2.1 (AGAAP pro-forma Forecast) has been prepared 

by Babcock & Brown for use in this document. Subject to the continuous disclosure requirements imposed on 

publicly listed companies, the Company does not intend to update this information or to publish forecast 

financial information in the future. 

The AGAAP pro-forma Forecast has been prepared on the basis set out in Section 5.3.1.1 above, including 

assuming that the Restructure occurred on 1 January 2004 and the Offer Proceeds net of the total transaction 

costs are available to the Group as of 30 September 2004.The pro-forma Forecast for 2004 has been prepared 

before income tax because the Restructure in 2004 reflects, among other things, the move from a private 

partnership to a public company.Tax expense is forecast for 2005 because it is the first full year the new tax 

structure will apply. 

The AGAAP pro-forma Forecast set out in Section 5.3.2.1 has been presented before: 

• The AGAAP accounting implications for the Restructure 

• Income tax in relation to 2004 

• Outside equity interest relating to interests of the pre-IPO US Executive Shareholders held directly in 

BBIPL under the new structure in relation to 2004 

• Currency gains, losses or costs 

115

SECTION 5 


but after the: 

• Offer Proceeds net of IPO and capital raising costs of $523 million 

• Transaction costs associated with the Restructure that, for AGAAP accounting purposes, are required to be 

expensed rather than offset against the proceeds of the capital raising 

It is important to note that the actual results for Babcock & Brown for the year ending 31 December 2004 will 

be substantially different from the AGAAP pro-forma Forecast operating profit before tax but after outside equity 

interest referred to above.This is because, in addition to the limitation and uncertainties relating to the AGAAP 

pro-forma Forecasts noted below, the actual results of Babcock & Brown for the period ending 31 December 

2004: 

• Will only reflect the results of the restructured Group from the date of the Restructure to 31 December 2004 

• Will reflect actual tax expense for the period from the date of the Restructure to 31 December 2004 

• May be subject to adjustment given the basis on which the Directors have determined to apportion the 

final pro-forma earnings of the restructured Group for 2004 between pre- and post-IPO Shareholders.This 

basis of allocation is set out in Section 5.2.3.4 

The Directors believe that they have prepared the AGAAP pro-forma Forecasts with due care and attention and 

consider all best estimate assumptions, when taken as a whole, to be reasonable at the date of this Prospectus. 

However, this information is not fact and investors are cautioned not to place undue reliance on the AGAAP 

pro-forma Forecasts. 

The AGAAP pro-forma Forecast has been prepared on the basis of a number of estimates and assumptions 

regarding future events and actions as set out in Section 5.3.2.2. Such assumptions are subject to business, 

economic and competitive uncertainties and contingencies, many of which are beyond the control of the Group 

and the Directors. Babcock & Brown currently relies on transactions to generate the majority of its revenue 

across a range of Business Units in five separate Business Groups. In particular, the Forecast Net Revenue has 

been prepared on the basis of certain assumptions in relation to the: 

• Expected scale and transaction mix of the portfolios of various Business Units 

• Probability of a large number of potential future transactions occurring within the Forecast Period 

Approximately 80% of the Forecast Net Revenue for 2005 relates to potential transactions that have been 

specifically identified by Babcock & Brown as likely to generate this revenue. However, the nature of Babcock 

&Brown’s business, coupled with the application of AGAAP in relation to certain future events and actions, 

introduces additional uncertainties in relation to the AGAAP pro-forma Forecasts.The most material of these are: 

• The probability, Forecast Net Revenue and timing of completion of specifically identified potential 

transactions occurring is not always easy to assess as these transactions are in varying stages of development 

• Transactions not specifically identified will occur in the Forecast Period and the Net Revenue generated by 

those transactions may be greater or smaller than the approximate 20% of the Forecast Net Revenue not 

based on specifically identified potential transactions 

• Babcock & Brown’s future decisions to invest equity in transactions in which they are involved can result in 

those investments being equity accounted or consolidated for accounting purposes 

• The timing of Babcock & Brown’s future decisions to dispose of equity or related investments and the 

forecast profit or loss on those disposals 

• As a consequence of Babcock & Brown’s investment in entities that are equity accounted or consolidated, 

deferred income may arise – refer Section 5.3.2.2 

• The potential impact that changes in tax laws could have on certain aspects of the Group’s activities 

116


It should be noted that the Forecast Net Revenue is diversified across a large number of transactions of many 

types, in a number of countries and across many Business Units. In the opinion of the Directors, the portfolio 

effect of this together with probability weightings applied to potential revenue provides a reasonable basis for 

confidence that the Forecast Net Revenue will be achieved. However, even if Forecast Net Revenue is achieved, 

it is possible that the source and nature of such revenue could vary from that forecast in this Prospectus. 

Furthermore, investors should be aware that the timing of actual events and the magnitude of their impact might 

differ from that assumed in preparing the AGAAP pro-forma Forecasts and that this may have a materially 

positive or negative effect on Babcock & Brown’s future financial performance or financial position. 

Therefore, the AGAAP pro-forma Forecasts should not be regarded as a representation or warranty with respect 

to its accuracy or the accuracy of the best estimate assumptions or that the Group will achieve, or is likely to 

achieve, any particular results. Investors are advised to review the AGAAP pro-forma Forecasts set out below in 

conjunction with the key assumptions underlying the AGAAP pro-forma Forecasts in Section 5.3.2.2, the 

Independent Accountants’ Report on the pro-forma Forecasts set out in Section 6, the sensitivity analysis set out 

in Section 5.3.2.3, the risk factors set out in Section 7 and other information contained in this Prospectus. 

5.3.2.1 Pro-forma summary of forecast financial performance 

Year ended 31 December ($000) 8 2003A 2004F 2005F 


Net Revenue 

– Real Estate 70,994 83,527 119,462 




– Corporate Principal Investment and Funds Management 42,747 38,328 29,253 

Net Revenue 1 2 432,927 424,109 533,319 

Other revenue 1,188 

Net corporate interest income/(expense) (1,328) 5,759 20,977 

Operating costs 

– Payroll and related (96,714) (90,272) (108,214) 

– Facilities (29,300) (26,811) (24,879) 

– Other (53,737) (42,762) (49,389) 

Operating costs (179,751) (159,845) (182,482) 

Operating profit before bonuses, restructuring costs and 

goodwill amortisation 3 253,036 270,023 371,814 

Bonus expense (pro-forma) 4 5 (127,509) (153,900) 

Operating profit before restructuring costs and goodwill 

amortisation 142,514 217,914 



Operating profit before tax and goodwill amortisation 10 11 132,714 217,914 

117

SECTION 5 


Year ended 31 December ($000) 8 2003A 2004F 2005F 

Amortisation of goodwill (9,072) (36,287) 

Operating profit before tax 123,642 181,627 

Tax (63,195) 

NPAT (before deduction of BBIPL outside equity interest) 118,432 

Outside equity interest – 30% BBIPL 9 (35,530) 

Profit after tax attributable to members 82,902 

NOTES 

1. Net Revenue represents gross revenue calculated in accordance with AGAAP less cost of sales, and directly attributable expenses plus net contribution from 


2. To facilitate comparison with historical periods, and consistent with excluding the AGAAP accounting implications for the Restructure in the presentation 

shown above, profits or losses on the forecast sale of investments included in 2004 and 2005 Net Revenue are based on the AGAAP carrying amount of the 

investments at 31 December 2003 (before the fair value adjustments required as part of the Restructure) rather than the fair value of those investments which 

is reflected in the pro-forma statement of financial position at 31 December 2003. Net Revenue from the sale of any investments included in the statutory 

results of the Babcock & Brown Group for the period from 1 October 2004 to 31 December 2004 will be based on the fair value of those investments as at 

the date of the Restructure. Had 2004 and 2005 Forecast Net Revenue (and earnings) been based on fair value at 31 December 2003, forecast operating profit 

before goodwill amortisation and tax in 2004 and 2005 would decrease by $9.6 million and $0.3 million respectively. It should be noted that these amounts 

are discussed in this note for completeness only. In particular the pro-forma consolidated net profit before tax and goodwill amortisation of the restructured 

Group for the year ending 31 December 2004 that is discussed in Section 5.3.2.4 in relation to the allocation of carrying between pre- and post-IPO 

shareholders will calculate profits or losses on the sale of investments in 2004 based on the AGAAP carrying amount of those investments at 31 December 

2004 and not their fair value. 

3. The forecast financial information for 2004 and 2005 includes amortisation of goodwill. Goodwill of approximately $726 million is reflected in the AGAAP 

pro-forma balance sheet at 31 December 2003.The actual amount of goodwill that will be reflected in the Group’s statutory financial statements will only 

become known after the Restructure. Under AGAAP, this goodwill must be amortised over a period not exceeding 20 years. Goodwill is not amortised under 

Australian IFRS and because of accounting for the Restructure under Australian IFRS (see (a) in Section 5.4.4) no goodwill is expected to arise. 


remuneration policy outlined in Sections 4.7.2 and 4.7.4, will be paid in cash or cash equivalents.Therefore the full amount of the forecast bonus pool is 

expensed during 2004. In 2005, based on forecast exchange rates, the total bonus pool is forecast to be $178.4 million consistent with the stated remuneration 

policy. However, of this amount $24.5 million is expected to be treated as Bonus Deferral Rights (see Section 4.7.5). As the Bonus Deferral Rights relate to 

equity transactions there is no requirement under AGAAP to recognise an expense for this amount.The forecast AGAAP 2005 bonus expense based on 

forecast exchange rates is therefore $153.9 million.Were Babcock & Brown to elect to recognise an expense, the value attributed to the rights would be 

recognised as an expense over the vesting period of the rights consistent with Australian IFRS (see footnote 5, Section 5.4.2). In addition, consistent with 

current AGAAP, no amount has been forecast as an expense in the AGAAP pro-forma Forecasts in respect of Shares and Options allocated to the Employee 

Trusts (see Section 4.7.7) in either 2004 or 2005. 

5. The forecast bonus expense in 2004 and 2005 includes forecast amounts payable in connection with forecast ringfenced revenue as discussed in Section 4.7.3. 

6. Restructure costs – business closure relates to redundancy costs and related expenditure in connection with the effective closure in 2004 of the Group’s US tax 

exempt cross border leasing activities due to changes in US tax laws and to provisions associated with assignment of the lease on the Group’s existing New 

York Office space and moving to smaller premises. 


the capital raising and has been netted off against the Offer Proceeds consistent with AGAAP.The remainder, amounting to $1.5 million will be expensed 

during 2004. 

8. The difference between Net Revenue, net corporate interest income, operating costs, operating profit before bonuses and bonuses set out above for 2005 and 

the equivalent amounts in the Restated Financial Information in Section 5.2.2, relates solely to the application of forecast exchange rates for 2005 compared 

to the constant exchange rates based on the 2004 forecast exchange rate assumptions used in the Restated Financial Information. 

9. For statutory purposes Babcock & Brown will only own 70% of BBIPL. In Babcock & Brown’s consolidated financial statements the 30% interest in BBIPL 

held by the pre-IPO US Executive Stakeholders will be treated as an outside equity interest.The final interest may be subject to adjustment as referred to in 

Section 4.7.8. 

10.At 31 December 2003 and at the date of this Prospectus, Babcock & Brown held an effective 19.9% interest in Primelife Corporation Ltd which is reflected 

in the pro-forma statement of financial position at 31 December 2003 and in the Forecasts as an equity accounted investment. In August 2004, PrimeLife 

announced an expected loss for the year ended 30 June 2004 of $78 million.The equity accounted portion of this loss has been offset by a gain on the 

settlement of a financing liability for this investment. 

11.As noted in Section 5.3.2, the Forecast has been prepared before currency gains, losses and costs.The Group expects to make currency gains of approximately 

$3.8 million in 2004 on the close-out of hedges relating to the Group’s Australian operations and earnings and other foreign exchange differences. 

118


5.3.2.2 Key assumptions 

General assumptions 

The 2004 and 2005 forecasts are based on the following general assumptions: 

• No material adverse change in the legislative regimes and regulatory environments (including in relation to 

tax) in the jurisdictions in which Babcock & Brown or its key customers or suppliers operate which will 

materially impact on the Forecasts, including, inter alia, the extension of the PTC regime in the US (see 

further discussion in Sections 3 and 7) 

• No material amendment to any material agreement or arrangement relating to Babcock & Brown.The 

parties to those agreements and arrangements are assumed to continue to comply with the terms of all 

material agreements and arrangements 

• No material changes to Babcock & Brown’s accounting policies or to Australian Accounting Standards, 

International Financial Reporting Standards, Statements of Accounting Concepts or other mandatory 

professional reporting requirements including Urgent Issues Group Consensus Views or the Corporations 

Act which will have a material impact on the forecast financial information 

• Retention of key personnel 

• No material adverse change in interest rate environment 

• No material adverse change in the competitive environment in the industries in which Babcock & Brown 

operates 

• No material adverse changes in the prevailing political conditions in countries in which Babcock & Brown 

operates or that will materially impact on the forecast financial information 

• No material business acquisitions or disposals (other than those in the ordinary course of business) and 

included in the forecast financial information 

• No significant disruption to the operations, material disturbances, environmental costs or legal claims 

• No change in Babcock & Brown’s capital structure other than as set out in, or contemplated by, this Prospectus 

• The gross amount raised through the Offer totals approximately $550 million.The gross proceeds, less the 

costs of the Offer of approximately $27 million, will be retained by the Babcock & Brown with allocation 

occurring in line with the timetable 

• No significant change in the economic conditions prevailing in the countries and industries in which 

Babcock & Brown operates other than as set out in, or contemplated by, this Prospectus 

• Commitment of counterparties to new transaction structures and products developed by the Group 

119

SECTION 5 


Net Revenue 

Section 3 sets out the background and key drivers for each of the Business Groups and principal 

industries/activities in which they operate. 

Babcock & Brown currently relies on transactions to generate the majority of its revenue which comprises 

advisory, investment management and principal investment revenue streams.The Forecasts have been prepared on a 

transaction-by-transaction basis for each Business Unit in each Business Group having regard to revenue, direct 

cost, probability weightings and timing assumptions specific to each transaction. Specifically identified potential 

transactions are estimated to generate almost all the Forecast Net Revenues in 2004, and over 80% of the Forecast 

Net Revenues in 2005.The other 20% of the Forecast Net Revenue in 2005 has been principally based on 

Babcock & Brown’s historical track record of being able to originate and execute a certain number of previously 

unidentified transactions within each year, reflecting the experience and capability of the Group’s Executives. 

This portion of the 2005 Forecast Net Revenue also includes an estimate of revenues from new initiatives. 

Consistent with the basis of preparation described above, Forecast Net Revenue from principal investments 

included in the Forecasts incorporates assumptions on the probability, timing, percentage interest and purchase 

price or sale proceeds of acquisitions and disposals of investments by Babcock & Brown. In turn, assumptions 

relating to percentage ownership have been considered in determining which forecast investments are associates 

or subsidiaries and therefore equity accounted or consolidated in the Forecasts. Forecast Net Revenue also reflects 

the deferral of fee income for accounting purposes where Babcock & Brown has forecast fee income from 

entities that are equity accounted or consolidated in the Forecast Period. Under both AGAAP and Australian 

IFRS, where an entity is equity accounted, fee income earned from that entity in a particular period is deferred 

in proportion to Babcock & Brown’s investment in the entity.Where an entity is consolidated, such fee income is 

eliminated in full.This deferred income is recognised as revenue (i) over time as the related cost is expensed by 

the equity accounted or consolidated entity or (ii) at point of sale of the investment in the equity accounted or 

consolidated entity. As the ratio of acquisitions to disposals is expected to increase substantially following the IPO, 

the level of deferred income is expected to increase during the Forecast Period. 

The transactions underlying the Forecast Net Revenue are diversified in several ways: 

• By business activity - Spread across the Group’s various Business Units within its five Business Groups 

• By geography - The Group operates in over 13 countries worldwide 

• By revenue type - Advisory, Investment Management and Principal Investment revenues, including a 

combination of one-off, trailing and recurring revenue streams 

Transactions that are not completed as forecast may have an adverse impact on revenue as will changes in the 

timing of completion of transactions which could result in Forecast Net Revenue being shifted from one year to 

another in the Forecast Period, or beyond that timeframe. 

The Forecast Net Revenue is based on over 350 identified transactions over the Forecast Period, none of which 

are estimated to individually represent more than 5% of total Group revenues in either 2004 or 2005. 

A detailed discussion of the nature of and trends in underlying Forecast Net Revenue for each Business Group is 

contained in Section 3. 

120


Net corporate interest income 

Net corporate interest income comprises interest income on cash and cash equivalent balances held by the Group 

and interest expense on corporate debt facilities.The Forecasts assume that the Group will have excess cash of 

approximately $185 million as at 31 December 2005 reflecting, among other things, the capital raising, repayment 

of debt drawn down at 31 December 2003 amounting to approximately $120 million, repayment of debt drawn 

down since that date and capital allocations to investment projects. Interest income on unutilised cash and cash 

equivalent balances has been assumed using a rate of 6% per annum.This assumes that cash has been invested at a 

variety of different deposit rates. 

Operating expenses 

Forecast operating expenditure for the years ending 31 December 2004 and 2005 has been based on historical 

operating expenditure, adjusted for major expected changes such as assumed increases in headcount. Certain 

expenses have then been increased by factors of up to 5% per annum in the years ending 31 December 2004 and 

2005. Additional costs associated with operating as a publicly listed company have also been included in the 

Forecasts. 

Bonus expense 

The forecast bonus expense in the Forecast Period is based on a forecast annual bonus pool calculated in 

accordance with the remuneration policy set out in Section 4.7.2. In respect of the year ending 31 December 

2004, the full amount of the bonus pool, forecast to be $127.5 million, will be paid in cash or cash equivalents. 

In respect of the year ending 31 December 2005, the bonus pool is forecast to be $178.4 million. However, 

approximately $24.5 million of that amount will be paid in the form of Bonus Deferral Rights as set out in 

Section 4.7.5. As the Bonus Deferral Rights relate to equity transactions there is no requirement under AGAAP 

to recognise an expense for this amount.The forecast AGAAP bonus expense for the year ending 31 December 

2005 is therefore $153.9 million.Were Babcock & Brown to elect to recognise an expense, the value attributed to 

the rights would be recognised as an expense over the period to the vesting date of the rights consistent with 

Australian IFRS (see footnote 5, Section 5.4.2). 

Income tax 

Pro-forma income tax expense is forecast to be $63.2 million in 2005.This reflects an effective tax rate of 29%. 

The effective tax rate for the year ending 31 December 2005 represents a blended tax rate arising from the tax 

rate applicable to the various jurisdictions in which the Group operates, and taking into account all applicable 

permanent differences. 

No income tax expense has been included in the pro-forma statement of financial performance for the year 

ending 31 December 2004 on the basis that the group structure in existence to the date of transaction reflects a 

private partnership. 

Babcock & Brown International Pty Ltd (BBIPL) will be the head company of an Australian consolidated tax 

group, which is formed as part of the Restructuring. It is not anticipated that the resetting of tax bases of the 

assets held by the consolidated group will have a material impact on the forecast income tax expense. 

Exchange rates 

The following Australian dollar exchange rates have been used in the preparation of the Forecasts: 

Years ending 

31 December 

2004 2005 

US Dollar 0.7220 0.7000 

Euro 0.5935 0.5792 

British Pound 0.3955 0.3894 

Japanese Yen 79.0193 76.5522 

Malaysian Ringgit 2.7429 2.6683 

121

SECTION 5 


5.3.2.3 Sensitivity analysis 

The AGAAP pro-forma Forecast has been based on certain economic and business assumptions about future 

events.The Forecast is considered to be sensitive to movements in the forecast exchange rate assumptions used. 

A summary of the likely impact of movements in these key assumptions on the forecast operating profit before 

goodwill amortisation and tax for 2004 and 2005 is set out below.The sensitivity analysis has been prepared on an 

annualised basis. It is intended to provide a guide only and variations in actual performance may exceed or be less 

than the ranges shown. 

Care should be taken in interpreting this information.This analysis treats each movement in isolation from 

possible movements in other assumptions, which may not be the case. Movements in one assumption may have 

offsetting or compounding effects on other variables, the effects of which are not reflected in the following 

analysis. In addition, it is possible that more than one assumption may move at any one point in time, giving rise 

to cumulative, or offsetting effects, which also are not reflected in this analysis. 

Further, the Group would typically respond to any material adverse change in conditions by taking appropriate 

action to minimise, to the extent possible, any adverse effect on profits and dividends.The effect of any such 

mitigating action has been excluded from the following analysis. 

Sensitivity of forecast operating profit before goodwill amortisation to movements in exchange rates ($ million) 

Movement 

±1% ±5% ±10% 

2004 

US Dollar 0.34 1.75 3.70 

Euro 0.22 1.16 2.44 

British Pound 0.05 0.28 0.58 

2005 

US Dollar 0.44 2.28 4.82 

Euro 0.25 1.32 2.79 

British Pound 0.08 0.44 0.92 

122


5.3.2.4 Allocation of 2004 earnings between pre- and post-IPO shareholders 

In view of the change in ownership of the Group which will be brought about by the IPO, it will be necessary 

to apportion the earnings for 2004 between the pre-IPO and the post-IPO periods. Consistent with AGAAP, the 

post-IPO period only will be reflected in the statutory financial statements of the Group at 31 December 2004. 

Whilst the change in ownership may not in fact occur until early October 2004, the Board has decided to 

recognise the change as at 30 September 2004 to coincide with the quarter end closest to the expected IPO date. 

To provide certainty for post-IPO Shareholders, the Group will use its best endeavours to ensure a minimum 

after tax earnings of the Group for the period from 1 October 2004 to 31 December 2004.This minimum has 

been determined as $14,485,735 which represents 25% of the AGAAP pro-forma consolidated forecast profit 

before tax and goodwill amortisation for the year ending 31 December 2004 less tax calculated at the forecast 

effective tax rate for 2005 (29%) and less the forecast AGAAP consolidated goodwill amortisation for that period. 

To ensure the post-IPO Shareholders receive at least that minimum, the profit after tax of the Group for the 

period from 1 October 2004 to 31 December 2004 will be calculated as: 

(a) 

the greater of: 

(i) $33,178,500; and 

(ii) 25% of the pro-forma consolidated net profit before tax and goodwill amortisation of the restructured 

Group for the year ending 31 December 2004 based on the actual results of operations and prepared on 

a basis consistent with the 2004 Forecast; less 

(b) 

tax on the amount determined under (a) calculated at the lower of: 

(i) 29%; and 

(ii) the tax expense of the restructured Group for the period from 1 October 2004 to 31 December 2004 as 

a percentage of the Group’s net profit before tax for the same period; less 

(c) 

the AGAAP consolidated goodwill amortisation expense of the restructured Group for the period from 

1 October 2004 to 31 December 2004. 

The total profit before tax and goodwill amortisation earned by the restructured Group for the year ending 

31 December 2004 will therefore be dealt with as follows: 

• By varying the post-IPO bonus pool as required by condition (a) above (and condition (b) if required), profit 

before tax and goodwill earned post-IPO will be adjusted in accordance with the formula outlined above 

• The balance will be attributable to the pre-IPO owners.This balance less any actual tax payable by the 

Group in respect of both the pre-IPO and post-IPO periods and goodwill amortisation, if any, applicable in 

the pre-IPO period will be paid to pre-IPO owners. 

$60 million of the amount payable to pre-IPO owners will be paid immediately following the IPO.The 

remainder will be paid in February 2005, after the announcement of the Group’s audited result for the period to 

31 December 2004. 

The effect of the formula outlined above is that the total compensation payment for the period from 1 October 

2004 to 31 December 2004 may vary (increase or decrease) from the indicative 50% of total Net Revenue, set 

out in the Babcock & Brown remuneration policy. In particular, if proportionately more pre-compensation profits 

are earned in the period from 1 October 2004 to 31 December 2004 than in the pre-IPO period, the total 

compensation expense for the period from 1 October 2004 to 31 December 2004 is likely to exceed 50% of Net 

Revenue for that period. 

123

SECTION 5 


124 

Post-IPO Shareholders should be aware that as a consequence of the method by which the Group is 

endeavouring to provide a minimum level of after tax earnings for the last quarter of the 2004 year as set out 

above, in the circumstances where the actual after tax earnings of the Group during that period exceed that 

minimum, a portion of that excess will be paid to the pre-IPO owners in accordance with the formula above. 

At or about the time of the release of its statutory financial results for the period to 31 December 2004, Babcock 

& Brown will also release the pro-forma statement of financial performance for the restructured Group for the 

year ending 31 December 2004 which is used to determine the pro-forma net profit before tax referred to in 

item a(ii) of the above formula. 

The cash balance in the pro-forma statement of financial position as at 31 December 2003 is net of the pre-IPO 

distribution of approximately $128 million to the pre-IPO owners.This distribution was sized to allow every 

Executive Stakeholder to meet its liability for tax arising from the Restructure.This distribution plus the 

$60 million payment referred to above will, in part, be met from the Executive Stakeholder loan repayments 

referred to in Section 8.3.3 and may, to the extent that the cash balance has been invested since the balance date, 

be met from the IPO proceeds. 

5.4 AUSTRALIAN IFRS FINANCIAL INFORMATION 

5.4.1 Adoption of International Accounting Standards 

For reporting periods beginning on or after 1 January 2005, Babcock & Brown will be required to comply with 

Australian equivalent International Financial Reporting Standards (Australian IFRS) as issued by the Australian 

Accounting Standards Board (AASB). 

The financial information presented in this document that is referred to as being presented on an Australian IFRS 

basis reflects the series of standards adopted by the AASB in July 2004. 

To provide an indication of the impact of Australian IFRS on the performance and position of the Group, the 

Group has prepared a pro-forma statement of financial performance for the year ended 31 December 2003, 

pro-forma forecasts of financial performance for the years ending 31 December 2004 and 2005 and a pro-forma 

statement of financial position as at 31 December 2003 under Australian IFRS on a basis otherwise consistent 

with the equivalent AGAAP Financial Information in Section 5.3.This information is presented below with a 

summary of some of the key differences between AGAAP and Australian IFRS set out in Section 5.4.4. Detailed 

reconciliations between the historical financial information prepared under AGAAP and under Australian IFRS 

are set out in notes 5 and 6 of Appendix A. 

As outlined in note (a) in Section 5.4.4, the accounting for the Restructure under Australian IFRS is significantly 

different than under AGAAP. 

Investors are advised to review the Australian IFRS pro-forma Forecasts in conjunction with the description of 

the basis of preparation of the AGAAP pro-forma Forecasts set out in Section 5.3.2. 

The Australian IFRS pro-forma Forecast set out in Section 5.4.2 has been presented before: 

• The Australian IFRS accounting implications for the Restructure 

• Income tax in relation to 2004 

• Outside equity interest relating to interests of the pre-IPO US Executive Stakeholders held directly in 

BBIPL under the new structure in relation to 2004 

• Currency gains, losses or costs 

but after the: 

• Offer Proceeds net of IPO and capital raising costs of $523 million 

• Transaction costs associated with the Restructure that, for Australian IFRS accounting purposes, are required 

to be expensed rather than offset against the proceeds of the capital raising 

Babcock & Brown will present actual results for 2005 under Australian IFRS. Comparative Australian IFRS 

information will also be presented with the actual results for 2005.


5.4.2 Pro-forma summary of forecast financial performance under Australian IFRS 

Year to 31 December ($000) 2003A 2004F 2005F 


Net Revenue by division 

– Real Estate 73,723 88,582 119,462 




– Corporate Principal Investment and Funds Management 42,747 38,328 29,253 

Net Revenue 1 2 435,656 429,164 533,319 

Other revenue 1,188 

Net corporate interest income/(expense) (1,328) 5,759 20,977 

Operating costs 

– Payroll and related (96,714) (90,272) (108,214) 

– Facilities (29,300) (26,811) (24,879) 

– Other (53,737) (42,762) (49,389) 


Operating profit before bonuses, restructuring costs and 

goodwill amortisation 4 255,765 275,078 371,814 

Bonus expense (pro-forma) 5 6 (133,009) (180,500) 

Operating profit before restructuring costs and goodwill 

amortisation 142,069 191,314 



Operating profit before tax 10 132,269 191,314 

Tax (55,481) 

NPAT (before deduction for BBIPL outside equity interest 9 ) 135,833 

Outside equity interest – 30% BBIPL 9 (40,750) 

Profit after tax attributable to members 95,083 

NOTES 

1. Net Revenue represents gross revenue calculated in accordance with Australian IFRS less cost of sales and, directly attributable expenses plus net contribution 

from equity accounted and consolidated non-strategic investments. 

2. As noted in Section 5.4.4(a) below, accounting for the Restructure of the Babcock & Brown Group under Australian IFRS will not involve revaluing all assets 

and liabilities to fair value on the date of the Restructure.The carrying amount/fair value difference (see footnote 2, Section 5.3.2.1) that arises in the AGAAP 

statutory accounts will not therefore arise under Australian IFRS. 

3. Operating costs comprise total expenses calculated in accordance with Australian IFRS but exclude cost of sales, expenses directly related to transactions, 

expenses of consolidated but non-strategic investments, bonuses and restructuring costs. 

4. As noted in Section 5.4.4(a) no significant new goodwill is expected to arise under Australian IFRS as a result of the Restructure. Should any goodwill arise 

because of the Restructure, Australian IFRS does not require amortisation of that goodwill. 


remuneration policy outlined in Sections 4.7.2 and 4.7.4, will be paid in cash or cash equivalents.Therefore the full amount of the forecast bonus pool is expensed 

during 2004. In 2005, the total bonus pool is forecast to be $178.4 million consistent with the stated remuneration policy. However, of this amount $24.5 million 

is expected to treated as Bonus Deferral Rights (see Section 4.7.5). Under Australian IFRS the Bonus Deferral Rights are treated as equity transactions and the 

related expense is recognised on a pro rata basis from the date the related service commences (1 January 2005) to the vesting date (approximately five years).The 

expense will be recognised in equal instalments over the 2005-2009 financial years.The expense recognised in 2005 is $4.7 million. In addition,Australian IFRS 

requires that an expense be recognised for the Shares and Options allocated to the Employee Trusts (see Section 4.7.7).The expense for the Shares and Options 

allocated to the Employee Trusts is recognised on a pro rata basis from the grant date to the vesting date (approximately four years).The expense recognised in 

2004 and 2005 in respect of the Shares and Options allocated to the Employee Trusts is $5.5 million and $21.9 million respectively.This expense will be subject to 

revision at the IPO date. 

125

SECTION 5 


6. The forecast bonus expense in 2004 and 2005 includes forecast amounts payable in connection with forecast ringfenced revenue as discussed in Section 4.7.3. 

7. Restructure costs – business closure relates to redundancy costs and related expenditure in connection with the effective closure in 2004 of the Group’s US cross 

border leasing activities due to changes in the US tax laws and to provisions associated with assignment of the lease on the Group’s existing New York office 

space and moving to smaller premises. 


the capital raising and has been netted off against the Offer Proceeds consistent with Australian IFRS.The remainder, amounting to $1.5 million will be 

expensed during 2004. 

9. For statutory purposes Babcock & Brown will only own approximately 70% of BBIPL. In Babcock & Brown’s consolidated financial statements under 

Australian IFRS the approximately 30% interest in BBIPL held by the pre-IPO US Executive Stakeholders will be treated as an outside equity interest.This 

amount for 2005 is $40.8 million.The final interest may be subject to adjustment as referred to in Section 4.7.8. 

10.At 31 December 2003 and at the date of this Prospectus, Babcock & Brown held an effective 19.9% interest in Primelife Corporation Ltd which is reflected in 

the pro-forma statement of financial position at 31 December 2003 and in the forecasts as an equity accounted investment. In August 2004, Primelife 

announced an expected loss for the year ended 30 June 2004 of $78 million.The equity accounted portion of this loss has been offset by a gain on the 

settlement of a financing liability for this investment. 

As noted in Section 5.4.1, the Australian IFRS pro-forma Forecast has been prepared before the accounting 

implications of the Restructure. Having regard to the potential adjustments under Australian IFRS: 

• No adjustment is required to restate the profit on investments sold (see footnote 2, Section 5.3.2.1) as in the 

context of the Restructure, Australian IFRS does not require all assets and liabilities to be carried at fair 

value (see (a) in Section 5.4.4) 

• The foreign exchange adjustment relating to the closed hedges in relation to the Group’s Australian 

operations and earnings and other foreign exchange differences (see footnote 11, Section 5.3.2.1), 

amounting to approximately $3.8 million is required under Australian IFRS 

• No goodwill is expected to arise on the Restructure and, in any event, Australian IFRS does not require 

amortisation of goodwill 

• Australian IFRS will also recognise an outside equity interest in respect of pre-IPO US Executive 

Stakeholders’ holdings in BBIPL 

Key Australian IFRS assumptions 

Other than as noted below, the key assumptions set out in Section 5.3.2.2 in respect of the AGAAP pro-forma 

summary of forecast financial performance apply equally to the Australian IFRS pro-forma forecast financial 

performance set out above. 

Net Revenue 

Forecast Net Revenue under Australian IFRS for the year ending 31 December 2004 incorporates an estimated 

$5 million value increment for investment properties. 

Bonus expense 

Under Australian IFRS, the value of the Bonus Deferral Rights to be issued at partial payment of the bonus pool 

for the year ending 31 December 2005 are amortised over the period to the vesting date of the rights.This results 

in an increase to the forecast bonus expense for the year ending 31 December 2005 of $4.7 million. 

Under Australian IFRS, the value of Shares and Options allocated to the Employee Trusts immediately prior to the 

Restructure (see Section 4.7.7) are recognised on a pro rata basis from the grant date to the vesting date 

(approximately four years).The forecast bonus expense under Australian IFRS includes $5.5 million and $21.9 million 

for the years ending 31 December 2004 and 31 December 2005 respectively relating to these Shares and Options. 

This expense will be subject to revision at the IPO date. 

126


5.4.3 Pro-forma statement of financial position under Australian IFRS 

As at 31 December ($000) 2003 

Assets 










Plant, property and equipment 19,539 





Liabilities 





Transportation equipment notes payable 505,888 


Other notes payable 131,595 

Shareholder dividend payable 12,981 





Net assets 810,643 

Equity 

Shareholders’ interests 540,994 


BBIPL 231,867 

Other minorities 37,782 

Total equity 810,643 

127

SECTION 5 


5.4.4 Differences between AGAAP and Australian IFRS 

The differences between AGAAP and Australian IFRS identified by Babcock & Brown as potentially having a 

significant effect on the financial position and financial performance of Babcock & Brown are summarised below. 

The summary should not be taken as an exhaustive list of all of the differences between AGAAP and Australian 

IFRS. Further differences may be identified prior to the release of the Group’s first statutory accounts in respect 

of 2005. No attempt has been made to identify all disclosure, presentation or classification differences that would 

affect the manner in which transactions or events are presented. 

(a) 

Accounting for the Restructure of the Babcock & Brown Group – Under AGAAP, consolidated 

accounts are prepared by the legal parent of a group.Where, as in the case of the Babcock & Brown 

Restructure, a new parent entity is interposed above an existing group, that parent entity is deemed to 

have acquired the existing group at fair value.This triggers the recognition of (i) adjustments to 

recognise the net assets acquired at their fair values and (ii) goodwill in the legal parent’s consolidated 

accounts as the difference between the fair value of the net assets acquired and the value of the deemed 

consideration. 

Australian IFRS requires that the acquirer in a business combination be identified as the party which 

gains control of another.This means that in a reverse takeover situation or where an existing group is 

acquired by a shell company, the legal acquirer may not be the parent for the purposes of the group’s 

consolidated financial reporting. Specifically in the case of the Babcock & Brown Restructure, 

notwithstanding that BBH is acquired by BBIPL and that Babcock & Brown is the legal parent of the 

Group, because BBIPL and Babcock & Brown were effectively shell companies immediately prior to the 

Restructure, the consolidated financial statements of the Group are prepared as if BBH were the parent. 

As BBH was the parent of the Group immediately prior to the Restructure, under Australian IFRS it is 

only required to apply the rules of acquisition accounting (and hence to recognise goodwill) to those 

parts of the Group it did not control immediately prior to the Restructure. As these parts of the Group 

are relatively minor, under Australian IFRS no significant new goodwill or fair value adjustments are 

expected to be recognised due to the Restructure at the IPO date and no such items have been 

reflected in the pro-forma statement of financial position of the Babcock & Brown Group as at 

31 December 2003. 

(b) 

Investment properties – Under AGAAP, investment properties are typically carried at cost or market 

value with fair value adjustments reflected through the asset revaluation reserve. Decreases are also 

recognised through the asset revaluation reserve to the extent of previously recognised increments and 

otherwise are charged as an expense through the statement of financial performance. 

Under Australian IFRS, changes in the fair value of investment properties are reflected directly in profit 

and loss. 

(c) 

Deferred taxes – Under AGAAP the tax effect of items of income and expense that are recognised in 

the statement of financial performance in one period but are taxable or deductible in other years are 

included in the calculation of the accounting income tax expense and reflected as deferred tax assets and 

liabilities in the statement of financial position. 

Australian IFRS introduces a balance sheet method of accounting for taxation. Under this approach, 

deferred tax is calculated as the tax expected to be payable or recoverable on differences between the tax 

bases of assets and liabilities and their carrying amounts for financial reporting purposes.Therefore, if an 

asset was held at valuation with changes in fair value recognised in an asset revaluation reserve, no deferred 

tax would be recognised under AGAAP but a deferred tax liability would be recognised under Australian 

IFRS. 

128


(d) 

Financial Instruments and Hedging – Under AGAAP, it is permissible to hold certain financial 

instruments at cost (for example, equity investments not held for trading purposes). Under Australian 

IFRS, broadly all financial instruments other than debt and investments held to maturity must be held at 

fair value. Fair value adjustments are made through equity when the underlying asset has been 

designated as available for sale and through profit and loss for derivatives, trading assets and where the 

reporting entity elects to reflect the adjustment in this manner.When a financial instrument designated 

as available for sale is sold, any cumulative fair value adjustments reflected in equity in respect of that 

instrument are released through profit and loss. Unless specifically identified otherwise, Babcock & 

Brown intends to designate its financial instruments as available for sale. 

Under AGAAP, where a derivative is held to hedge a forecast transaction, gains and losses on those 

instruments are deferred and brought to account in the same period as the hedged transactions. Under 

Australian IFRS, derivatives may only be classified as hedges of forecast transactions where hedge 

designation, documentation and effectiveness tests can be met. If these tests are satisfied, then the 

hedging derivative is measured at fair value and gains and losses are reflected directly in equity until the 

hedged transaction occurs when they are released to profit and loss. For fully effective hedges, this results 

in a profit and loss outcome similar to AGAAP. However, to the extent that hedges do not satisfy the 

above tests then all or some of the gain or loss is immediately reflected in profit and loss. 

(e) 

(f) 

Non-current assets held for sale – AGAAP requires that all non-current assets with limited useful lives 

be depreciated over that useful life. Australian IFRS provides that where there is a clear intention to sell 

a non-current asset within 12 months and that non-current asset is designated as held for sale, no further 

depreciation should be provided. 

Share Based Payments – Under AGAAP there is no requirement to recognise an expense in respect of 

Share based payments. Public companies are required to disclose the value of equity instruments granted 

to directors and some entities have recognised an expense for this amount but there is no uniformity of 

practice and no requirement to recognise an expense. 

Under Australian IFRS, where an equity instrument is granted to an employee, the value of that 

instrument must be determined at the date of grant and that value must be expensed on a pro rata basis 

between the date of grant and the date the instrument fully vests with the employee. 

(g) 

Comparative Period – Under AGAAP, the consolidated statutory financial statements of the Group for 

2004 will only include the results of operations for the period from the IPO date to 31 December 2004. 

Australian IFRS will apply for the year ending 31 December 2005 and Australian IFRS requires that a 

comparative period be presented in the consolidated financial statements at that date. As noted under (a) 

above, under Australian IFRS, BBH is the deemed parent of the Babcock & Brown Group following the 

IPO. As BBH existed for all of 2004, the comparative period in the 2005 financial statements will be the 

full year ending 31 December 2004 rather than the abridged period under AGAAP. 

129

SECTION 5 


This page has been left blank intentionally 

130


INDEPENDENT 

ACCOUNTANTS' 

REPORTS 

131

SECTION 6 

INDEPENDENT ACCOUNTANTS’ REPORTS 

TRANSACTION SUPPORT 

9 September 2004 

The Ernst & Young Building 

321 Kent Street 

Sydney NSW 2000 

Australia 

GPO Box 2646 


Tel 61 2 9248 5555 

Fax 61 2 9248 5212 

DX Sydney Stock 

Exchange 10172 

The Directors 


Level 39, Chifley Tower 

2 Chifley Square 

SYDNEY NSW 2000 

Dear Directors 

Independent Accountant’s Report on Pro-Forma Forecast Financial Information 

Ernst & Young Transaction Advisory Services Limited has prepared this Independent Accountant’s Report 

(the “Report”) in relation to certain pro-forma consolidated forecast financial information of Babcock & Brown 

Limited (“Babcock & Brown”) for the two years ending 31 December 2005 for inclusion in a Prospectus to be 

dated on or about 9 September 2004 (the “Prospectus”) relating to the initial public offering (“IPO”) of shares in 


Expressions defined in the Prospectus have the same meaning in this Report. 

The nature of this Report is such that it can be given only by an entity, which holds an Australian Financial 

Services License under the Corporations Act. Ernst & Young Transaction Advisory Services Limited holds the 

appropriate Australian Financial Services License. 

Scope 

You have requested Ernst & Young Transaction Advisory Services Limited to prepare a report, for inclusion in the 

Prospectus on the pro-forma consolidated forecast profit and loss statement of Babcock & Brown for the two 

years ending 31 December 2005 (the “Forecast”) as set out in Sections 5.3.2.1 and 5.4.2 of the Prospectus. 

The Forecast is presented in accordance with applicable Accounting Standards in Australia (“AGAAP”) and 

Australian equivalents to International Financial Reporting Standards (“Australian IFRS”).The basis of Australian 

IFRS is set out in Section 5.4.4 of the Prospectus. 

Our Report relates only to the Forecast referred to above and does not extend to any other forecast financial 

information included in the Prospectus including the restated statements of forecast financial performance set out 

in Section 5.2.2 of the Prospectus. 

The Forecast has been presented as if the Restructure had occurred as at 31 December 2003 and the initial 

public offering and related capital raising occurred on 30 September 2004. However, the Forecast does not 

incorporate the financial implications of the fair value adjustments to assets and liabilities as part of the 

application of purchase price accounting under AGAAP or the forecast gains and losses on the close-out 

of hedges related to the structure of the Group pre-IPO. These items are discussed in Section 5.3.2.1 of 

the Prospectus. 

Babcock & Brown currently relies on transactions to generate the majority of its revenue. Investors are 

encouraged to read Section 5.3.2 of the Prospectus which summarises the basis of preparation of the Forecast 

and, due to the nature of Babcock & Brown’s business, the additional uncertainties in relation to the Forecast. 

Responsibility 

The Directors are responsible for the preparation and presentation of the Forecast, including the best-estimate 

assumptions, which include the pro-forma transactions, on which they are based.The Forecast has been prepared 

for inclusion in the Prospectus.We disclaim any assumption of responsibility for any reliance on this Report or 

on the Forecast to which it relates for any purposes other than for which it was prepared.This report should be 

Transaction Support is a part of Ernst & Young Transaction Advisory Services Limited 

ABN 87 003 599 844 Australian Financial Services Licence No. 240585 

Liability limited by the Accountants Scheme, approved 

under the Professional Standards Act 1994 (NSW). 

132


read in conjunction with the full Prospectus. 

Ernst & Young Transaction Advisory Services Limited is liable for the content of this report. Babcock & Brown is 

liable for the remainder of the Prospectus, other than the Independent Accountant’s Report on Reviewed 

Historical Pro-Forma Financial Information. 

Review of Directors’ Best-Estimate Assumptions 

Our review of the best-estimate assumptions underlying the Forecast was conducted in accordance with the 

Australian Auditing and Assurance Standard AUS 902 “Review of Financial Reports”. Our procedures consisted 

primarily of enquiry and comparison and other such analytical review procedures we considered necessary.These 

procedures included discussion with the Directors and management of Babcock & Brown and have been 

undertaken to form an opinion whether anything has come to our attention which causes us to believe that: 

(a) the best-estimate assumptions do not provide a reasonable basis for the preparation of the Forecast; 

(b) in all material respects, the Forecast is not properly compiled on the basis of the best-estimate assumptions; 

and 

(c) the Forecast is not presented fairly in accordance with the recognition and measurement principles prescribed 

in Accounting Standards and other mandatory professional reporting requirements in Australia, Australian 

IFRS and the accounting policies of Babcock & Brown disclosed in note 1 of Appendix A of the Prospectus. 

The Forecast has been prepared by the Directors to provide investors with a guide to Babcock & Brown’s 

potential future financial performance based upon the achievement of certain economic, operating, transactional 

and investment assumptions about future events and actions that have not yet occurred and may not necessarily 

occur. There is a considerable degree of subjective judgement involved in the preparation of the Forecast. Actual 

results may vary materially from those Forecast and the variation may be materially positive or negative. 

Accordingly, investors should have regard to the Risk Factors set out in Section 7 of the Prospectus and 

Sensitivity Analysis set out in Section 5.3.2.3 of the Prospectus. 

The Forecast set out in Section 5.4.2 of the Prospectus has been prepared using Australian IFRS.The principal 

differences between AGAAP and Australian IFRS are set out in Section 5.4.4 of the Prospectus. 

Our review of the Forecast, that is based on best-estimate assumptions, is substantially less in scope than an audit 

examination conducted in accordance with Australian Auditing and Assurance Standards. A review of this nature 

provides less assurance than an audit.We have not performed an audit and we do not express an audit opinion on 

the Forecast included in the Prospectus. 

Statement 

Based on our review of the Forecast as set out in Sections 5.3.2.1 and 5.4.2 of the Prospectus, which is not an 

audit, and based on an investigation of the reasonableness of the Directors’ best-estimate assumptions giving rise 

to the prospective financial information, nothing has come to our attention which causes us to believe that: 

(a) the Directors’ best-estimate assumptions set out in Sections 5.3.2.2 and 5.4.2 of the Prospectus do not provide 

a reasonable basis for the preparation of the Forecast; 

(b) the Forecast is not properly compiled on the basis of the Directors’ best-estimate assumptions; and 

(c) the Forecast is not presented fairly in accordance with the recognition and measurement principles prescribed 

in Accounting Standards and other mandatory professional reporting requirements in Australia, Australian 

IFRS and the accounting policies of Babcock & Brown disclosed in note 1 of Appendix A of the Prospectus 

as applied in Australia for presenting pro-forma forecasts in Prospectus documents. 

The underlying assumptions are subject to significant uncertainties and contingencies often outside the control of 

Babcock & Brown and the Directors. If events do not occur as assumed, actual results achieved and distributions 

provided by Babcock & Brown may vary significantly from the Forecast. Accordingly, we do not confirm or 

guarantee the achievement of the Forecast, as future events, by their very nature, are not capable of independent 

133

SECTION 6 


substantiation. 

Subsequent Events 

Apart from the matters dealt with in this Report, and having regard to the scope of our Report, to the best of 

our knowledge and belief no material transactions or events outside of the ordinary business of Babcock & 

Brown have come to our attention that would require comment on, or adjustment to, the information referred to 

in our Report or that would cause such information to be misleading or deceptive. 

Independence or Disclosure of Interest 

Ernst & Young Transaction Advisory Services Limited does not have any interest in the outcome of the proposed 

transaction other than in connection with the preparation of this Report. Ernst & Young has prepared an 

Independent Accountant’s Report on Reviewed Pro-Forma Historical Financial Information and participated in 

due diligence procedures. Ernst & Young Transaction Advisory Services Limited will receive a professional fee for 

the preparation of this Report. Ernst & Young also acts as the statutory auditor of Babcock & Brown. 

Yours faithfully 

Ernst & Young Transaction Advisory Services Limited 

Paul Siviour 

Director and Representative 

134


The Ernst & Young Building 



Australia 

Tel 61 2 9248 5555 

Fax 61 2 9248 5212 

DX Sydney Stock 

Exchange 10172 

9 September 2004 

GPO Box 2646 


The Directors 


Level 39, Chifley Tower 


SYDNEY NSW 2000 

Dear Directors 

Independent Accountant's Report on Reviewed Pro-Forma Historical Financial Information 

We have prepared this Independent Accountant's Report (“Report”) on historical pro-forma financial 

information of Babcock & Brown Limited and its consolidated entities (“Babcock & Brown”) for inclusion in a 

prospectus to be dated on or about 9 September 2004 (the “Prospectus”) relating to the initial public offering 

(“IPO”) of shares in Babcock & Brown. Expressions used in this report are the same as those used in the 

prospectus. 

Scope 

We have been requested to prepare a report reviewing the following information for inclusion in the Prospectus: 

• the pro-forma consolidated statements of financial performance of Babcock & Brown for the years ended 

31 December 2001, 2002 and 2003 and the pro-forma consolidated statements of cash flows for the years 

ended 31 December 2002 and 2003 prepared under applicable Accounting Standards in Australia 

(“AGAAP”); 

• the pro-forma consolidated financial performance for the year ended 31 December 2003 based on 

Australian equivalents to International Financial Reporting Standards (“Australian IFRS”).The basis of 

Australian IFRS is set out in Section 5.4.4 of the Prospectus; 

• the pro-forma consolidated statements of financial position of Babcock & Brown as at 31 December 2003 

under both AGAAP and Australian IFRS; and 

• accompanying notes information; 

(together the “Detailed Pro-Forma Historical Financial Information”).The Detailed Pro-Forma Historical 

Financial Information in relation to Babcock & Brown is included in Appendix A of the Prospectus. 

Financial information for the year ended 31 December 2001 has been derived from the audited consolidated 

financial statements of Babcock & Brown Holdings Inc (“BBH”), prepared under applicable Accounting Standards 

in the United States, which were previously audited by a firm other than Ernst & Young LLP, who issued an 

unqualified audit opinion on those financial statements.The Detailed Pro-Forma Historical Financial Information 

relating to the years ended 31 December 2002 and 2003 has been derived from the audited financial statements 

of BBH, prepared under applicable Accounting Standards in the United States, which were previously audited by 

Ernst & Young LLP. Ernst & Young LLP issued unqualified audit opinions on those financial statements. 

In preparing the financial statements the effects of all transactions between entities within the Babcock & Brown 

group have been eliminated. 

The pro-forma consolidated statements of financial performance have been prepared to the level of profit from 

ordinary activities before bonus expense and income tax expense.The pro-forma consolidated statements of 

financial performance exclude the impact of the historical bonus and taxation structures, which are not 

considered relevant given anticipated changes as a result of the IPO. 

Liability limited by the Accountants Scheme, approved 

under the Professional Standards Act 1994 (NSW). 

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SECTION 6 


Similarly, the pro-forma consolidated statements of cash flows do not include cash inflows or outflows relating to 

bonuses and income taxes. 

As noted by the directors in the Prospectus, the Detailed Pro-Forma Historical Financial Information does not 

purport to present the results of operations and cash flows of Babcock & Brown had it operated as a public listed 

entity during the periods indicated or to project results of operations or cash flows for any future period. 

Our Report relates only to the Detailed Pro-Forma Historical Financial Information referred to above and does 

not extend to any other pro-forma historical financial information included in the Prospectus including the 

restated statements of historical pro-forma financial performance set out in Section 5.2.2 of the Prospectus. 

The Detailed Pro-Forma Historical Financial Information has been adjusted to reflect certain one-off transactions 

and the internal restructure required to facilitate the IPO (the “Pro-Forma Adjustments”). In particular the proforma 

consolidated statements of financial performance and statements of cash flows have been adjusted to reflect: 

• the exclusion of the results of entities historically controlled by BBH but which will not form part of the 

Babcock & Brown group following the IPO; 

• the inclusion of the results of entities which were not historically controlled by BBH but will form part of 

the Babcock & Brown group following the IPO; 

• the exclusion of the impact of gains and losses on hedges of Australian operations entered into during the 

historical period when the US dollar was the main operating currency of BBH; and 

• the exclusion of the impact of historic outside equity interests which are eliminated under the new 

structure and recognise outside equity interests applicable to the pre-IPO US Executive Stakeholders' 

interests in BBIPL. 

The pro-forma consolidated statements of financial position have been adjusted to reflect: 

• the internal restructure required to facilitate the IPO and the intended structure of the Babcock & Brown 

group following the IPO; 

• the raising of new capital as part of the IPO; 

• the repayment of debt from the proceeds of the IPO; and 

• anticipated costs of the IPO and internal restructure. 

Details of these adjustments are set out in notes 3 and 4 of the pro-forma consolidated historic financial 

statements set out in Appendix A of the Prospectus. 

Responsibility 

The Directors of Babcock & Brown are responsible for the preparation and content of the Detailed Pro-Forma 

Historical Financial Information including determination of the Pro-Forma Adjustments. 

It is our responsibility to review the Detailed Pro-Forma Historical Financial Information and report on it.We 

disclaim any responsibility for any reliance on this Report or the financial information to which it relates for any 

purpose other than that for which it was prepared.This Report should be read in conjunction with the full 

Prospectus. 

Ernst & Young is liable for the content of this report. Babcock & Brown is liable for the remainder of the 

Prospectus, other than the Independent Accountant’s Report on Pro-Forma Forecast Financial Information. 

Review of Historical Financial Information 

We have performed a review of the Detailed Pro-Forma Historical Financial Information in order to state 

whether on the basis of the procedures described, anything has come to our attention that would indicate that 

the Detailed Pro-Forma Historical Financial Information as set out in Appendix A is not presented fairly in 

accordance with the recognition and measurement requirements (but not all of the disclosure requirements) of 

applicable Accounting Standards in Australia and Australian IFRS, as applicable. 

136


Our review of the Detailed Pro-Forma Historical Financial Information was conducted in accordance with the 

Australian Auditing and Assurance Standard AUS 902 “Review of Financial Reports”.We made such inquiries 

and performed such procedures as we, in our professional judgement, considered reasonable in the circumstances 

including: 

• a review of the adjustments used to translate the financial statements of BBH from applicable Accounting 

Standards in the United States to AGAAP; 

• analytical procedures on the pro-forma financial performance of Babcock & Brown for the relevant 

historical period; 

• a review of relevant audit work papers and other accounting records and other documents; 

• a review of the reasonableness of the Pro-Forma Adjustments as a basis for compiling the Detailed Pro- 

Forma Historical Financial Information; 

• a comparison of consistency in application of the recognition and measurement principles in Accounting 

Standards and other mandatory professional reporting requirements in Australia, and the accounting policies 

adopted by Babcock & Brown disclosed in note 1 of the notes to the Detailed Pro-Forma Historical 

Financial Information; 

• enquiry of Directors, management and others; and 

• a review of the adjustments used to translate the pro-forma financial information prepared under AGAAP to 

Australian IFRS. 

These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance 

provided is less than given in an audit.We have not performed an audit and, accordingly, we do not express an 

audit opinion. 

Review Statement 

Based on our review, which is not an audit, nothing has come to our attention which causes us to believe that 

the Detailed Pro-Forma Historical Financial Information does not present fairly: 

(a) (i) 

the pro-forma consolidated statements of financial performance of Babcock & Brown for the years 

ended 31 December 2001, 2002 and 2003 and the pro-forma consolidated statements of cash flows for 

the years ended 31 December 2002 and 2003; and 

(ii) the pro-forma consolidated statement of financial position of Babcock & Brown at 31 December 2003; 

in accordance with the Pro-Forma Adjustments, the recognition and measurement principles (but not all of the 

disclosure requirements) prescribed in Accounting Standards and other mandatory professional reporting 

requirements in Australia, and the accounting policies adopted by Babcock & Brown as disclosed in note 1 of the 

notes to the Detailed Pro-Forma Historical Financial Information; 

(b) (i) 

the pro-forma consolidated statement of financial performance of Babcock & Brown for the year ended 

31 December 2003; and 

(ii) the pro-forma consolidated statement of financial position of Babcock & Brown at 31 December 2003; 

in accordance with the Pro-Forma Adjustments and the recognition and measurement principles (but not all of 

the disclosure requirements) of Australian IFRS. 

Subsequent Events 

Apart from the matters dealt with in this Report and elsewhere in this Prospectus, and having regard to the scope 

of our Report, to the best of our knowledge and belief no material transactions or events outside of the ordinary 

business of Babcock & Brown subsequent to 31 December 2003 have come to our attention that would require 

comment on, or adjustment to, the information referred to in our Report or that would cause such information 

to be misleading or deceptive. 

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SECTION 6 


Independence or Disclosure of Interest 

Ernst & Young does not have any interest in the outcome of the IPO of shares in Babcock & Brown other than 

in the preparation of this Report, performing a review of forecast information and participation in due diligence 

procedures for which normal professional fees will be received. Ernst & Young also acts as statutory auditor for 


Yours faithfully 

Ernst & Young 

138

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SECTION 7 

RISK FACTORS 

There are a number of risks, both specific to Babcock & Brown and general investment risks, which may 

materially and adversely affect the future operating and financial performance and financial condition of Babcock 

& Brown and the value of the Shares.This Section describes a number of risks associated with an investment in 

Shares. Prospective investors should note that this list of risks is not exhaustive. 

Many of these risks are outside the control of Babcock & Brown and its Directors.There can be no guarantee 

that Babcock & Brown will achieve its stated objectives or that any forward-looking statements or forecasts will 

eventuate, nor can Babcock & Brown give an assurance that past performance (such as historical IRRs) will be 

repeated. 

Prior to making an investment decision, prospective investors should read the entire Prospectus and carefully 

consider the following risk factors. Investors should have regard to their own investment objectives and financial 

circumstances, and should consider seeking professional guidance from their stockbroker, solicitor, accountant or 

other independent professional advisor before deciding whether to invest. 

Babcock & Brown has a number of general policies and processes in place which help to mitigate these risks. 

These policies and processes are set out in Section 4.8. 

7.1 SPECIFIC RISKS 

7.1.1 Competition 

The financial services industry is intensely competitive and expected to remain so. Babcock & Brown competes 

on the basis of a number of factors, including the quality of advice and service, innovation, reputation and price. 

Over time, Babcock & Brown relies on the creation of new products and business lines within that environment. 

Many competitors are better capitalised, have a greater range of products and services, greater financial and 

marketing resources and larger customer bases than Babcock & Brown. 

7.1.2 Loss of key personnel 

Babcock & Brown’s performance is largely dependent on the talents and efforts of highly skilled individuals. 

Babcock & Brown’s continued ability to compete effectively depends on the ability to retain and motivate 

existing employees as well as attracting new employees. Section 4.7 sets out the Executive retention initiatives that 

Babcock & Brown has put in place. 

7.1.3 Large holdings by existing Shareholders and Executive Stakeholders 

When the Offer is completed the Executive Stakeholders and HVB will own or control approximately 54.2% 

and 11.9%, respectively of the Shares. In particular, a number of the Executive Stakeholders are on the Board and 

will have significant influence over the direction of the Group.The interests of these Executive Stakeholders may 

be different to those of other Shareholders.The Shares may remain tightly held with limited liquidity on ASX. 

The size of the Executive stakeholding significantly reduces the likelihood of a takeover of the Company. Certain 

Executive Stakeholders have entered into voluntary escrow arrangements, and other arrangements which will 

assist with the management of an orderly market should they wish to sell down post the escrow period.These are 

detailed in Sections 4.7.8 and 4.8.4. However, if HVB, or Executive Stakeholders following release of the escrow, 

did sell their shareholdings, it may adversely impact the market price of Shares. 

7.1.4 Employee misconduct 

Babcock & Brown runs the risk that employee misconduct may occur. Misconduct by employees could involve 

the improper use or disclosure of confidential information resulting in regulatory sanctions and serious 

reputational or financial harm.Whilst Babcock & Brown believes that its processes for preventing employee 

misconduct are adequate, it is not always possible to avoid employee misconduct and the precautions taken to 

detect and prevent this activity may not be effective in all cases. 

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7.1.5 Reputation and adverse publicity 

Babcock & Brown’s business relies to a large extent on relationships and a reputation for integrity and 

high-calibre professional services to attract and retain clients. As a result, if a client is not satisfied with the services 

provided or Babcock & Brown is involved in litigation relating to a transaction in which it is involved, it may be 

more damaging to Babcock & Brown than in other businesses. Babcock & Brown may incur significant legal 

expenses in defending itself against any litigation arising in such cases and may also incur significant reputational 

and financial harm if litigation is successful. 

The Group’s business has, over a number of years, included providing advice to numerous clients on leasing and 

other transactions. Some of those transactions are now subject to litigation involving the Group’s clients 

(including some actions commenced by the US Internal Revenue Service), and others may be litigated in the 

future. Babcock & Brown, as advisor, is typically not a party to the litigation, and is not exposed to the risk of 

material financial liability as a result of the litigation. However, as some of these actions involve alleged corporate 

tax shelters there is a higher than usual risk of potential adverse publicity surrounding the litigation, and this 

publicity may draw attention to Babcock & Brown’s role in the relevant transactions. As with any negative 

publicity, there is the potential for damage to the Group’s reputation and to the goodwill of the business. 

While Babcock & Brown has full ownership of the Babcock & Brown name it has allowed, on occasions, third 

parties to use the Babcock & Brown name in relation to certain activities, principally comprising joint venture 

activities in which Babcock & Brown is involved. 

7.1.6 Liability for advice/arranging 

Babcock & Brown’s business often involves providing advice and assisting in arranging transactions for third 

parties. In doing so Babcock & Brown could be held liable for this advice in certain circumstances. In order to 

mitigate this risk, Babcock & Brown seeks, wherever possible, to limit any potential liability to parties by way of 

contract to the fees paid on the transaction and generally includes express representations from the third party 

that Babcock & Brown has not provided any tax advice.The Group also carries indemnity insurance to help 

defray this risk. 

7.1.7 Transaction reliance 

Historically, a large proportion of revenues have been earned from fees on transactions that are sometimes paid 

conditional upon successful completion of the client’s transaction. As a result, high activity levels in any period are 

not necessarily indicative of continued high levels of activity in the following or any other period. In addition, 

when an engagement is terminated, whether due to the cancellation of a transaction due to market reasons or 

otherwise, Babcock & Brown may earn limited or no fees and may not be able to recoup the costs incurred prior 

to that termination. 

7.1.8 Market conditions 

Unfavourable financial or economic conditions may reduce the number and size of transactions on which 

Babcock & Brown provides advisory services. Unfavourable market conditions could also affect Babcock & 

Brown’s ability to engage in, or exit, principal investments as well as syndicate into key markets, correspondingly 

reducing revenues. 

7.1.9 Ability to access capital markets 

Babcock & Brown depends on a variety of markets as principal sources of funding for many transactions, including 

principal investment. Inability to access debt markets on acceptable terms would significantly limit the ability of 

Babcock & Brown to fund its activities. Further, an inability to procure debt funding for clients would limit 

Babcock & Brown’s ability to offer financing offerings and therefore reduce advisory and arranging revenues. 

Babcock & Brown also depends on a variety of equity investors to provide funding in transactions which are 

either not fully funded by Babcock & Brown or which are arranged by Babcock & Brown, for example, leasing 

transactions. Inability to access equity investors on acceptable terms would also significantly limit Babcock & 

Brown’s activities. 

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SECTION 7 

RISK FACTORS 

7.1.10 Use of capital 

Capital raised as a result of this Offer will be utilised for investment activities. Such investments made may be in 

relatively high risk, illiquid assets and Babcock & Brown may lose some or all of the amounts invested. Babcock 

& Brown may also be impacted by an inability to exit investments when desired, or to exit investments for full 

value, especially where assets acquired do not have an active secondary market (or that market is volatile) or for 

which there is only a limited number of investors. As a consequence, the value of an asset may ultimately be less 

than its apparent value.The success and profitability of Babcock & Brown will, in part, depend upon the Group 

investing in assets which have the ability to increase in value over time and where such value can be realised 

for cash. 

7.1.11 Relationship with key financiers 

In order to finance the transactions in which it is involved as either principal or advisor/arranger Babcock & Brown 

accesses a wide variety of forms of debt and equity capital and associated providers.These sources vary widely 

depending upon the transaction in question, for example in relation to Aircraft and Rail Operation Leasing (BBAM 

and BBRM) Babcock & Brown places significant reliance on two respective providers for the provision/sourcing of 

equity investment.While management is confident that alternative sources of financing could be found if required, 

Babcock & Brown has enjoyed long relationships with both of these entities and is confident of this continuing. 

7.1.12 Third-party obligations 

Babcock & Brown commonly invests alongside third parties in its investment transactions.The inability of 

co-investors to fulfil their obligations may result in Babcock & Brown being required to contribute additional 

capital that it did not initially envisage or not completing transactions that it otherwise might have completed. 

Babcock & Brown may also be exposed to credit or performance risk in respect of its investments and 

arrangements with other counterparties. For example, in UK PFI contracts, Babcock & Brown generally seeks to 

contract out construction and maintenance of facilities to third parties at pre-determined prices.To the extent 

that these parties cannot fulfil their contractual obligations (for example due to insolvency) Babcock & Brown 

may be required to source these services from other parties at some cost to itself. Babcock & Brown, where 

possible, seeks to contract with reputable parties of acceptable credit standing to mitigate such risks. Similar risks 

exist in relation to the Citta development at Parkville Gardens in Melbourne. 

7.1.13 Industry issues 

The business of Babcock & Brown has particular emphasis on the airline industry. General risks in relation to that 

industry include exceptional events such as SARS or terrorism. In addition there are more general business risks 

such as fuel costs and the level of general travel activity. 

Certain of Babcock & Brown’s investments are in operating companies with significant development components 

such as PrimeLife Corporation Limited and Environmental Infrastructure Limited.While the value of the assets 

may exceed the liabilities in these businesses, under normal operating conditions these businesses rely on cash 

flow to fund the development components.Therefore should cash flow be constrained this could have an adverse 

impact on the business and significantly impair the value of the investment. PrimeLife is currently seeking to raise 

funds to meet its cash flow requirements. If that raising is not successful the value of Babcock & Brown’s 

investment in PrimeLife may be significantly impaired. However, even in the circumstances of a complete loss, 

that loss would not be material in the context of the Forecasts. 

7.1.14 Regulatory environment 

Babcock & Brown is subject to extensive regulation in multiple jurisdictions. Babcock & Brown may be fined, 

prohibited from engaging in some business activities or subject to limitations or conditions on business activities. 

New laws or regulations or changes in the enforcement of existing laws or regulations applicable to clients may 

also adversely affect business performance. For example, there are currently pending bills in the US Congress 

which may potentially have an adverse effect on Babcock & Brown’s lease advisory and structured finance 

businesses, with provisions including: 

142


• a provision, with retroactive effect to November 2003, disallowing depreciation and interest deductions in 

transactions commonly known as LILOs and SILOs, and 

• a provision that would codify the “economic substance doctrine” which could make finance leasing a less 

attractive financing alternative and could negatively affect Babcock & Brown’s development of other 

structured finance lease products in the US 

These bills are not likely to involve penalties for Babcock & Brown but could potentially have a negative impact 

on future income. In addition, the mere existence of these proposals has substantially shut down this business and 

resulted in the redeployment of personnel previously engaged in this market to other areas or in some cases has 

led to a reduction in employees. 

7.1.15 US Promoter Penalty Examination (PPE) 

Like many companies in the financial services industry, Babcock & Brown is routinely subject to tax audits.At 

present, there is an ongoing examination being conducted by the US Internal Revenue Service (IRS).The IRS is 

looking into Babcock & Brown’s US affairs in relation to the years ended 31 December 1993 to 1999, with a view 

to determining whether Babcock & Brown should have made certain filings and registrations required under US 

tax law in relation to corporate tax shelters that may have been used by the Group’s clients in that period. 

At present, the IRS is still gathering information and reviewing documents.The IRS has not commenced 

proceedings against Babcock & Brown, nor has it issued an assessment for liability under the relevant provisions. 

However, there is no time limit requiring the IRS to conclude the audit by a specific date. 

It is uncertain whether or not the IRS will ultimately make a claim against Babcock & Brown as a result of its 

examination. If the IRS does make a claim, the amount is also highly uncertain, and could be within a wide 

range. Based on advice from its legal and financial advisors, the Group has made such provision as it considers 

appropriate in its financial statements in respect of this matter. 

7.1.16 Windpower/tax credits legislation 

Development of private sector funded windpower projects in a number of jurisdictions, including the US, is 

heavily dependent on government financial assistance (which is provided in a number of forms). In the US the 

Production Tax Credit (PTC) for renewable energy expired at the end of 2003 and an extension of the PTCs 

must be passed by Congress and signed by the President of the United States in order for Babcock & Brown’s 

wind projects to be progressed to the full extent anticipated.The extension of the PTC is included in a number 

of pending tax bills and is not regarded as controversial and is supported by both major parties in both houses, 

however, the timing of its enactment is uncertain. If these bills are not enacted, or are not enacted in their current 

form, the US windpower business may be adversely affected. See discussion on Forecasts in Infrastructure and 

Project Finance in Section 3 for additional discussion on the impact on Forecasts of a delay in the extension of 

the PTC regime. 

Similar risks are applicable to all other Babcock & Brown businesses which rely, in part, on a favourable 

legislature framework, including the Australian and European windpower and other regulated businesses. 

7.1.17 Provision of warranties on sale of businesses 

When Babcock & Brown disposes of assets it is sometimes required to provide warranties regarding the assets 

(and associated liabilities).These vary significantly in content and length required. Recent examples of sale 

contracts in which Babcock & Brown has provided certain warranties include UK businesses recently sold to 

Tagus Infrastructure Assets Limited (in August 2003) and Powergen Renewable Holdings Limited (in September 

2003). Babcock & Brown’s maximum ongoing liability under the warranties is £14 million and £5.3 million, 

respectively.These warranties expire in 2010. Babcock & Brown management has not received notice of any 

claims under either sale agreement and does not anticipate any such claims. 

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SECTION 7 

RISK FACTORS 

7.1.18 Interest rates 

Babcock & Brown, as a borrower of money, is potentially exposed to adverse interest rate movements that may 

increase the financial risk inherent in its business.While this risk may be reduced through interest rate hedging, 

such as interest rate swaps or other mechanisms, there is sometimes residual risk. 

Low interest rates may also have an adverse impact on the revenues of the Group’s leasing activities since lower 

interest rates may encourage debt funded acquisition of assets over finance leasing.The related tax deductions 

generated by some of the Group’s investment products also become less valuable in a low interest rate 

environment which may adversely impact the Group’s earnings. 

7.1.19 Inflation risk 

Depending on the anticipated cash flows from an investment, investment returns can be affected by changes in 

the rate of inflation in a particular jurisdiction or geographic region. 

7.1.20 Foreign exchange 

More than 50% of Babcock & Brown’s earnings are generated in currencies other than the Australian dollar, 

exposing the Group to adverse foreign exchange movements. As discussed in Section 4.9.5, Babcock & Brown 

has a policy of hedging the value of investments made in non-Australian markets. Since the majority of the 

Group’s expenses are denominated in the same currencies as the associated revenues, only the net income after 

total compensation is generally exposed to currency fluctuations. 

7.1.21 Tax 

The income tax expense included in the forecast statement of financial performance for the year ending 

31 December 2005 is predicated on the reorganisation of the Group and future operations of the Group being 

subject to the tax laws in the countries in which the Group operates on a basis that is consistent with current law 

and interpretation of the law. Any change to the current rate of company income tax in any of the jurisdictions 

where Babcock & Brown operates may impact on financial performance and cash flows, ability to pay dividends 

and Share price, which could impact Shareholder returns. Any changes to the current rates of income tax 

applying to individuals and trusts will similarly impact on Shareholder returns. In addition, any change in tax 

arrangements between Australia and other jurisdictions could affect the ability of the Group to restructure its tax 

affairs from a US domicile to an Australian domicile and thereby have an adverse impact on future net operating 

profit after tax, net operating cash flows and the level of dividend franking. 

7.1.22 Insurance 

Babcock & Brown has insurance, including Errors and Omissions (Professional Indemnity) and Directors and 

Officers insurance, which it believes to be commensurate with industry standards, and adequate having regard to the 

business activities of Babcock & Brown. However, there are risks that this will be insufficient to meet a very large 

claim or a number of large claims, that either Babcock & Brown or one of its investments is unable to secure 

insurance to satisfactorily cover all anticipated risks or that the cost of insurance will increase beyond anticipated 

levels. 

7.1.23 Information technology 

Babcock & Brown relies on various information systems, technology and software products to efficiently carry 

out its business.While Babcock & Brown has put in place procedures and plans to ensure that data is retained and 

that these systems are maintained to meet the demands of the business, widespread system failures may negatively 

impact on the Group’s performance. 

7.1.24 Change in accounting, legal and tax regimes 

Babcock & Brown operates in and across a variety of accounting, legal and tax regimes. Change in these regimes, 

whilst providing opportunities, could also limit the functionality of the financial structures that Babcock & Brown 

has developed for clients, which could impact on business performance, particularly of the Structured Finance 

Group. Further, any structured financial products utilised when principal investing may also be adversely impacted 

by changes in accounting, legal or tax regimes. 

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7.1.25 Accounting standards and reported income 

Babcock & Brown operates in a variety of jurisdictions, many with different accounting standards.The difference 

in accounts produced under US GAAP, Australian GAAP and Australian IFRS may be considerable. Please refer 

to Section 5.4.4 for a discussion of the impact of reporting under Australian IFRS. 

Babcock & Brown’s accounting policies and methods are fundamental to how it records and reports its financial 

position and results of operations. Babcock & Brown’s management must exercise judgement in selecting and 

applying many of these accounting policies and methods so that not only do they comply with generally 

accepted accounting principles but that they also reflect the most appropriate manner in which to record and 

report Babcock & Brown’s financial position and results of operations. 

In some cases, management must select an accounting policy or method from two or more alternatives, any of 

which might be reasonable under the circumstances yet might result in Babcock & Brown reporting materially 

different outcomes than would have been reported under a different alternative. 

For reporting periods beginning on or after 1 January 2005, Babcock & Brown must comply with International 

Financial Reporting Standards as issued by the Australian Accounting Standards Board (Australian IFRS). Pending 

standards have been released, with further standards to come; and as such, Babcock & Brown is continuing to 

evaluate the impact that these new standards will have on its results. Consequently, reported results beyond 2005 

could materially vary to those reported under current Australian Accounting Standards and IFRS contained 

herein. 

7.1.26 Documentation risk 

Babcock & Brown enters into a number of highly structured transactions that require detailed documentation. 

As a result, the risk of dispute over interpretation or enforceability of the documentation, or errors in preparation 

of the documentation may be higher than for other investments. 

7.2 GENERAL RISKS 

7.2.1 Stock market fluctuations 

The price of the Shares on ASX may rise or fall due to numerous factors which may affect the market 

performance of Babcock & Brown, including: 

• General economic conditions, including inflation rates and interest rates 

• Variations in the local and global market for listed stocks 

• Changes to government policy, legislation or regulation 

• Inclusion or removal from major market indices 

• The nature of competition in the markets in which Babcock & Brown operates 

• General operational and business risks 

In particular, the Share prices for many companies have in recent times been subject to wide fluctuations, which 

in many cases may reflect a diverse range of non-company specific influences such as global hostilities and 

tensions, acts of terrorism and the general state of the economy. Such market fluctuations may materially 

adversely affect the market price of the Shares. 

No assurances can be made that Babcock & Brown’s market performance will not be adversely affected by any 

such market fluctuations or factors. None of Babcock & Brown, or its Directors or any other person guarantees 

Babcock & Brown’s market performance. 

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SECTION 7 

RISK FACTORS 

7.2.2 Liquidity and realisation 

There can be no guarantee that an active market in the Shares will develop or that the price of the Shares will 

increase.There may be relatively few, or many potential buyers or sellers of the Shares on ASX at any time.This 

may increase the volatility of the market price of the Shares. It may also affect the prevailing market price at 

which Shareholders are able to sell their Shares.This may result in Shareholders receiving a market price for their 

Shares that is less or more than the price that Shareholders paid. 

7.3 OTHER RISKS 

The above risks should not be taken as exhaustive of the risks faced by Babcock & Brown.The risks above 

and other risks not specifically referred to may in the future materially adversely affect Babcock & Brown’s 

business performance. 

146

147

SECTION 8 

ADDITIONAL INFORMATION 

8.1 REGISTRATION AND CORPORATE STRUCTURE 

8.1.1 Registration and corporate structure 

Babcock & Brown was registered as an Australian public company in Victoria,Australia, on 2 April 2004. 

8.1.2 Share capital 

Babcock & Brown has one class of Share that is fully paid ordinary Shares. Immediately after the Allotment, 

Babcock & Brown will have 325 million Shares on issue. 

Babcock & Brown will also have 23.5 million Options on issue, which will be held in the Employee Trusts 

described in Section 4.7.7 above.These Options have an exercise price equal to the Offer Price, and expire six 

years after the date on which Babcock & Brown lists on ASX. 

8.2 CONSTITUTION AND RIGHTS ATTACHING TO SHARES 

The Shares issued under the Prospectus are fully paid ordinary Shares and will rank equally in all respects with 

Babcock & Brown’s fully paid ordinary Shares that are currently on issue.The rights attaching to the Shares are 

set out in the Constitution and, in certain circumstances, regulated by the Corporations Act, the Listing Rules, 

the ASTC Settlement Rules and general law. 

A summary of the Constitution is set out below. It is not intended to be an exhaustive summary of the rights and 

obligations of Shareholders. Investors who wish to inspect the Constitution may do so at the registered office of 

Babcock & Brown during normal office hours. 

8.2.1 Voting 

Subject to the Corporations Act, the Listing Rules and any rights or restrictions for the time being attached to 

any class or classes of Share at general meetings of Shareholders or classes of Shareholders: 

• Every Shareholder entitled to vote may vote in person or by proxy, attorney or representative 

• On a show of hands, every person present who is a Shareholder or a proxy, attorney or representative of a 

Shareholder has one vote 

• On a poll, every person present who is a Shareholder or a proxy, attorney or representative has one vote for 

every fully paid Share and a fraction of a vote for every partly paid Share. 

Voting at any Shareholder meeting is by a show of hands unless a poll is demanded by the chairperson of the 

meeting, five Shareholders entitled to vote on the resolution, or Shareholders holding at least 5% of the votes that 

may be cast on the resolution on a poll. 

On certain resolutions, notably the election of Directors, the proportions in which votes are cast will “flow 

through” to the votes cast by Babcock & Brown on its Shares in BBIPL in relation to the corresponding 

resolution in that company. See Section 8.4 below for more detail. 

8.2.2 Dividends 

The Directors may from time to time declare and pay dividends out of the profits of Babcock & Brown and may 

fix the amount and timing for payment and the method of payment of any such dividend. Subject to any special 

rights attached to any class of Share dividends are payable to all Shareholders in proportion to the amounts paid 

up (not credited) on the Shares held by them. Except as otherwise provided by law, all dividends unclaimed for 

one year after having been declared may be invested or otherwise made use of by the Directors for the benefit of 

Babcock & Brown until claimed. 

In addition, the Directors may implement a dividend reinvestment plan on such terms as they think fit to be 

amendable as and when they think fit. 

8.2.3 General meetings and notices 

Each Shareholder is entitled to receive notice of, and to attend and vote at, general meetings of Babcock & 

Brown and to receive all notices, accounts and other documents required to be sent to Shareholders under the 

Constitution, the Corporations Act or the Listing Rules. 

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8.2.4 Issue of further Shares 

Subject to the Constitution, the Corporations Act, the Listing Rules and any rights previously conferred on the 

holders of existing Shares the Directors may allot, issue or otherwise dispose of Shares to any persons, on any 

terms and conditions, at that issue price and at those times as the Directors think fit. Directors have full power to 

give any person a call or option over any Shares during any time and for any consideration as they think fit and 

may issue Shares with any preferential, deferred or special rights, privileges or conditions or with any restrictions 

(whether in regard to dividend, voting, return of Share capital or otherwise) as they determine. 

8.2.5 Winding up 

Subject to the rights of Shareholders with special rights in a winding up, on a winding up of Babcock & Brown 

all assets that may be legally distributed among the Shareholders will be distributed to Shareholders in order to 

return capital paid up on their Shares and distribute any surplus in proportion to the amount paid up (not 

credited) on Shares held by them. 

8.2.6 Transfer of Shares 

Shareholders may transfer Shares by a written transfer instrument in the usual form, any form approved by the 

Directors, or by a proper transfer effected in accordance with the ASTC Settlement Rules and ASX requirements. 

All transfers must comply with the Constitution, the Corporations Act, the Listing Rules and the ASTC 

Settlement Rules.The Directors may refuse to register a transfer of Shares, including in circumstances where the 

transfer is not in registrable form or the refusal to register the transfer is permitted by the Listing Rules or 

ASX.The Directors must refuse to register a transfer of Shares where required to do so by the Listing Rules. 

In addition, subject to the Corporations Act and the ASX Listing Rules, the Directors may, in limited 

circumstances as described in the Constitution, apply a holding lock to prevent a transfer of Shares. 

8.2.7 Number of Directors and appointment 

The number of Directors must be not less than three and the maximum is to be fixed by the Directors but may 

not be more than 10 unless Babcock & Brown passes a resolution varying that number. 

Subject to the Corporations Act and the Listing Rules, Directors, other than the Managing Director, must retire 

from office or seek re-election by no later than the third annual general meeting following their appointment or 

election or three years, whichever is longer. In addition, while Babcock & Brown is admitted to the Official List, 

at least one Director must retire from office at each annual general meeting unless there has been an election of 

Directors earlier that year. 

The Directors may also appoint a Director to fill a casual vacancy on the Board or in addition to the existing 

Directors, who will then hold office until the next annual general meeting of Babcock & Brown. 

8.2.8 Remuneration of Directors 

Subject to the Listing Rules, in a general meeting of Shareholders Babcock & Brown has the ability to determine 

the maximum cash fees to be paid to Directors.The sum fixed in the Constitution as the maximum aggregate 

cash remuneration to be paid to the Directors for services rendered as Directors is $1.5 million, which may be 

distributed among the Directors as they determine.The Constitution also makes provision for Babcock & Brown 

to pay all reasonable expenses of Directors in attending meetings and carrying out their duties. 

8.2.9 Indemnification and insurance of Directors 

Babcock & Brown, on a full indemnity basis and to the full extent permitted by law, indemnifies each person 

who is or has been a Director or Secretary of Babcock & Brown, and such other officers or former officers of 

Babcock & Brown as the Directors in each case determine (each an Officer), or representative of Babcock & 

Brown serving as an Officer of another company at the request of Babcock & Brown, against any liability 

(other than legal costs) incurred in the discharge of their duties as an Officer of Babcock & Brown or such other 

company except where the liability is a liability owed to Babcock & Brown or a related body corporate or the 

liability arises out of conduct involving a lack of good faith on the part of the Officer or conduct attracting the 

civil penalty provisions of the Corporations Act. Officers are also indemnified by Babcock & Brown for costs 

(including legal costs) and expenses incurred in defending an action for a liability incurred in acting as an Officer 

of Babcock & Brown or a related body corporate. 

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Babcock & Brown may pay insurance premiums on behalf of an Officer of Babcock & Brown or of a subsidiary 

of Babcock & Brown, other than in relation to a liability arising out of conduct involving wilful breach of duty 

in relation to Babcock & Brown or a contravention of civil obligations under the Corporations Act prohibiting 

improper use of position or information gained in that position. 

8.2.10 Proportional takeover provisions 

The Constitution requires an ordinary resolution to approve registration of a transfer giving effect to an Offer 

made under a proportional takeover scheme.The provision regulating proportional takeover bids must be 

renewed in a general meeting every three years to remain effective. 

8.2.11 Share buy back 

Babcock & Brown may, in accordance with the Corporations Act and the Listing Rules, buy back its own Shares 

on any terms and conditions determined by the Directors.The consideration paid for a buy back of Shares may 

include specific assets, including securities of Babcock & Brown or of any other corporation, trust or entity. 

8.2.12 Variation of rights 

Subject to the Corporations Act and the Listing Rules, all or any of the rights attached to any class of Shares 

may be varied or cancelled with the consent in writing of the holders of at least 75% of the issued Shares in 

the particular class or the sanction of a special resolution passed at a meeting of holders of Shares in that class. 

8.2.13 Unmarketable parcel 

If a Shareholder holds a number of Shares which is less than a marketable parcel (as defined in the Listing Rules) 

Babcock & Brown may, as agent for the Shareholder, sell or dispose of such Shares held by each unmarketable 

parcel holder on any terms and in that manner and at those times which the Directors determine provided that 

the procedures set out in the Constitution are followed. 

8.2.14 Alteration of Constitution 

The Constitution can only be amended by a special resolution passed by at least 75% of votes cast by 

Shareholders present and voting at a general meeting of Babcock & Brown. 

8.3 RESTRUCTURE AGREEMENTS 

8.3.1 Current Babcock & Brown Group structure 

The Babcock & Brown Group is currently owned by Babcock & Brown Executive Stakeholders (approximately 

80%) and HVB (approximately 20%).These interests are held via ownership interests in several core Babcock & 

Brown Group entities: 

• Babcock & Brown Holdings Inc. (BBH), a Delaware corporation wholly owned by US-resident Babcock & 

Brown employees 

• Non-US resident Babcock & Brown employees hold proxy interests in BBH via the Babcock & Brown 

Phantom Plan, a contractual arrangement designed to replicate the economic effect of owning Shares in 

BBH (the Phantom Plan) 

• Babcock & Brown Associates LLC (BBA), a Delaware limited liability company wholly owned by Babcock 

& Brown employees (both US resident and non-US resident) 

• Babcock & Brown Investment Management Partners LP (BBIMP), a Delaware limited partnership, owned as 

to 79% by BBA, 20% by HVB and 1% by Babcock & Brown GP LLC (a wholly owned subsidiary of BBH) 

• Babcock & Brown LP (BBLP), a Delaware limited partnership, owned as to 79.8% by BBH, 20% by HVB 

and 0.2% by Babcock & Brown GP LLC 

• Babcock & Brown Operating Partnership LP (BBOP), a Delaware limited partnership, owned as to 79.2% 

by BBA, 19.8% by HVB and 1% by BBOP GP LLC, a wholly owned subsidiary of BBLP 

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Collectively, these entities own all the assets of the Babcock & Brown Group.This structure is shown in the 

diagram below: 

Pre-IPO Babcock & Brown Group structure 

GP 

LP 

1% GP 

20% LP 

The above structure is to be reorganised in the period immediately prior and immediately after the issue of 

Shares under this Prospectus. 

8.3.2 Objectives of the restructuring 

The objectives of the Babcock & Brown Group restructuring are to: 

• Transfer all Babcock & Brown Group entities under Babcock & Brown and BBIPL 

• Convert the ownership interests of Babcock & Brown Executive Stakeholders and HVB in the Babcock & 

Brown Group into Shares in Babcock & Brown or BBIPL (in the case of US-resident Executive Stakeholders) 

• Terminate the Phantom Plan arrangements 

• Cash out the interests of certain Babcock & Brown employees with smaller interests in BBA and BBH 

• Re-align the ownership interests of certain Executive Stakeholders by allowing those stakeholders to 

subscribe for Shares in Babcock & Brown prior to the IPO 

The Babcock & Brown Shares issued to HVB as part of the restructuring are issued subject to the disclosure in 

this Prospectus. 

All documents required to effect this restructuring have been executed by the relevant parties and placed into 

escrow.The restructuring documentation will be released from escrow, and become effective, only following the 

satisfaction of certain conditions, most relevantly, achieving the minimum subscription under this Prospectus and 

both the Executive Committee and HVB authorising their release (which may occur after the Offer closes but is 

expected to occur by the date on which the Institutional Offer closes). Additionally, certain parties have the right 

to withdraw their documents from escrow during a brief period following the date of this Prospectus. If this 

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occurs then either that party’s current interest in the Group may be redeemed for cash based on the pre-IPO 

net tangible assets or the Offer may be withdrawn. Babcock & Brown believe that it is unlikely that these parties 

will withdraw. 

8.3.3 Employee loan arrangements 

BBH has provided Babcock & Brown Executive Stakeholders with loan financing for the acquisition of their interests 

in BBH or the Phantom Plan.These loans are generally repaid by salary and bonus sacrifice arrangements with the 

relevant Babcock & Brown employee or through the application of distributions from BBH or the Phantom Plan. 

The loans are secured against the employee’s interests in BBH Shares or the Phantom Plan, as the case may be. 

As part of the termination of the Phantom Plan and the transfer of Babcock & Brown employees’ interests in 

BBH to Babcock & Brown and BBIPL, all existing financing arrangements with BBH are to be repaid by 

Babcock & Brown employees. Existing salary and bonus sacrifice arrangements are also to be terminated. 

Babcock & Brown is arranging a replacement facility with a third party financier to assist Babcock & Brown 

employees to refinance their existing financing arrangements with BBH. Babcock & Brown employees will be 

obliged to repay their existing financing arrangements with BBH, but only once the alternative facility is in place. 

This alternative facility may not be in place until after the IPO. 

8.3.4 Post restructuring Babcock & Brown Group structure 

The Babcock & Brown Group structure post the restructuring is outlined in Section 2.4. Shareholdings and 

Economic Interests in Babcock & Brown are outlined at Section 2.5. 

8.3.5 Documentation 

All documents required to effect the restructuring of the Babcock & Brown Group required for the purposes of 

this Prospectus and the listing of Babcock & Brown on ASX have been executed by the relevant parties and 

placed into escrow.These restructuring documents will only be released from escrow, and become effective, 

following the satisfaction of certain conditions.These conditions include achieving the minimum subscription 

under this Prospectus and receiving the written consents of both the Executive Committee and HVB to the 

release of the restructuring documents. Additionally, certain parties have the right to withdraw their documents 

from escrow during a brief period following the date of this Prospectus. If this occurs then either that party’s 

current interest in the Group may be redeemed for cash based on the pre-IPO net tangible assets or the Offer 

may be withdrawn. Babcock & Brown believe that it is unlikely that these parties will withdraw. 

8.4 BBIPL RIGHTS AND CONSTITUTION SUMMARY 

US Executive Stakeholders will hold their interests in Babcock & Brown through Babcock & Brown 

International Pty Limited (BBIPL), the holding company for Babcock & Brown’s operations.The US Executive 

Stakeholders will hold their interest at the BBIPL level as direct ownership at the listed company level may have 

material adverse tax consequences for US Executive Stakeholders. 

The following summary sets out details of the special provisions in the Constitution of BBIPL that regulate the 

relationship between: 

• Babcock & Brown, which holds a majority shareholding in BBIPL in the form of “A Class” Shares. Babcock 

& Brown is the sole holder of A Class Shares 

• The various US Executive Stakeholders of Babcock & Brown who will hold redeemable preference shares 

in BBIPL (termed “B Class” shares) 

The various special provisions in BBIPL’s Constitution are designed to provide an appropriate balance between 

the rights of Babcock & Brown and those of the B Class shareholders. An overriding principle in relation to 

that balance, however, is that B Class shareholders should not interfere with the ability of Babcock & Brown’s 

shareholders to determine issues concerning control of Babcock & Brown and of the Babcock & Brown Group 

as a whole. 

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Specific relevant provisions of the Constitution are as follows. 

8.4.1 Classes of shares 

The A Class Shares held by Babcock & Brown are ordinary Shares.The B Class shares held by employees are 

redeemable preference shares.The preference given to B Class shares is a token one cent per share priority on a 

winding up, and those shares otherwise have the right to participate equally with A Class Shares in a distribution 

of surplus assets on a winding up. B Class shares do not have a preferential right to dividends. 

8.4.2 B Class Share redemption/conversion provisions 

1. Redemption/conversion at the request of a shareholder 

The ability of B Class shareholders to deal with their shares is initially limited by a 3 1 ⁄2 year, progressively 

reducing, escrow restriction identical to that applying to shares in Babcock & Brown which are held by Executive 

Stakeholders. Should any B Class shares be converted into Babcock & Brown Shares, a similar restriction will 

continue to apply for the balance of the escrow period. 

B Class shareholders will be able to request that their shares are redeemed or converted.When a shareholder 

makes this request, one of three things will happen: 

• The shares will be redeemed by BBIPL for cash 

• The shares will be purchased by Babcock & Brown for cash 

• Babcock & Brown will purchase the B Class shares in return for an issue of new fully paid ordinary Shares 

in Babcock & Brown (in which case those B Class shares automatically convert into A Class Shares) 

A decision as to how a redemption/conversion request is dealt with under one of the three options above will 

be made by Babcock & Brown or in its absence BBIPL. It is anticipated that Babcock & Brown will seek to 

purchase the B Class shares in return for an issue of fully paid ordinary Shares in Babcock & Brown. 

In the event of a scheme of arrangement, takeover or similar control transaction being announced, B Class 

shareholders may require that their shares are converted into Babcock & Brown Shares rather than being 

redeemed or purchased for cash. 

2. Redemption/conversion price 

The conversion ratio will be maintained at one for one, subject only to an adjustment for Babcock & Brown 

having material assets or liabilities other than its shares in BBIPL. Likewise, the amount of the cash redemption 

or purchase price payable to a B Class shareholder will generally be the market value of a Share in Babcock & 

Brown. In the case of a redemption or cash purchase, the market value is determined as the highest sale price on 

ASX of Babcock & Brown’s Shares on the fourth business day after the redemption notice is received. 

After the later to occur of the date 11 years after Babcock & Brown’s listing on ASX and the date on which at 

least 60% of the B Class shares have been redeemed or purchased, the redemption and conversion price begins to 

decline at the rate of 5% per annum. 

3. Redemption/conversion instigated by BBIPL 

There are certain circumstances in which BBIPL can compulsorily redeem or convert (at its option) B Class 

shareholdings.The first such circumstance is the later of the date seven years after the IPO and the date on which 

80% of B Class shares have been redeemed or purchased. At any time after that date, BBIPL can require any 

BClass shareholder to either have its shares redeemed for cash, or to sell its shares to Babcock & Brown for 

either cash or an issue of Shares in Babcock & Brown.The cash redemption or purchase price is the same as that 

set out above, with the exception that the diminishing price after 11 years does not apply to mandatory 

redemptions. 

Further circumstances in which BBIPL can compulsorily redeem or buy out B Class shares are following a 

successful scheme of arrangement, selective capital reduction, or takeover bid for Babcock & Brown which results 

in a third party acquiring 100% of the issued Shares in Babcock & Brown. In that case, regardless of whether or 

not the seven-year/80% threshold referred to above has been met, BBIPL can require any remaining B Class 

shareholders to either have their shares redeemed or sell their shares to Babcock & Brown in exchange for either 

cash or Shares in Babcock & Brown (at BBIPL’s option). 

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8.4.3 Issue of further BBIPL shares 

In order to maintain the one-for-one conversion ratio between B Class shares and Babcock & Brown Shares, it 

will be necessary to maintain the number of issued Shares and Options in Babcock & Brown at exactly the same 

number as the A Class Shares which Babcock & Brown holds in BBIPL. In this way, both a Share in Babcock & 

Brown and a B Class share will have the same per share dividend entitlement, and this should ensure that (all else 

being equal) both shares have a comparable value so as to make the one-for-one conversion ratio fair to both 

BClass shareholders and Babcock & Brown’s Shareholders. 

Accordingly, whenever Babcock & Brown issues further Shares and Options (for example, under a placement, 

dividend reinvestment plan, employee incentive plan, etc.) it will be obliged to subscribe for an equal number of 

new A Class Shares in BBIPL.The issue price for those new A Class Shares will be the amount (net of issue costs) 

that Babcock & Brown receives for the issue of its own Shares. 

The only scope for the issue of further B Class shares in BBIPL is if there is a rights issue at Babcock & Brown 

level, in which case BBIPL may be obliged to offer rights to its own shareholders in the same ratio. B Class 

shareholders also have the right to “cash out” their BBIPL rights at the applicable market price of Babcock & 

Brown’s rights. 

8.4.4 Voting rights and election of directors to the BBIPL board 

Generally, A Class and B Class shares have equal voting rights at a general meeting of BBIPL. 

There are some cases, however, where the A Class Shares “flow through” the votes taken at a general meeting of 

Babcock & Brown. In these cases, a “proportional voting requirement” applies under which Babcock & Brown is 

obliged to vote and abstain from voting its A Class Shares in the same proportions as “for” and “against” votes 

were cast and Shares were not voted (respectively) by shareholders at the Babcock & Brown level. 

One of the key matters to which the proportional voting requirement applies is the election of directors at the 

BBIPL level. It is intended that the boards of Babcock & Brown and BBIPL should closely mirror one another, 

subject to BBIPL B Class shareholders having a vote at the BBIPL level. For instance, whenever a BBIPL director 

who is also a director of Babcock & Brown retires and stands for re-election at the Babcock & Brown level, the 

director must also retire and stand for re-election at the BBIPL level. Even if a BBIPL director is not a director of 

Babcock & Brown, the person must retire and stand for re-election on the same rotational basis as if he or she 

was a director of a listed company.The right of the BBIPL board to appoint a new director as a casual vacancy is 

also limited to people who are also directors of Babcock & Brown. 

Further, the Constitution provides that after the date on which BBIPL is entitled to compulsorily redeem B Class 

shares (see above) Babcock & Brown will essentially be able to exercise complete control over the composition of 

the BBIPL board. 

8.4.5 Election of directors to Babcock & Brown’s board 

B Class shareholders do not have any voting rights at a general meeting of Babcock & Brown, including in 

relation to the appointment of directors to Babcock & Brown’s board. 

However, Babcock & Brown is obliged to accept a nomination from the board of BBIPL where an election is to 

be held to fill a board vacancy at Babcock & Brown level. However, such nominations do not displace the right 

of Babcock & Brown’s board to put its own nominees to a vote of shareholders. 

8.4.6 Sale of substantial assets by BBIPL 

Upon listing, all of Babcock & Brown’s business interests, investments and assets will be held through BBIPL and 

BBIPL’s subsidiaries.The BBIPL Constitution maintains this position going forward. 

If Babcock & Brown’s shareholders are to vote on a significant acquisition, disposal or related party transaction to 

which Chapter 10 or 11 of the ASX Listing Rules applies and which affects BBIPL (which will usually be the 

case), any such decision must also be approved by BBIPL’s shareholders to the extent that it affects BBIPL’s assets. 

Babcock & Brown can vote its A Class Shares on that resolution, and the proportional voting requirement 

referred to above applies to this resolution. 

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Similarly, the sale by Babcock & Brown of its A Class Shares in BBIPL (this will be Babcock & Brown’s major, 

and initially only, directly held asset) also requires the approval of BBIPL shareholders. Babcock & Brown can 

vote its A Class Shares on this resolution, and the proportional voting requirement referred to above applies. 

These special provisions in relation to substantial assets only apply until the date on which BBIPL becomes 

entitled to compulsorily redeem B Class shares. After that date, acquisitions or disposals of this kind do not 

require the approval of BBIPL shareholders. 

8.4.7 Dividends 

A Class Shares and B Class shares have the same per share dividend rights.While there are B Class shareholders in 

BBIPL, Babcock & Brown may not pay a total dividend which exceeds the total dividend that it receives from 

BBIPL on its A Class Shares. 

8.4.8 General minority shareholder protection 

The Constitution requires Babcock & Brown not to do anything that would materially prejudice the ability of 

B Class members to have their B Class shares redeemed or converted.This restriction does not apply where the 

relevant event is specifically provided for elsewhere in the Constitution, such as under a scheme of arrangement 

or takeover bid. 

8.5 INTERESTS OF DIRECTORS 

Set out below are details of the current interests of the Directors (and their associates) in Babcock & Brown: 

Director Shares Options 

James Babcock 21,501,522 100,000 

James Fantaci 8,498,699 100,000 

Phillip Green 12,622,963 800,000 

Ian Martin 100,000 – 

Elizabeth Nosworthy 100,000 – 

Martin Rey 2,423,788 200,000 

Michael Sharpe 50,000 – 

NOTES: 

“Shares” includes shares in BBIPL and Shares to be issued under the Restructure (see Section 8.3), but not under the IPO. 

“Options” are Options to be granted in relation to the Employee Trusts (see Section 4.7.7). 

8.6 BBIPL SHAREHOLDERS 

Members of the Executive Committee or other senior Executives (or their associates) who have shares in BBIPL 

and may exchange their shares for Shares in Babcock & Brown as described in Section 8.16, are: 

Name of holder Number of BBIPL shares held 1 

Daniel Brickman 6,561,249 

Bruce Carusi 3,437,621 

Robert Falkenberg 4,285,725 

Michael Garland 5,008,751 

Ted Lachowicz 5,461,060 

Paul Marini 4,362,732 

Victoria McManus 2,369,598 

Leonard Shavel 3,803,226 

Richard Umbrecht 5,599,505 

Steven Zissis 8,436,920 

NOTE: 

1. Number of BBIPL shares are approximate as they include proposed pre-IPO adjustments and proposed purchases through or shortly after the Offer 

(see Section 4.7.8). 

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8.7 RESTRICTIONS ON SHARE ALLOCATIONS 

A subsidiary (Subsidiary) of Babcock & Brown is licensed and regulated in the US by the National Association of 

Securities Dealers (NASD). If, either as a result of the Offer or after Babcock & Brown is listed, a person or 

entity acquires Shares in Babcock & Brown, the ownership of which results in one person or entity directly or 

indirectly owning or controlling 25% or more of the equity or partnership capital of the Subsidiary, the 

Subsidiary is obligated to make certain filings with the NASD to reflect this change in ownership. 

Accordingly, Babcock & Brown will limit the number of Shares to be issued to any Applicant under the Offer so 

as to ensure that this 25% limit is not exceeded. 

8.8 RELATED PARTY TRANSACTIONS 

Babcock & Brown’s interests in a small number of its investments are obtained under arrangements with entities 

(Related Parties) associated with Directors of Babcock & Brown. In these cases the underlying assets are held by 

the Related Parties, and the relevant arrangements ensure that Babcock & Brown obtains the full economic 

benefit of and interest in the assets. Due to the fact that Babcock & Brown is the economic (although not legal) 

holder of these investments, Babcock & Brown in some cases has agreed to guarantee or indemnify certain of the 

Related Parties’ liabilities and obligations in connection with their holding of the investments. 

In particular, Babcock & Brown has guaranteed a $4.4 million payment obligation of two Related Parties, ESIC 

Limited and Adder Securities Pty Ltd, to the Commonwealth Government. However, Babcock & Brown does 

not believe that it will be necessary for the Commonwealth Government to call on this guarantee. 

8.9 MATERIAL CONTRACTS 

8.9.1 Prime Infrastructure Trust 

Various Babcock & Brown entities act as responsible entity or trustee for the various trusts that, along with 

various related companies, hold the assets of the Prime Infrastructure Group. 

Under the terms of Prime Infrastructure Trust (PIT) constitution, Babcock & Brown Investors Services Pty 

Limited (BBIS) is entitled to receive from PIT a fee for its services as responsible entity calculated at 2% per 

annum of the gross asset value of PIT. BBIS has agreed to receive a fee which is less than the amount it would 

be paid under that rate, comprising: 

• A base fee component, calculated as 

– 0.1% per annum of a set base market capitalisation of $400 million, and 

– an additional 1% per annum of the amount by which Prime Infrastructure Group’s market capitalisation 

exceeds the set base market capitalisation of $400 million and 

• An annual incentive fee component, which is equal to 15% of any excess rate of return of the accumulation 

index for Prime Infrastructure Group’s stapled securities over the return of the S&P/ASX 200 

Accumulation Index, multiplied by Prime Infrastructure Group’s market capitalisation 

During the 14 months ended 30 June 2003, PIT paid BBIS $41,000 for reimbursement of expenses (at cost), 

a base fee of $541,000 and an incentive fee of $3.258 million (representing a third of the amount payable). 

The final two thirds of the incentive fee for this period are payable over a period of two years conditional on 

continued outperformance. 

A Babcock & Brown subsidiary, Prime Infrastructure (DBCT) Investor Services Ltd, is also entitled to an annual 

fee of 2% of the gross asset value of Prime Infrastructure (DBCT) Trust (PIDT) for acting as trustee of PIDT. 

PIDT is wholly owned by PIT. However, Babcock & Brown has waived its entitlement to this fee. 

156


Another Babcock & Brown subsidiary, Prime Energy Investor Services Pty Ltd, is the trustee of Prime Energy 

Trust (PET), which is also wholly owned by PIT. Under the terms of the trust deed of PET the trustee is only 

entitled to be paid fees for its services as agreed from time to time, and at present no such fee has been agreed 

nor is any fee payable by PET. 

These Babcock & Brown entities may be removed as responsible entity or trustee of the trusts at any time as follows: 

• PIT: the responsible entity may be removed by an ordinary resolution of the unitholders in accordance with 

section 601FM of the Corporations Act 

• PIDT and PET: the trustee may, in each case, be removed by a special resolution (75% of votes cast by 

unitholders entitled to vote on the resolution) 

8.9.2 Offer Management Agreement 

On 8 September 2004, Babcock & Brown and the Lead Manager entered into the Offer Management 

Agreement. Under the agreement, the Lead Manager agreed to manage the Offer, including the bookbuild and 

allocation processes for the Offer. 

Babcock & Brown must pay the Lead Manager an aggregate base selling fee comprising: 

• 3.0% of the total gross proceeds of the Offer up to $300 million, plus 

• 2.5% of the total gross proceeds of the Offer between $300 million and $400 million, plus 

• 2.0% of the total gross proceeds of the Offer in excess of $400 million 

In addition, Babcock & Brown agrees to pay the Lead Manager an advisory success fee of $2 million and a work 

fee of up to $400,000.The amount payable by Babcock & Brown will be reduced depending on the amount of 

Shares allocated to the Foundation Investors. For a Foundation Offer above $100 million, the Lead Manager’s fee 

will be reduced by $625,000. 

Babcock & Brown must pay, or reimburse the Lead Manager for reasonable costs incurred in respect of the 

Offer and all costs payable in relation to ASX’s delivery versus payment settlement service as soon as reasonably 

practicable after a request for payment or reimbursement is made by the Lead Manager.The Lead Manager is 

responsible for all fees and commissions due to any co-lead manager or co-manager it appoints. 

Under the Offer Management Agreement, Babcock & Brown gives certain representations, warranties and 

undertakings. Babcock & Brown’s undertakings include entering into certain escrow and restructure agreements 

as described in the Prospectus. 

Subject to certain exclusions relating to, among other things, fraud, recklessness, negligence and wilful misconduct 

by an indemnified party, Babcock & Brown agrees to keep the Lead Manager and certain affiliated parties 

indemnified from losses suffered in connection with the Offer. 

The Lead Manager may terminate the Offer Management Agreement by notice to Babcock & Brown if one or 

more of the termination events set out below occurs (although, in the case of the termination events marked 

with an asterisk, the Lead Manager may not terminate the agreement unless it has reasonable grounds to believe 

and does believe that (i) the event has or is likely to have a materially adverse effect on the success or Settlement 

of the Offer or, the likely price at which the Shares will trade on ASX; or (ii) the event would give rise to a 

material liability of the Lead Manager under any applicable law or regulation): 

• * A statement contained in this Prospectus is misleading or deceptive, or a matter is omitted from this 

Prospectus 

• * There is an adverse change in the assets, liabilities, financial position or performance, profits, losses or 

prospects of the Group 

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• * Babcock & Brown issues or becomes required to issue a supplementary prospectus in circumstances where 

the matter is materially adverse from the point of view of an investor within the meaning of section 719 of 

the Corporations Act 

• There is an outbreak or major escalation of hostilities involving any one or more of Australia, New Zealand, 

the United States, the United Kingdom, any member of the European Union, Indonesia, North Korea, 

South Korea, China or Japan or the declaration by any of these countries of a national emergency or war or 

a terrorist attack is perpetrated involving any of those countries or any diplomatic, military, commercial or 

political establishment of any of those countries elsewhere in the world. In this case there will only be a 

termination right if, in the reasonable opinion of the Lead Manager, it is impracticable to market the Offer 

or to enforce contracts to issue and allot the Shares 

• * There is introduced, or there is a public announcement of a proposal to introduce, into the parliament of 

Australia or any State of Australia a new law, or the Reserve Bank of Australia, any federal or state authority 

of Australia, adopts or announces a proposal to adopt a new policy (other than a law or policy which has 

been announced before the date of this agreement), any of which does or is likely to prohibit or regulate 

the Offer, capital issues or stock markets 

• * There is a change in senior management or in the board of directors of Babcock & Brown 

• * Any of the following occur 

–a director of Babcock & Brown is charged with an indictable offence 

– any regulatory body commences any public action against a Director in their capacity as a director of 

Babcock & Brown, or announces that it intends to take such action 

– any director of Babcock & Brown is disqualified from managing a corporation under the Corporations 

Act, or 

– the chairman or chief executive officer of Babcock & Brown vacates his or her office 

• * A contravention by Babcock & Brown or any entity in the Group of the Corporations Act, its 

constitution, or any of the ASX Listing Rules 

• Approval is refused or not granted, other than subject to customary conditions, in respect of admission of 

Babcock & Brown to, or its quotation on, ASX 

• Any of the following notifications are made 

– ASIC issues an order under section 739 of the Corporations Act 

– an application is made by ASIC for an order under Part 9.5 of the Corporations Act in relation to this 

Prospectus or ASIC commences any investigation or hearing under Part 3 of the Australian Securities and 

Investments Commission Act 1989 (Cwlth) in relation to this Prospectus 

– any person gives a notice under section 733(3) of the Corporations Act or any person who has previously 

consented to the inclusion of its name in this Prospectus or any supplementary prospectus or to be named 

in the Prospectus withdraws that consent, or 

– any person gives a notice under section 730 of the Corporations Act in relation to this Prospectus 

• * There is a default by Babcock & Brown in the performance of any of its obligations under the Offer 

Management Agreement 

• * A warranty contained in the Offer Management Agreement is not true or correct 

• * After completion of the bookbuild process there is a suspension or material limitation in trading in 

securities generally on ASX, the New York Stock Exchange and/or the London Stock Exchange 

158


• * After completion of the bookbuild process, a general moratorium on commercial banking activities in 

Australia, New Zealand, the US or UK is declared, or there is a material disruption in commercial banking 

or securities settlement or clearance services in those places, or 

• * After completion of the bookbuild process, there is an adverse change or disruption to the existing 

financial markets, political or economic conditions of Australia, Japan, the United Kingdom, the United 

States or the international financial markets or any change in national or international political, financial or 

economic conditions, in each case the effect of which is such as to make it, in the reasonable opinion of the 

Lead Manager, impracticable to market the Offer or to enforce contracts to issue and allot the Shares 

8.10 EQUITY INCENTIVE PLAN 

Babcock & Brown has established the Long-Term Equity Incentive Plan (Plan) to assist in the attraction, 

retention and motivation of Executives (including Directors) of Babcock & Brown and its subsidiaries.The Plan 

contains typical terms for dealing with the Plan’s administration, its variation, termination and suspension. A 

summary of the key terms of the Plan is set out below. 

8.10.1 General 

The Plan is Babcock & Brown’s incentive scheme for selected Executives and Directors (collectively Employees). 

Under the Plan, eligible Employees may be granted various kinds of equity related awards, including Options, 

performance rights or bonus deferral rights (each being a right to acquire a Share on terms and conditions 

determined by the Board) or cash awards (which are the right to receive an amount of cash calculated by 

reference to the market price of Babcock & Brown’s Shares, but do not involve an actual acquisition of Shares). 

Collectively these are termed “Awards”. 

The Plan confers broad discretions on Babcock & Brown to set the terms of Awards when they are granted, 

including the vesting conditions and performance hurdles (if any) and the exercise price of options. Performance 

rights and bonus deferral rights have a nil exercise price, but will have vesting conditions. 

8.10.2 Initial grant of Awards 

The Employee Trusts have purchased from Babcock & Brown 12.5 million fully paid $5 Shares and 23.5 million 

Options exercisable at $5, as referred to in Section 4.7.7. Babcock & Brown has granted rights to acquire Shares 

and Options to identified and as yet unidentified Executives.The Shares and Options held by the Employee 

Trusts will be used to satisfy these grants.The rights granted to Executives by Babcock & Brown vest, as referred 

to in Section 4.7.7. 

8.10.3 Terms of subsequent Awards 

Under the Plan, Awards are granted at no cost to the Employee.The rules of the Plan provide that the Board may 

determine (at the time of grant) a price that is payable on exercise of a cash award. 

Each Option, performance right and bonus deferral right is an entitlement to one Share, subject to satisfaction of 

any vesting conditions.To the extent the vesting conditions are satisfied, Awards will vest and may be exercised by 

participants to acquire Shares, subject to the terms of the Plan. 

8.10.4 Vesting of bonus deferral rights 

The initial grant of bonus deferral rights, likely to be made in the first quarter of 2006, will be subject to vesting 

conditions such that they cannot be exercised until four years after the date of grant. Once vested, these bonus 

deferral rights can be exercised by the participant at any time during the two-year period commencing on the 

fourth anniversary of the date of grant. If at the end of this two-year period, the vested bonus deferral rights have 

not been exercised, they will lapse. 

If a participant ceases to be employed by Babcock & Brown or any of its subsidiaries before bonus deferral rights 

have vested for any reason, those bonus deferral rights will lapse, unless the Board determines otherwise. 

159

SECTION 8 


8.10.5 Vesting and performance conditions of Options 

It is envisaged that following the initial grant of Options to the Trustees and Executives as described above, any 

future grant of Options will be subject to a performance condition based on Babcock & Brown’s Total 

Shareholder Return (TSR) performance (although the Board may impose a different performance condition if it 

is determined to be appropriate at the relevant time).TSR is the return to shareholders measured by Share price 

change plus reinvested dividends, expressed as a percentage of investment. 

The percentage of Options that vest will be determined by reference to Babcock & Brown’s TSR performance 

over three years (and potentially four years) ranked against the TSR performance of companies in the 

S&P/ASX 200 (as at the relevant date of grant), as set out below: 

Group’s TSR performance ranked against comparator group Percentage of Options that vest 

Below 51st percentile 

Nil 

At 51st percentile 50% 

Between 51st and 75th percentiles Pro rata between 50% and 100% 

At or above 75th percentile 100% 

This performance condition will be first tested for the three-year period commencing on the date the Options 

are granted.The Options will then vest to the extent the performance condition has been satisfied.Where 100% 

vesting is not achieved based on Babcock & Brown’s three-year performance, the performance condition will be 

tested again for the four-year period commencing on the date the Options were granted.To the extent Options 

do not vest following this second test, the Options will lapse. 

Once vested, Options can be exercised by the participant at any time during the two-year period that 

commences on vesting. If at the end of this two-year period, the vested Options have not been exercised, they 

will lapse. 

If a participant ceases to be employed by Babcock & Brown or any of its subsidiaries before Options have vested 

for any reason, those Options will lapse, unless the Board determines otherwise. 

Similar vesting and performance criteria are likely to apply to any award of performance rights or cash awards. 

8.10.6 Restriction on dealing 

Shares acquired through exercise of Awards will, subject to the terms of the Plan, rank equally with all existing 

Shares and participants will be entitled to rights attaching to Shares, other than the restrictions noted below that 

apply to certain participants. 

Employees based in Australia will not be entitled to trade in Shares acquired on the exercise of Awards until the 

earliest to occur of: 

• Ten years after the date of grant of the relevant Awards 

• The date of cessation of employment with Babcock & Brown or any of its subsidiaries, or 

• The participant makes an application to the Board to sell the Shares and the application is approved 

This restriction on dealing does not apply to participants based outside Australia. 

8.10.7 Other terms of the Plan 

The Plan provides that, at the Board’s discretion, the exercise of Awards can be satisfied through either the issue of 

new Shares or the delivery of existing issued Shares, or payment of a cash amount to the participant rather than 

delivery of Shares. If the Board decides to exercise this latter discretion, the appropriate cash amount will be paid 

to the participant (net of any tax required to be withheld) at the time of exercise and will take into account the 

Share price at that time and the terms and conditions of the relevant Awards (including what exercise price, if 

any, the participant would have been required to pay on exercise of the Award). 

160


In the event of a bonus issue or reorganisation of capital, participants’ Awards will be adjusted under the Plan 

rules in the manner set out in the ASX Listing Rules at the relevant time.There is no adjustment for cash rights 

issued by Babcock & Brown. 

In the case of a takeover where the bidder becomes entitled to compulsorily acquire Babcock & Brown’s Shares, 

all Awards will immediately vest. In the case of other change of control transactions Babcock & Brown has a 

discretion to allow immediate vesting of all unvested Awards. 

The Plan rules allow additional rules to be adopted that provide for the grant of awards on additional or modified 

terms in relation to participants in overseas jurisdictions to take account of local securities, exchange control or 

taxation laws or regulations or other factors that may apply. 

8.10.8 Dilution limit 

An offer of Awards must not be made if the total of the following: 

• The number of Shares subject to the Offer and any outstanding offers, and 

• The total number of Shares which would be issued under all outstanding Awards (or any other awards under 

the Plan) which have been granted but which have not been exercised, terminated or expired, assuming all 

such Awards were exercised 

• Minus any issued Shares held by a trustee for the purpose of satisfying Awards 

would exceed 20% of the total number of Shares on issue at the time the Offer is made. 

Details of Awards granted and Shares issued under the Plan will be published in Babcock & Brown’s annual 

report for the relevant financial year. 

8.11 EXPENSES OF THE OFFER 

If the Offer proceeds, the total estimated costs of the Offer and Restructure, including advisory, legal, accounting, 

tax, listing and administrative fees, as well as printing, advertising and other expenses are currently estimated to be 

approximately $28.5 million and will be paid by Babcock & Brown.The net effect of this payment will result in 

an equivalent reduction in the proceeds received by Babcock & Brown pursuant to the Offer. Of this amount 

$27 million is directly attributable to the capital raising and has been netted off against the Offer Proceeds for 

accounting purposes.The remainder, amounting to $1.5 million, had been expensed in the 2004 Forecast. 

8.12 INTERESTS OF ADVISORS 

Other than as set out below or elsewhere in this Prospectus, no person named in this Prospectus as providing 

professional or advisory services in connection with the preparation of this Prospectus or any firm in which such 

person is a partner: 

(a) 

(b) 

has or had during the two years preceding the date of this Prospectus, any interest in the formation or 

promotion of, or in any property acquired or proposed to be acquired, by Babcock & Brown, or the 

Offer, and 

has been paid or agreed to be paid any amount or given or agreed to be given any other benefit for 

services rendered by them in connection with the promotion or formation of Babcock & Brown or the 

Offer 

Baker & McKenzie has acted as legal advisor to Babcock & Brown in respect of the Offer. At the date of this 

Prospectus, Babcock & Brown estimates that it will pay approximately $3.6 million (excluding disbursements and 

GST) to Baker & McKenzie in respect of these services. 

161

SECTION 8 


Ernst & Young has: 

(a) 

(b) 

performed work in relation to the due diligence enquiries, and 

prepared the Independent Accountant’s Report set out in Section 6, including a review of Pro-Forma 

Historical Financial Information and the Pro-forma Statement of Financial Position set out in Section 5 

Ernst & Young Transaction Advisory Services Limited has: 

(a) 

(b) 

performed work in relation to the due diligence enquiries, and 

reviewed the Forecast Financial Information and prepared the Report on the Forecast Financial 

Information included in Section 6 

At the date of this Prospectus, Babcock & Brown estimates that it will pay approximately $4.5 million (excluding 

disbursements and GST) to Ernst & Young and Ernst & Young Transaction Advisory Services Limited in respect 

of their services. 

UBS AG, Australia Branch has acted as Lead Manager in relation to the Offer. At the date of this Prospectus, 

Babcock & Brown estimates that it will pay approximately $15.9 million (excluding disbursements and GST) to 

UBS in respect of these services. 

Each of Wilson HTM Corporate Finance Limited and Tricom Equities Limited has agreed to act as a Co-Lead 

Manager of the Offer.They will each be paid a 1.5% commission on all Shares allocated by them in the Broker 

Firm Offer. In addition Wilson HTM Corporate Finance Limited will be paid a fee of $750,000 and Tricom 

Equities Limited a fee of $200,000 in relation to their role. 

Each of Bell Potter Securities Limited and UBS Private Clients Australia Limited has agreed to act as a Co- 

Manager of the Offer.They will each be paid a 1.5% commission on all Shares allocated by them in the Broker 

Firm Offer. 

All of the amounts payable to Co-Lead Managers and Co-Managers are payable by the Lead Manager out of the 

fees payable to them by Babcock & Brown. 

8.13 CONSENTS TO BE NAMED IN THIS PROSPECTUS 

Written consents to the issue of this Prospectus have been given and, at the time of lodgement of this Prospectus 

with ASIC, had not been withdrawn by the following parties: 

• ASX Perpetual Registrars Limited has given and not withdrawn prior to the lodgement of this Prospectus 

with ASIC, its written consent to be named in this Prospectus as the Share Registrar in the form and 

context in which it is so named 

• Baker & McKenzie has given, and not withdrawn prior to the lodgement of this Prospectus with ASIC, its 

written consent to be named in this Prospectus as Babcock & Brown’s legal advisor in the form and context 

so named 

• Bell Potter Securities Limited has given, and not withdrawn prior to the lodgement of this Prospectus with 

ASIC, its written consent to be named in this Prospectus as a Co-Manager to the Offer in the form and 

context so named 

• BTM Consult has given, and not withdrawn prior to the lodgement of this Prospectus with ASIC, its 

written consent to the inclusion of the statements in the section captioned ‘Renewable Energy Generation’ 

on page 55, which are based on statements made by it, in the form and context in which those statements 

are included 

162 

• Ernst & Young has given, and not withdrawn prior to the lodgement of this Prospectus with ASIC, its 

written consent to be named in this Prospectus as auditor and Independent Accountant to Babcock & 

Brown as to pro-forma Historical Financial Information and the pro-forma statement of financial position 

in the form and context so named and has given and not withdrawn its consent to the inclusion in this 

Prospectus of its Independent Accountant’s Report in the form and context in which it is included


• Ernst & Young Transaction Advisory Services Limited has given, and not withdrawn prior to the lodgement 

of this Prospectus with ASIC, its written consent to be named in this Prospectus as Independent Accountant 

to Babcock & Brown in relation to pro-forma Forecast Financial Information included in Sections 5.3.2.1 

and 5.4.2 of this Prospectus in the form and context so named and has given and not withdrawn its consent 

to the inclusion in this Prospectus of its Independent Accountants’ Report of Forecast Financial Information 

in the form and context in which it is included 

• Tricom Equities Limited has given, and not withdrawn prior to the lodgement of this Prospectus with 

ASIC, its written consent to be named in this Prospectus as a Co-Lead Manager to the Offer in the form 

and context so named 

• UBS AG, Australia Branch has given, and not withdrawn prior to the lodgement of this Prospectus with 

ASIC, its written consent to be named in this Prospectus as Lead Manager to the Offer in the form and 

context so named 

• UBS Private Clients Australia Limited has given, and not withdrawn prior to the lodgement of this 

Prospectus with ASIC, its written consent to be named in this Prospectus as a Co-Manager to the Offer in 

the form and context so named 

• Wilson HTM Corporate Finance Limited has given, and not withdrawn prior to the lodgement of this 

Prospectus with ASIC, its written consent to be named in this Prospectus as a Co-Lead Manager to the 

Offer in the form and context so named 

No entity or person referred to above has made any statement that is included in this Prospectus or any statement 

on which a statement made in this Prospectus is based, except as stated above. Each of the entities and persons 

referred to above expressly disclaims and takes no responsibility for any statements in or omissions from this 

Prospectus.This applies to the maximum extent permitted by law and does not apply to any matter to the extent 

to which consent is given above. 

8.14 LITIGATION AND CLAIMS 

As far as the Directors are aware, except as disclosed elsewhere in this Prospectus, there is no current or threatened 

civil litigation, arbitration proceeding or administrative appeal or criminal or governmental prosecution of a 

material nature in which Babcock & Brown is directly or indirectly concerned which is likely to have a material 

adverse impact on the business or financial position of Babcock & Brown. 

8.15 FOREIGN ACQUISITIONS AND TAKEOVERS ACT 

Whilst Babcock & Brown has obtained approval under the Foreign Acquisitions and Takeovers Act 1974 (the Act) 

in respect of the IPO and the restructuring described in Section 8.3, the Group will still require approval under 

the Act in respect of certain kinds of corporate finance and real estate transactions which it may wish to enter 

into in the future. 

8.16 ASX WAIVERS AND ASIC RELIEF 

ASIC has granted relief to Babcock & Brown so that the takeovers provisions of the Corporations Act do not 

apply to any “relevant interest” that Babcock & Brown would otherwise acquire in its own Shares by reason of 

the escrow restrictions referred to above.The exemption only applies to Shares in relation to which the escrow 

restriction is for no more than two years after Babcock & Brown is listed. 

In addition, ASIC has granted relief so that the first periodic financial report to be lodged by Babcock & Brown 

after listing will be its preliminary final report for the period ending 31 December 2004. 

ASX has granted “in-principle” waivers from Listing Rules 10.11 and 7.1 to the extent necessary to permit the 

US Executive Stakeholders named in Section 8.6 to convert their BBIPL Shares into Group Shares pursuant to 

the arrangements described in Section 8.4 without obtaining shareholder approval. Babcock & Brown will apply 

for the formal grant of these waivers prior to listing. 

163

SECTION 8 


8.17 ASX ADMISSION AND QUOTATION 

Babcock & Brown will apply for admission to the official list of ASX, and quotation of the Shares on ASX, no 

later than seven days after the date of this Prospectus. 

8.18 GOVERNING LAW 

This Prospectus and the contracts that arise from the acceptance of the Applications are governed by the law 

applicable in New South Wales and each Applicant submits to the exclusive jurisdiction of the courts of 

New South Wales. 

8.19 EXPIRY DATE 

No Shares will be offered on the basis of this Prospectus after the Expiry Date. 

8.20 REFERENCES TO PUBLICATIONS 

References are made in this Prospectus to material that is attributed to various sources.These references are based 

on statements already published in public documents or a book, journal or comparable publication.Those 

organisations did not prepare those materials specifically for this Prospectus and have had no involvement in the 

preparation of any part of this Prospectus. 

8.21 DOCUMENTS AVAILABLE FOR INSPECTION 

Copies of the Constitution, Employee Share Plan, reviewed Pro-Forma Historical Financial Information and the 

Pro-Forma Statement of Financial Position of Babcock & Brown and the consents referred to in Section 8.13 

will be available for inspection free of charge between 9.00am and 5.00pm Sydney time, Monday to Friday at 

Babcock & Brown’s registered office during the Offer. 

8.22 STATEMENT OF DIRECTORS 

The Directors report that after due enquiries by them, in their opinion since the date of the financial statements 

in Section 6, there have not been any circumstances that have arisen that have materially affected or will 

materially affect the assets and liabilities, financial position, profits of losses or prospects of Babcock & Brown 

other than as disclosed in this Prospectus. 

This Prospectus is authorised by each Director who consents to its lodgement with ASIC and its issue. 

This Prospectus is signed by each Director. 

James Babcock 

Martin Rey 


Phillip Green 

Ian Martin 

James Fantaci 

Elizabeth Nosworthy 

164

165

SECTION 9 

DEFINITIONS AND GLOSSARY 

Term 

Accor 

Advisory (Net Revenue) 

Definition 

Accor SA, a French joint stock company, governed by applicable laws and 

regulations, in particular articles L. 225-57 to L. 225-93 of the Commercial 

Code.Trade Register 602 036 444 RCS Évry, Business Identification (APE) 

Code: 551A 

Net Revenue from advisory assignments that do not involve the deployment of 

Babcock & Brown capital or the management of investments on behalf of clients 

AGAAP Financial The financial information prepared as described in Section 5.3 

Information 

AIDC ESIC Limited (formerly AIDC Limited) ABN 61 008 647 658 

AIG 

Allotment 

Applicant 

Application 

Application Money 

Application Form 

ASIC 

American International Group Inc, a publicly traded company listed on the 

New York Stock Exchange 

The issue of Shares to investors under the Offer 

A person who makes an Application 

An application to purchase Shares under this Prospectus 

Funds accompanying an Application 

An application form included or accompanying this Prospectus 

Australian Securities & Investments Commission 

ASTC ASX Settlement and Transfer Corporation ABN 49 008 504 532 

ASX 

ASX Guidelines 

Australian Stock Exchange Limited ABN 98 008 624 691 or the stock market 

conducted by Australian Stock Exchange Limited, as the context requires 

The Principles of Good Corporate Governance and Best Practice 

Recommendations developed by the ASX Corporate Governance Council 

AUSDOC Ausdoc Group Pty Limited ABN 61 005 482 913 

Australian GAAP/AGAAP 

Australian IFRS 

Generally accepted accounting principles in Australia 

Australian equivalent International Financial Reporting Standards adopted by the 

Australian Accounting Standards Board 

Australian IFRS The financial information prepared as described in Section 5.4 

Financial Information 

Australand Australand Holdings Limited ABN 12 008 443 696 

Babcock & Brown 

BBH 

Babcock & Brown Limited ABN 53 108 614 955 and, where the context 

permits, its consolidated entities 

Babcock & Brown Holdings Inc, a company incorporated in Delaware and 

the parent entity of the group immediately prior to the restructure outlined in 

this document 

BBIPL Babcock & Brown International Pty Limited ABN 76 108 617 483 

166


Term 

Definition 

BBIS Babcock & Brown Investor Services Limited ABN 67 099 717 638 

BBRE 

Best Estimate 

Babcock & Brown Real Estate 

Assumptions as to future events which management expects to take place, and the 

actions that management expects to take as of the date of this Prospectus 

Bonus Deferral Rights See Sections 4.7.5 and 8.10.4 

Broker 

Broker Firm Applicant 



Closing Date 

Business Group 

Business Unit 

A Co-Lead Manager or Co-Manager to the Offer or other party approved by 

Babcock & Brown 

A person offered a firm allocation of Shares by a Broker under the Broker Firm 

Offer 

The Offer of Shares under this Prospectus to Eligible Retail Investors who have 

received a firm allocation from their Broker as outlined in Section 2.7 of this 

Prospectus 

Friday 1 October, unless altered 

One of Babcock & Brown’s five Business Groups including Real Estate, 

Infrastructure and Project Finance, Operating Leasing, Structured Finance and 

Corporate Principal Investment and Funds Management groups 

Business Unit within a Business Group 

Carillon Carillon Development Pty Limited ABN 63 000 305 742 

CHESS 

Clearing House Electronic Subregister System 

Citta Citta Property Group Pty Ltd ABN 25 100 409 443 

Company 

Constitution 

Corporations Act 

Co-Lead Manager 

Co-Manager 

DBCT 

Directors 

DPS 

EBIT 

Economic Interest 

Babcock & Brown Limited ABN 53 108 614 955 and its consolidated entities 

and operations 

The Babcock & Brown Limited Constitution 

Corporations Act (2001) Cth 

One of the parties outlined as such in the Corporate Directory on the rear inside 

cover 

One of the parties outlined as such in the Corporate Directory on the rear inside 

cover 

Dalrymple Bay Coal Terminal, owned by DBCT Holdings Pty Ltd 

ABN 57 096 395 783 

Directors of Babcock & Brown Limited as disclosed in this Prospectus 

Dividend per Share 

Earnings before interest and tax 

Ownership interest in Babcock & Brown assuming the exchange of Shares in 

BBIPL into Shares in Babcock & Brown 

167

SECTION 9 


Term 

Eligible Institutional 

Investor 

Eligible Retail Investor 

Employee Trusts 

EPS 

Executives 

Definition 

An investor to whom offers or invitations in respect of securities can be made 

without the need for a lodged prospectus (or other formality, other than a 

formality which the Company is willing to comply with), including in Australia 

persons to whom offers or invitations in respect of securities can be made without 

the need for a lodged prospectus under section 708 of the Corporations Act 

An Australian resident retail client of a Broker 

The Australian Employee Trust and the Non-Australian Employee Trust 

established to provide Executives with equity in the Group 

Earnings per Share 

Employees of Babcock & Brown 

Executive Committee The Committee described in Section 4.2 

Executive Stakeholders 

Expiry Date 

Exposure Period 


Forecast(s) 

Employees of Babcock & Brown who are also equity or phantom equity holders 

in Babcock & Brown (either directly or in conjunction with their associated 

entities) 

The date which is 13 months after the Prospectus Date 

The waiting period specified in section 727(3) of the Corporations Act, 

being a minimum period of seven days after the lodgement of this Prospectus 

with ASIC during which an Application must not be accepted, subject to any 

extension by ASIC 

The restated, pro-forma and forecast information relating to Babcock & Brown 

Group contained in Section 5 

Directors’ financial forecasts for each of the years ending 31 December 2004 and 

31 December 2005, either individually or combined where the context requires 

Forecast Financial Financial information relating to the year(s) ending 31 December 2004 

Information and/or 2005 

Forecast Period 

Foundation Investor(s) 

Foundation Offer 

Foundation Offer 

Closing Date 

GE 

GECAS 

GPG 

Group 

The period relating to the years ending 31 December 2004 and 

31 December 2005 

Parties selected by Babcock & Brown 

The Offer outlined in Section 2.8 of this Prospectus 

Tuesday 28 September, unless altered 

General Electric Company, a publicly traded company listed on the New York 

Stock Exchange 

GE Capital Aviation Services or GECAS, a unit of the General Electric Company 

Guinness Peat Group Plc, a publicly traded company listed on the London, 

Australian and New Zealand Stock Exchanges 

Babcock & Brown Limited ABN 53 108 614 955 and its consolidated entities 

and operations 

168


Term 

GST 

HIN 

Definition 

Goods and Services Tax 

Holder Identification Number 

Historical Financial Financial information relating to the year(s) ending 31 December 2001, 2002 

Information and/or 2003 

Holding Statement 

HVB 

HVB Subscription 

Agreement 

Independent Accountants 

IFRS 

ILFC 

Institutional Offer 

Investment 

Management 

(Net Revenue) 

IPO 

IRR 

Statements issued to Shareholders setting out their holdings of Shares 

Bayerische Hypo- und Vereinsbank AG, a publicly traded holding company based 

in Germany focusing on the banking and financial services industry 

The agreement of that name as between the Company, HVB and BBH 

Ernst & Young and Ernst & Young Transaction Advisory Services Limited 

International Financial Reporting Standards 

International Lease Finance Corporation, a wholly owned subsidiary of American 

International Group Inc (AIG) 

The Offer outlined in Section 2.9 of this Prospectus 

Net Revenue from activities associated with managing investments for clients. 

These may include those where Babcock & Brown’s capital is deployed on a 

short-term basis as part of a warehousing facility, or prior to the syndication to 

the investors or the creation of some other investment product 

Initial Public Offering or Offer 

Internal Rate of Return 

Issuer Babcock & Brown Limited ABN 53 108 614 955 

Jagen Jagen Pty Ltd ABN 63 005 137 851 

JV 

Lead Manager 

Listing Rules 

MW 

Net Revenue 

Nomura 

Joint venture 

UBS AG, Australia Branch 

Listing Rules of the ASX 

Megawatt 

Gross revenue (calculated in accordance with AGAAP or Australian IFRS as 

indicated) less cost of sales and directly attributable expenses plus net 

contribution from equity accounted and consolidated non-strategic investments 

Nomura Holdings, Inc, a publicly traded holding company based in Japan 

focusing on the banking and financial services industry 

Nomura Babcock & Brown Nomura Babcock & Brown Co., Ltd 

NPAT 

Offer 

Offer Price 

Net operating profit after tax 

The Offer of Shares made pursuant to this Prospectus 

$5.00 per Share being the price that all Applicants must pay per Share 

169

SECTION 9 


Term 

Offer Proceeds 

Definition 

$550 million raised in the Offer 

Options The options described in Section 8.10 

Phantom Plan The Babcock & Brown Phantom Plan as described in Section 8.3.1 

PFI 

Private finance initiative 

PIT Prime Infrastructure Trust ARSN 100 375 479 

PPP 

Prime Infrastructure 

Group 

Public-Private partnerships 

The group comprising Prime Infrastructure and PIT, which group’s stapled 

securities trade on the ASX 

Prime Infrastructure Prime Infrastructure Management Limited ABN 61 100 364 234 

PrimeLife PrimeLife Corporation Limited ABN 16 010 622 901 

Principal Investment 

(Net Revenue) 

Prospectus 

Net Revenue from activities associated with investment of Babcock & Brown 

capital (both debt and equity) or asset trading, excluding those classified as 

Investment Management 

This prospectus and any supplementary or replacement prospectus in relation to 

this prospectus 

Prospectus Date 9 September 2004 

Restated Financial The financial information prepared as described in Section 5.2 

Information 

Restructure The restructuring of the Babcock & Brown Group as described in Section 8.3 

Settlement Has the meaning given to it in Section 2.12 

Share Registry or ASX Perpetual Registrars Limited ABN 54 083 214 537 

Share Registrar 

Share(s) 

Shareholder 

SRN 

A fully paid ordinary Share(s) in Babcock & Brown Limited 

A person who holds Shares 

Security Reference Number 

TAHL Tourism Asset Holdings Limited ABN 25 060 896 568 

Total Annual 

Remuneration 

UBS 

US GAAP 

Total fixed remuneration plus total annual bonus pool, including the present value 

of Bonus Deferral Rights 

UBS AG, Australia Branch 

Generally accepted accounting principles in the United States 

170

APPENDIX A 

PRO-FORMA CONSOLIDATED 

FINANCIAL STATEMENTS 

171

APPENDIX A PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS 

AGAAP CONSOLIDATED PRO-FORMA STATEMENT OF FINANCIAL 

PERFORMANCE 

Year ended 31 December Notes 2003 2002 2001 

$000 $000 $000 

Revenues from Ordinary Activities 7 1,501,938 1,571,690 1,920,511 

Expenses from Ordinary Activities excluding Borrowing 

Costs and Bonuses 8(a) (1,206,917) (1,261,719) (1,585,175) 

Borrowing costs expense 8(b) (44,452) (41,208) (50,837) 

Share of net profits/(losses) of associates and joint ventures 

accounted for using the equity method 15 11,198 2,700 614 

Profits from Ordinary Activities before Bonus Expense, 

Income Tax Expense and Outside Equity Interests 261,767 271,463 285,113 

Outside equity interests excluding BBIPL (8,731) (7,993) (1,368) 

Profit from Ordinary Activities before Bonus Expense 

and Income Tax Expense Attributable to Members and 

BBIPL Equity Interest 253,036 263,470 283,745 

BBIPL outside equity interest (75,911) (79,041) (85,124) 


and Income Tax Expense Attributable to Members 177,125 184,429 198,621 

172


AGAAP CONSOLIDATED PRO-FORMA STATEMENT OF FINANCIAL 

POSITION 

At 31 December Notes 2003 

$000 

Assets 

Cash and short-term trading securities 10 570,733 

Fees receivable from financing transactions 11 47,202 

Other receivables 12 64,468 

Notes receivable 13 164,430 

Investments in financial assets 14 58,651 

Investments accounted for using the equity method 15 161,776 

Transportation equipment 16 503,498 

Real estate 17 388,671 

Semiconductor equipment 18 4,720 

Property and equipment 19 19,539 

Assets under development 20 65,565 

Other assets 21 28,968 

Deferred tax assets 22 68,591 

Intangible assets 23 725,733 

Total Assets 2,872,545 

Liabilities 

Accounts payable and accrued liabilities 24 244,848 

Deposits held 25 48,431 

Deferred income 26 32,097 

Interest bearing liabilities 27 

– Transportation equipment notes payable 505,888 

– Real estate notes payable 341,617 

– Other notes payable 131,595 

Shareholder distributions payable 28 12,981 

Current tax liabilities 22 7,524 

Deferred tax liabilities 22 5,150 

Other liabilities 29 6,038 

Total Liabilities 1,336,169 

Net Assets 1,536,376 

Equity 

Contributed equity 30 1,048,999 

Outside equity interest 31 

– BBIPL 449,595 

– Other minorities 37,782 

Total Equity 1,536,376 

173


AGAAP CONSOLIDATED PRO-FORMA STATEMENT OF CASH FLOWS 

Year ended 31 December Notes 2003 2002 

$000 $000 

Cash Flows from/(used in) Operating Activities 

Fees received 323,354 411,790 

Rental income received 100,250 72,355 

Payments to vendors and employees (252,656) (268,185) 

Interest received 19,385 18,619 

Borrowing costs (42,777) (38,456) 

Other 13,642 38,401 

Net Cash Flows from/(used in) Operating Activities 

before Bonus and Income Tax 32 161,198 234,524 

Cash Flows from/(used in) Investing Activities 

Proceeds from sale of transportation equipment 739,762 985,707 

Proceeds from sale of real estate 108,328 45,250 

Proceeds from sale of semiconductor equipment 29,538 – 

Proceeds from sale of subsidiaries and affiliates 143,094 26,317 

Proceeds from sale of financial assets 16,529 10,561 

Purchase of transportation equipment (789,673) (1,256,473) 

Purchase of real estate (17,898) (95,271) 

Purchase of semiconductor equipment (9,119) (5,388) 

Purchase of controlled entity (6,856) – 

Purchase of and investment in associates (178,757) (28,941) 

Purchase of property and equipment (6,979) (1,526) 

Purchase of financial assets (9,238) (10,782) 

Payments received on notes receivable 115,410 150,160 

Notes receivable fundings (74,459) (157,126) 

Assets under development (40,571) (41,525) 

Deposits (repaid)/received (2,147) 13,321 

Dividends and distributions received from associates 23,245 35,633 

Deposits received for asset purchase 4,197 27,575 

Net Cash Flows from/(used in) Investing Activities 44,406 (302,508) 

Cash Flows from Financing Activities 

Proceeds from borrowings 716,701 1,435,200 

Repayments of borrowings (858,620) (960,237) 

Proceeds from issuance of ordinary capital 628,849 29,118 

Capital redemption payments (36,969) (20,678) 

Distributions paid to equity holders (405,351) (245,523) 

Outside interest capital contributions 24,844 4,749 

Outside interest capital distributions (57,063) (13,092) 

Net Cash Flows from/(used in) Financing Activities 12,391 229,537 

Net Increase/(Decrease) in Cash Held 217,995 161,553 

174


AUSTRALIAN IFRS CONSOLIDATED PRO-FORMA INCOME STATEMENT 

Year ended 31 December 2003 

$000 

Revenues from Ordinary Activities 1,505,581 

Expenses from Ordinary Activities excluding Borrowing Costs and Bonuses (1,206,917) 

Borrowing costs expense (44,452) 

Share of net profits/(losses) of associates and joint ventures accounted for using the equity method 11,198 

Profits from Ordinary Activities before Bonus Expense, Income Tax Expense and 

Outside Equity Interests 265,410 

Outside equity interests excluding BBIPL (9,645) 

Profit from Ordinary Activities before Bonus Expense and Income Tax Expense 

Attributable to Members and BBIPL Outside Equity Interest 255,765 

BBIPL outside equity interest (76,730) 

Profit from Ordinary Activities before Bonus Expense and Income Tax Expense 

Attributable to Members 179,035 

175


AUSTRALIAN IFRS CONSOLIDATED PRO-FORMA BALANCE SHEET 

At 31 December 2003 

$000 

Assets 










Property and equipment 19,539 




Total Assets 2,146,812 

Liabilities 





– Transportation equipment notes payable 505,888 

–Real estate notes payable 341,617 

– Other notes payable 131,595 

Shareholder distributions payable 12,981 




Total Liabilities 1,336,169 

Net Assets 810,643 

Equity 

Contributed equity 478,974 

Retained earnings 995 

Reserves 61,025 


540,994 

– BBIPL 231,867 

– Other minorities 37,782 

Total Equity 810,643 

176


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

(a) Basis of Preparation 

These historical consolidated pro-forma financial statements have been prepared as a special purpose financial 

report in connection with the IPO of Babcock & Brown Limited (Babcock & Brown).The consolidated 

pro-forma financial statements are those of the consolidated entity, comprising Babcock & Brown Limited (the 

parent company) and all entities that Babcock & Brown will control subsequent to the restructure and IPO.The 

historical consolidated pro-forma financial statements have been prepared in accordance with the measurement, 

but not all the disclosure requirements of Accounting Standards and other mandatory professional reporting 

requirements, including Urgent Issues Group Consensus Views, in Australia (AGAAP). 

There have been departures from the disclosure requirements of Australian accounting standards where the 

disclosures are not considered applicable given the pro-forma nature of these financial statements and the nature 

of the restructured group subsequent to the IPO. Accordingly, the historical consolidated pro-forma financial 

statements include some, but not all of the disclosure requirements of the following pronouncements: 

• AASB 1005 Segment Reporting 

• AASB 1008 Leases 

• AASB 1016 Accounting for Investments in Associates 

• AASB 1017 Related Party Disclosures 

• AASB 1026 Statement of Cash Flows 

• AASB 1033 Presentation and Disclosure of Financial Instruments 

• AASB 1046 Director and Executive Disclosures by Disclosing Entities 

These pro-forma financial statements comprise pro-forma statements of financial performance for the years 

ending 31 December 2001, 2002 and 2003, pro-forma statements of cash flows for the years ending 31 December 

2002 and 2003 and a pro-forma statement of financial position as at 31 December 2003 for Babcock & Brown 

Limited and the entities it will control following the proposed public listing. A list of those entities is included in 

note 36. 

Information concerning the nature of pro-forma adjustments has been included at note 2. 

(b) Presentation of a consolidated Pro-forma Balance Sheet and Income Statement prepared in 

Accordance with Australian IFRS 

Included within this special purpose financial report is a consolidated pro-forma Balance Sheet as at 

31 December 2003 and a consolidated pro-forma Income Statement for the period ended 31 December 2003 

prepared in accordance with the Australian equivalents to International Financial Reporting Standards (Australian 

IFRS).The Australian IFRS consolidated pro-forma balance sheet and income statement have been reconciled to 

the consolidated pro-forma statements of financial position and performance prepared under AGAAP. 

Adjustments from AGAAP to Australian IFRS have been detailed at notes 5 and 6. 

All other notes have been prepared in accordance with AGAAP. 

(c) Reporting Currency 

All numbers are reported in Australian dollars unless otherwise stated. 

(d) Principles of Consolidation 

The consolidated pro-forma financial statements are those of the consolidated entity, comprising Babcock & 

Brown Limited (the parent company) and all entities that Babcock & Brown will control subsequent to the 

restructure and IPO. 

177


The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using 

consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that 

may exist. 

All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have 

been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. 

(e) Cash and Cash Equivalents 

Cash and cash equivalents consist of cash in banks and highly liquid investments with original maturities of three 

months or less.These assets are stated at nominal values. 

Bank overdrafts are carried at the principal amount. Interest is recognised as an expense as it accrues. 

(f) Receivables 

Fees receivable from financing transactions are recognised and carried at original invoice amount less a provision 

for any uncollectible amounts. Fees receivable are non-interest bearing and are generally on 30 day terms. An 

estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are 

written off as incurred. 

Notes receivable are recorded at the principal amount outstanding plus accrued interest. All notes receivable are 

reviewed regularly for impairment. A note receivable is considered impaired when, based on current information 

and events, it is probable that the group will be unable to collect all amounts due.The amount of the specific 

impairment provision is equal to the difference between the current carrying amount of a receivable and the 

greater of: (a) the net present value of the expected cash flows from the borrower, discounted at the original 

effective interest rate of the transaction, or (b) the net fair value of the collateral, if any. Any impairment 

provisions are included in the statement of financial performance in the period in which the asset is impaired. 

Receivables from related parties are recognised and carried at the nominal amount due. Interest is taken up as 

income on an accrual basis. 

(g) Investments in Financial Assets 

Investments in listed shares and other marketable securities, including those held for three months or less, are 

held for trading and are carried at net market value. Changes in net market value are recognised as a revenue or 

expense in the statement of financial performance during the period in which the net market value changed. 

Investments in unlisted shares are carried at the lower of cost or net realisable value. Under this method, the 

investment is adjusted only for the additional cash investments and any impairment in the value of the 

investment. 

(h) Investments Accounted for Using the Equity Method 

Investments in associates are carried at the lower of the equity accounted amount and recoverable amount in the 

consolidated financial report. Under the equity method of accounting, the investment is initially recorded at cost, 

subsequently adjusted for Babcock & Brown’s share of undistributed earnings or losses, and increased by 

additional investments in the associates and reduced by cash distributions received. 

(i) Transportation Equipment 

Transportation equipment consists primarily of aircraft and railcars. 

Aircraft and railcars are recorded at cost.The depreciable amount of these assets is depreciated on a straight line 

basis over the asset’s remaining useful life. 

178


Depreciation periods are: 

New asset 

Used asset 

Aircraft 25 years 25 years less current age 

Railcars 25 years 25 years less current age 

(j) Real Estate 

Real estate acquired for development and sale in the ordinary course of business is carried at cost to date, 

including borrowing costs incurred.The net realisable value of each holding is assessed at each reporting period 

and a provision for diminution in value is raised where cost (including costs to complete) exceeds net realisable 

value. 

(k) Semiconductor Equipment 

Semiconductor equipment are assets that are purchased for the purposes of trading.These assets are recorded at 

the lower of cost or net realisable value. 

(l) Property and Equipment 

All classes of property and equipment are measured at cost and depreciated using the straight-line method over 

the estimated useful life. 

Costs incurred in the design and installation of internal use software are capitalised at cost and depreciated over 

the estimated useful life of the asset. 

Major depreciation periods are: 

Furniture and Fixtures 

Leasehold improvements 

Computer Software and Equipment 

2003 

7 years 

The lease term 

3 to 5 years 

(m) Assets Under Development 

Assets under development are recorded at the lower of cost or net realisable value and will be transferred to the 

appropriate class of asset when the development is completed and the asset is ready for use.Where the asset is a 

qualifying asset cost will include any capitalised borrowing costs. 

(n) Intangible Assets 

As discussed in the pro-forma adjustments at note 2, goodwill represents the excess of the purchase consideration, 

being the fair value of shares issued to effect the acquisition, over the fair value of the net assets acquired at the 

date of the transaction. 

Goodwill is amortised on a straight-line basis over the period during which the benefits are expected to arise. 

This is expected to be the maximum permitted period of 20 years. 

(o) Recoverable Amount 

The recoverable amount for all non-current assets carried at cost is assessed at each reporting date.The 

recoverable amount of an asset is the net amount expected to be recovered through the cash inflows and outflows 

arising from its continued use and subsequent disposal.These cash flows have not been discounted to their 

present value. 

Where the carrying amount of a non-current asset is greater than its recoverable amount, the asset is written 

down to its recoverable amount.Where net cash inflows are derived from a group of assets working together, 

recoverable amount is determined on the basis of the cash flows of the relevant group of assets. Any provisions for 

recoverable amount write-down are included in the statement of financial performance in the period in which 

the recoverable amount write-down occurs. 

179


(p) Taxes 

Income taxes 

Tax effect accounting is applied using the liability method whereby income tax is regarded as an expense and is 

calculated on the accounting profit after allowing for permanent differences. As disclosed in note 2(b) no 

disclosure of current tax expense is made in the historical pro-forma financial statements. 

To the extent that timing differences occur between the time items have been recognised in the historical 

financial statements and when items have been taken into account in determining taxable income, the net related 

taxation benefit or liability, calculated at the tax rates currently prevailing in the various tax jurisdictions in which 

the group operates, is disclosed as a future income tax benefit or a provision for deferred income tax.The net 

future income tax relating to tax losses and timing differences is not carried forward as an asset unless the benefit 

is virtually certain of being realised. 

Goods and Services Tax, Value Added Tax and Sales Tax (referred to as GST) 

Revenues, expenses and assets are recognised net of the amount of GST except: 

• Where the GST incurred on a purchase of goods and services is not recoverable from the taxation 

authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the 

expense items as applicable; and 

• Receivables and payables are stated with the amount of GST included 

The net amount of GST recoverable from or payable to, the taxation authority is included as part of receivables 

or payables in the statement of financial position. 

Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows 

from investing activities which is recoverable from, or payable to, the taxation authority are classified as operating 

cash flows. 

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the 

taxation authority. 

(q) Payables 

Liabilities for trade creditors and other amounts are carried at cost which is the fair value of the consideration to 

be paid in the future for goods and services received, whether or not billed to the consolidated entity.The 

amounts are unsecured and are usually paid within 30 days of recognition. 

(r) Deposits Held 

In the normal course of leasing aircraft to third parties under operating lease agreements, the group receives 

deposits as rental security, deposits in advance of sale and monies to be applied against the future maintenance of 

aircraft.These deposits are generally refundable if they are unapplied. 

(s) Interest Bearing Liabilities 

All loans and notes payable are recorded at the principal amount outstanding plus accrued interest. Interest 

payable is recognised as an expense as it accrues. 

(t) Leases 

Leases are classified at their inception as either operating or finance leases based on the economic substance of the 

agreement so as to reflect the risks and benefits incidental to ownership.There are currently no finance leases in 

existence. 

Operating leases 

The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks 

and benefits of ownership of the leased item, are recognised as an expense on a straight-line basis over the term 

of the lease. 

180


Any lease incentive liability in relation to non-cancellable operating leases is being reduced on an imputed 

interest basis over the lease term at the interest rate implicit in the lease. Contingent rentals are recognised as an 

expense in the financial year in which they are incurred. 

The cost of improvements to or on leasehold property is capitalised and depreciated in accordance with note 1(l). 

(u) Joint Ventures 

Interests in joint venture operations are recognised by including in the respective classifications, the share of 

individual assets employed, revenue earned and share of liabilities and expenses incurred. 

(v) Foreign Currencies 

Transactions in foreign currencies of entities within the consolidated group are converted to local currency at the 

rate of exchange prevailing at the date of the transaction. 

Foreign currency monetary items that are outstanding at the reporting date are translated using the spot rate at 

the end of the financial year. 

The financial reports of overseas operations are translated using the current rate method and any exchange 

differences are taken directly to the foreign currency translation reserve. 

(w) Derivative Financial Instruments 

Forward exchange contracts 

The consolidated entity enters into forward exchange contracts where it agrees to sell specified amounts of 

foreign currencies in the future at a predetermined exchange rate.The objective is to match the contract with 

anticipated future cash flows from sales and purchases in foreign currencies, to protect the consolidated entity 

against the possibility of loss from future exchange rate fluctuations.The forward exchange contracts are usually 

for no longer than 12 months. 

Forward exchange contracts are recognised at the date the contract is entered into. Exchange gains or losses on 

forward exchange contracts are recorded at their fair values through the statement of financial performance. 

These have been eliminated as a pro-forma adjustment (refer note 3). 

Interest rate swaps 

Babcock & Brown enters into interest rate swap agreements that are used to convert the variable interest rate of 

its short-term borrowings to medium-term fixed interest rates.The swaps are entered into with the objective of 

reducing the risk of rising interest rates. 

Interest rate swaps are carried at fair value, with movements in fair value recorded in net profit. Interest rate swaps 

with a positive fair value are included as a component of Other Assets. Interest rate swaps with a negative fair 

value are included as a component of Other Liabilities. 

(x) Employee Benefits 

Provision is made for employee benefits accumulated as a result of employees rendering services up to the 

reporting date, in accordance with local statutory requirements.These benefits include wages and salaries, annual 

leave and long service leave. 

Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be 

settled within 12 months of the reporting date are measured at their nominal amounts based on remuneration 

rates which are expected to be paid when the liability is settled. All other employee benefit liabilities are 

measured at the present value of the estimated future cash outflow to be made in respect of services provided by 

employees up to the reporting date. In determining the present value of future cash outflows, the market yield as 

at the reporting date on national government bonds, which have terms to maturity approximating the terms of 

the related liability, are used. 

181


Employee benefit expenses and revenues arising in respect of the following categories: wages and salaries, 

non-monetary benefits, annual leave, long service leave, sick leave and other leave benefits; and other types 

of employee benefits are recognised against profits on a net basis in their respective categories. 

A liability for employee benefits in the form of bonus plans is recognised in accrued liabilities when it is probable 

that the liability will be settled and there are formal terms in place to determine the amount of the benefit, or the 

amount of the benefit has been determined before the time of completion of the annual report. Liabilities for 

bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid 

when they are settled. 

(y) Revenue Recognition 

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the 

revenue can be reliably measured.The following specific recognition criteria must also be met before revenue is 

recognised.Where amounts do not meet these recognition criteria, they are deferred and recognised in the period 

to which they relate. 

Fees from financing transactions and management fees 

Fees from financing transactions are recognised as revenue when the group has provided all services necessary for 

a final closing of the transaction, the transaction has actually closed, the fee is due and payable, and the likelihood 

that any contingencies that could result in a reduction of the fee is remote. 

Fees from financing transactions include fees earned on asset sales that are payable to the group on certain 

financings at the end of the financing term. On certain transactions, the fee earned on asset sales is equal to a 

share of the asset value above a specified minimum and such fees are recognised when the group controls the 

right to receive the fee. 

Periodic management fees are received for management services provided for income producing assets owned by 

third parties.These fees are recognised as revenues as the management services are provided, and the group 

controls the right to be compensated for the services provided. 

Rental income 

Rental income from aircraft, railcars and real estate leases, other than contingent rents, is recognised on a 

straight-line basis over the respective lease terms. Contingent rents are recognised as revenue when they are due 

and payable. 

Sale of assets 

Revenue from sales of assets is recognised at the time the title is transferred or delivery has occurred, the price is 

fixed and determinable, and collectibility is probable. 

Interest 

Interest income from loans and advances and other interest bearing assets is brought to account on an accrual 

basis. Accrued coupons, amortisation of premiums and accretion of discounts are brought to account as interest 

income on a yield to maturity basis in accordance with the terms of the security. 

Dividends 

Dividend revenue is recognised when Babcock & Brown controls the right to receive the dividend payment. 

182


2. CONSOLIDATED PRO-FORMA FINANCIAL STATEMENTS 

The consolidated pro-forma financial statements of Babcock & Brown Limited have been extracted from the 

audited consolidated financial statements of Babcock & Brown Holdings Inc. (BBH), a US corporation and the 

parent entity of Babcock & Brown immediately prior to the public listing.The consolidated financial statements 

of BBH were prepared in accordance with accounting principles generally accepted in the United States 

(USGAAP) in US dollars.These consolidated pro-forma financial statements have been prepared by converting 

the BBH USGAAP consolidated financial statements to AGAAP, translating those accounts from US dollars to 

Australian dollars and taking into account the pro-forma entries outlined below and detailed in notes 3 and 4. 

These pro-forma financial statements comprise pro-forma statements of financial performance for the years 

ending 31 December 2001, 2002 and 2003, pro-forma statements of cash flows for the years ending 31 December 

2002 and 2003 and a pro-forma statement of financial position as at 31 December 2003 for Babcock & Brown 

Limited and the entities it will control following the proposed IPO. A list of those entities is included in note 36. 

(a) Pro-forma Statement of Financial Position 

The following pro-forma adjustments have been made to the consolidated pro-forma statement of financial 

position. Quantification of the impact of these adjustments is detailed in note 4. 

Internal restructure of Babcock & Brown Limited and its controlled entities 

Prior to the proposed public listing, BBH, as the parent entity prior to the listing, undertook an internal 

restructure to establish a new listing vehicle, Babcock & Brown Limited and a holding company, Babcock & 

Brown International Pty Limited (BBIPL) above the existing parent and include and exclude certain entities from 

the group. As part of the restructure, the existing shareholders of BBH received a 30% ownership interest in 

BBIPL, resulting in an additional outside equity interest recognised in the consolidated pro-forma financial 

statements of Babcock & Brown Limited. 

In accordance with AGAAP, Babcock & Brown Limited as the ultimate parent following the proposed IPO, is 

deemed to acquire the existing group (being BBH plus additions and disposals) at fair value at the listing date, 

in consideration for the issue of shares. As disclosed in the Prospectus, the shares have been issued at a price of 

$5 per share. Any difference between the value of the shares issued and the fair value of the net assets acquired by 

Babcock & Brown has been accounted for as goodwill in the historic consolidated pro-forma financial 

statements. 

The final amount of goodwill, share capital and outside equity interest may be different to that disclosed in the 

historical pro-forma financial statements as they will be determined based on the fair values at the acquisition 

date, which is the proposed listing date. 

Equity raising 

The consolidated pro-forma statement of financial position reflects the financial position of Babcock & Brown 

Limited and its controlled entities after the proposed capital raising of $550 million. As noted above, this amount 

is based on a share issue price of $5 per share giving a total raised of $550 million less directly attributable 

transaction costs of $27 million which have been recognised directly in equity. 

The equity raising adjustment also includes amounts raised from existing owners and employees of Babcock & 

Brown immediately prior to the IPO (refer note 30). 

Foreign currency translation 

Assets and liabilities of Australian entities have been included in the consolidated pro-forma statement of financial 

position at actual amounts.The carrying value of assets and liabilities of non-Australian entities have been 

translated from US dollars at the closing spot rate on 31 December 2003 of 0.7531. 

183


Deferred tax 

The consolidated pro-forma statement of financial position reflects the deferred taxes of the consolidated entity 

of Babcock & Brown subsequent to the proposed IPO.The deferred tax balances reflect any changes in the tax 

status of the US entities resulting from the restructure noted above and any resulting associated additional tax 

losses that are considered virtually certain at the transaction date.The formation of a tax consolidated group for 

all Australian wholly owned subsidiaries has also been incorporated in the pro-forma deferred tax balances. 

Special cash distribution 

A special cash distribution of $128,550,000 will be made to the existing partners/unit holders of the group prior 

to the proposed listing date to enable personal tax liabilities crystallised as part of the transaction to be met. 

(b) Pro-forma Statements of Financial Performance and Pro-forma Statements of Cash Flows 

Reporting format 

The consolidated pro-forma statements of financial performance have been presented to the level of profit before 

tax and bonus after recognition of outside equity interests. Reflecting the move from a private partnership to a 

public company following the IPO, Babcock & Brown will be structured with a different tax profile and with a 

different remuneration policy than prior to the IPO. Accordingly, Babcock & Brown does not believe that the 

reporting of historical tax and bonus charges and related cash flows would be meaningful or appropriate. 

Foreign currency translation 

The consolidated pro-forma statements of financial performance and pro-forma statements of cash flows have 

been translated from US dollars at the average rate for the relevant period, except for the revenues, expenses and 

cash flows of Australian entities which are included at actual amounts for the relevant period.The rates used are 

as follows: 

• year ended 31 December 2003 – 0.6529 



Hedging transactions 

The consolidated pro-forma historical statements of financial performance exclude the gains and losses associated 

with hedging transactions undertaken to hedge exchange gains and losses of Australian dollar exposures. As the 

reporting and functional currency of Babcock & Brown is Australian dollars, these hedging transactions will not 

be undertaken by Babcock & Brown subsequent to the proposed public listing. 

As a result of the factors outlined above in (a) and (b), the financial information included in these pro-forma 

financial statements may not reflect the financial position, operating results or cash flows of Babcock & Brown 

Limited and its controlled entities had the group existed as a publicly listed company under its proposed 

corporate structure for the periods presented. 

184


3. PRO-FORMA ADJUSTMENTS TO THE CONSOLIDATED 

STATEMENTS OF FINANCIAL PERFORMANCE – AGAAP 

Summary of Pro-forma Adjustments 

The following adjustments have been made in converting the pro-forma amounts under AGAAP: 

Year ended 31 December 2003 2003 2002 2001 

$000 $000 $000 

Pro-forma Revenues from Ordinary Activities under AGAAP 1,501,938 1,571,690 1,920,511 

Adjustments to Profit/(loss) from Ordinary Activities before 

Income Tax Expense 

Profit/(loss) from ordinary activities before income tax expense 

attributable to members and outside equity interests 

under AGAAP (a) (17,089) 68,026 56,463 

Reversal of losses on foreign exchange contracts (b) 44,917 23,922 3,835 

Reversal of bonus expense (c) 160,769 142,258 187,607 

Reversal of charges associated with the group’s previous capital structure (d) 1,663 19,952 3,705 

Reversal of historic outside interest charges (e) 62,776 9,312 32,135 

BBIPL outside equity interests (f) (75,911) (79,041) (85,124) 

Pro-forma Profit from Ordinary Activities before 

Bonus Expense and Income Tax Expense Attributable to 

Members under AGAAP 177,125 184,429 198,621 

(a) Profit/(loss) from ordinary activities before income tax expense attributable to members and outside equity interests under AGAAP represents the consolidated 

profit or loss of BBH adjusted to include the results of entities which were not controlled by BBH prior to the IPO but which will be controlled by the 

group following the IPO and to exclude the results of entities which were controlled by BBH prior to the IPO but which will not be controlled by Babcock 

& Brown following the IPO.The results of BBH were initially prepared in US dollars in accordance with USGAAP.The above profits and losses have been 

converted into AGAAP and translated to Australian dollars as per note 2. 

(b) Reversal of losses on forward foreign exchange contracts entered to hedge Australian dollar exposures while Babcock & Brown was a US dollar reporting 

entity. As no such hedges are to be entered into in the future, the impact of the hedges has been eliminated as a pro-forma adjustment. In the historical periods 

the gains and losses associated with the underlying exposures were reflected in the foreign currency translation reserve. 

(c) Consistent with the reporting format outlined in note 2(b), the bonus expense has been reversed. 

(d) Reversal of compensation and other payments associated with the previous capital structure which will be non-recurring under the new capital structure. 

(e) Reversal of outside equity interests under the previous structure for parties that will become shareholders in Babcock & Brown or BBIPL under the new 

structure. 

(f) Reflects the outside equity interest of the US Executive Stakeholders in BBH prior to the IPO.This interest is held through BBIPL. 

185


4. PRO-FORMA ADJUSTMENTS TO THE CONSOLIDATED 

STATEMENT OF FINANCIAL POSITION 

Summary of Pro-forma Adjustments 

The following adjustments have been made in converting the pro-forma balances under AGAAP: 

186 

At 31 December 2003 Pro-forma Pro-forma 

AGAAP adjustments AGAAP 

$000 $000 $000 

Assets 

Cash and trading securities 318,874 251,859 (a) 570,733 

Fees receivable from financing transactions 47,202 47,202 

Other receivables 64,468 64,468 

Notes receivable 183,279 (18,849) (b) 164,430 

Investments in financial assets 43,627 15,024 (c) 58,651 

Investments accounted for using the equity method 154,168 7,608 (c) 161,776 

Transportation equipment 503,498 503,498 

Real estate 384,820 3,851 (c) 388,671 

Semiconductor equipment 4,720 4,720 

Property, plant and equipment 19,539 19,539 

Assets under development 65,565 65,565 

Other assets 28,968 28,968 

Deferred tax assets 3,591 65,000 (d) 68,591 

Intangible assets – 725,733 (e) 725,733 

Total Assets 1,822,319 1,050,226 2,872,545 

Liabilities 

Accounts payable and accrued liabilities 214,661 30,187 (f) 244,848 

Deposits 48,431 48,431 

Deferred income 32,097 32,097 


– Transportation equipment notes payable 505,888 505,888 

– Real estate notes payable 341,617 341,617 

– Revolving credit agreement with HVB and term loan from HVB 72,914 (72,914) (g) – 

– Other notes payable 251,970 (120,375) (h) 131,595 

Shareholder distributions payable 12,981 12,981 

Current tax liabilities 7,524 7,524 

Deferred tax liabilities 5,150 5,150 

Other liabilities 64,710 (58,672) (i) 6,038 

Total Liabilities 1,557,943 (221,774) 1,336,169 

Net Assets 264,376 1,272,000 1,536,376 

Equity 

Contributed equity 111,398 937,601 (j) 1,048,999 


– BBIPL – 449,595 (k) 449,595 

– Other minorities 152,978 (115,196) (k) 37,782 

Total Equity 264,376 1,272,000 1,536,376


AGAAP requires that in any acquisition, all assets and liabilities be carried at fair value and the difference between the fair value of the assets and liabilities and the 

consideration paid be treated as goodwill. Given the Restructure of the group outlined in Section 8.3 of the Prospectus, in the consolidated pro-forma statement 

of financial position, the Executive Stakeholders are deemed to subscribe for shares in Babcock & Brown at the relevant subscription price (in most cases this is 

the IPO Price) and goodwill is therefore calculated as the difference between the number of shares allocated to existing owners at the Subscription Price and the 

fair value of the underlying assets and liabilities at 31 December 2003.The consolidated pro-forma statement of financial position has therefore been derived from 

the statement of financial position of BBH at 31 December 2003 adjusted to reflect: 

• The transactions required to give effect to the restructured Babcock & Brown including the recognition of: 

– all assets and liabilities at fair value at 31 December 2003; 

– deferred tax balances consistent with the new structure; and 

– goodwill inherent in the group 

• An accrual for dividends and distributions to the existing Executive Stakeholders 

• The raising of $17.6 million from existing Executive Stakeholders immediately prior to the IPO 


• The repayment of debt amounting to $170.2 million 

• Transaction costs of the IPO estimated at $27 million 

• The reflection of an outside equity interest representing the interests of the existing US Executive Stakeholders held through BBIPL 

Further details of the impact of these pro-forma adjustments on individual line items within the consolidated pro-forma statement of financial position are set out 

below. 

(a) Purchase by Company of HVB interest in German subsidiary (3,186) 

Payments to current owners to provide cash to cover personal income taxes due upon restructure (128,550) 

Net subscriptions and redemptions of Company equity effective 1 January 2004 53 

Repayment by employees of financing used to purchase equity under the previous capital structure 30,711 

Proceeds from Listing 550,000 

Listing expenses (27,000) 

Debt payments by Company (170,169) 

251,859 

(b) Equity raised from existing employees immediately prior to IPO (24,205) 

Acquisition Fair value adjustments 5,356 

(18,849) 

(c) Acquisition Fair value adjustments 26,483 

(d) Adjustment of deferred tax balance to reflect post-reorganisation tax paying status 15,000 

Deferred tax assets related to deductions generated by Babcock & Brown reorganisation 50,000 

65,000 

(e) Goodwill recorded in connection with Babcock & Brown reorganisation and IPO 725,733 

(f) Accrual of other liabilities in connection with reorganisation 4,249 

Reclassification from Other Liabilities 7,333 

Acquisition Fair value adjustments 18,605 

30,187 

(g) Repayment of Notes Payable from IPO proceeds (72,914) 

(h) Repayment of Notes Payable from IPO proceeds (92,305) 

Reclassification to Equity of Notes Payable related to Babcock & Brown Equity subscriptions (23,120) 

Repayment of Note Payable to Employee related to Babcock & Brown Equity subscription (4,950) 

(120,375) 

(i) Reclassification to accounts payable and accrued liabilities (7,333) 

Reclassification to equity of balance related to phantom stock plan (51,339) 

(58,672) 

(j) Purchase by Company of HVB interest in Company German subsidiary (3,186) 

Payments to current owners to provide cash to cover personal income taxes due upon reorganisation in connection with IPO (128,550) 

Net subscriptions and redemptions of equity effective 1 January, 2004 53 

Equity raised from existing employees immediately prior to IPO (24,205) 

Reclassification to Equity of Notes Payable related to equity subscriptions 23,120 

Repayment by employees of financing used to purchase equity 30,711 

Reversal of liabilities related to compensation charges on stock and phantom purchases 1,250 

Proceeds from IPO 550,000 

IPO expenses (27,000) 

Adjustment of deferred tax assets to reflect post reorganisation tax paying status 15,000 

Deferred tax assets related to deductions generated by reorganisation 50,000 

Record Employee and HVB redemptions and subscriptions 270,639 

Reclassification to equity of balance related to phantom stock plan 51,339 

Reclassification to equity of HVB and BBA outside interest 116,786 

Fair value adjustment 11,644 

937,601 

(k) Reclassification to equity of HVB and BBA outside interest (116,786) 

Record employees redemption and BBIPL equity purchase 449,595 

Fair value adjustments 1,590 

334,399 

187


5. RECONCILIATION OF CONSOLIDATED PRO-FORMA 

AGAAP TO AUSTRALIAN IFRS CONSOLIDATED INCOME 

STATEMENT 

Pro-forma AGAAP to Pro-forma IFRS 

Adjustments have been made in converting the pro-forma amounts under AGAAP to pro-forma amounts under 

Australian IFRS: 

Year ended 31 December 2003 Pro-forma Adjustments Pro-forma 

AGAAP 

Australian 

IFRS 

3 $000 $000 $000 

Pro-forma Revenue under Australian IFRS 1,501,938 3,643 (a) 1,505,581 

Profits from Ordinary Activities before Bonus Expense, 

Income Tax Expense and Outside Equity Interests 261,767 3,643 265,410 

Outside equity interests excluding BBIPL (8,731) (914) (b) (9,645) 


and Income Tax Expense Attributable to Members and 

BBIPL Equity Interest 253,036 2,729 255,765 

BBIPL outside equity interests (75,911) (819) (c) (76,730) 

Profit from Ordinary Activities before Bonus expense 

and Income Tax Expense Attributable to Members 177,125 1,910 179,035 

(a) Fair valuation of investment properties 3,643 

(b) Outside equity interest in fair valuation of investment properties (914) 

(c) Fair value adjustment attributable to BBIPL outside equity interests (819) 

188


6. RECONCILIATION OF CONSOLIDATED PRO-FORMA 

AGAAP TO CONSOLIDATED AUSTRALIAN IFRS BALANCE 

SHEET 

Pro-forma AGAAP to Pro-forma Australian IFRS 

The following adjustments have been made in converting the pro-forma balances under AGAAP to pro-forma 

balances under Australian IFRS: 

At 31 December 2003 Pro-forma Adjustments Pro-forma 

AGAAP 

Australian 

IFRS 

$000 $000 $000 

Assets 

Cash and trading securities 570,733 570,733 

Fees receivable from financing transactions 47,202 47,202 

Other receivables 64,468 64,468 

Notes receivable 164,430 164,430 

Investments in financial assets 58,651 58,651 

Investments accounted for using the equity method 161,776 161,776 

Transportation equipment 503,498 503,498 

Real estate 388,671 388,671 

Semiconductor equipment 4,720 4,720 

Property, plant and equipment 19,539 19,539 

Assets under development 65,565 65,565 

Other assets 28,968 28,968 

Deferred tax assets 68,591 68,591 

Intangible assets 725,733 (725,733) (a) – 

Total Assets 2,872,545 (725,733) 2,146,812 

Liabilities 

Accounts payable and accrued liabilities 244,848 244,848 

Deposits 48,431 48,431 

Deferred income 32,097 32,097 


– Transportation equipment notes payable 505,888 505,888 

– Real estate notes payable 341,617 341,617 

– Other notes payable 131,595 131,595 

Shareholder distributions payable 12,981 12,981 

Current tax liabilities 7,524 7,524 

Deferred tax liabilities 5,150 5,150 

Other liabilities 6,038 6,038 

Total Liabilities 1,336,169 1,336,169 

Net Assets 1,536,376 (725,733) 810,643 

189


At 31 December 2003 Pro-forma Adjustments Pro-forma 

AGAAP 

Australian 

IFRS 

$000 $000 $000 

Equity 

Contributed equity 1,048,999 (570,025) (b) 478,974 

Retained earnings – 995 (c) 995 

Reserves – 61,025 (d) 61,025 

1,048,999 (508,005) 540,994 


– BBIPL 449,595 (217,728) (e) 231,867 

– Other minorities 37,782 – (e) 37,782 

Total Equity 1,536,376 (725,733) 810,643 

The disclosure requirements of Australian IFRS have not been complied with to facilitate comparison to the AGAAP Consolidated Pro-Forma Statements of 

Financial Performance and Position. 

(a) Reversal of goodwill recorded for AGAAP purposes in connection with the reorganisation and listing 725,733 

(b) Reversal of goodwill recorded for AGAAP purposes in connection with the reorganisation and listing (508,005) 

Reclassification of equity accounts 62,020 

(570,025) 

(c) Reclassification of equity accounts 995 

(d) Reclassification of equity accounts 61,025 

(e) Reversal of goodwill recorded for AGAAP purposes in connection with the reorganisation and listing (217,728) 

190


7. REVENUE FROM ORDINARY ACTIVITIES 

Revenues From Ordinary Activities 

2003 2002 2001 

$000 $000 $000 

Fees from financing transactions 331,825 406,950 427,857 

Rental income 100,250 72,355 76,857 

Proceeds from sales of assets 

– Transportation equipment 739,762 985,707 1,346,500 

– Real estate 108,328 45,250 – 

– Semiconductor equipment 29,538 – – 

– Subsidiaries and associates 143,094 26,317 25,599 

Realised and unrealised gains on marketable securities 5,986 3,836 262 

Interest income 29,512 27,135 29,246 

Other income 13,643 4,140 14,190 

Total Revenues from Ordinary Activities 1,501,938 1,571,690 1,920,511 

191


8. EXPENSES 

2003 2002 2001 

$000 $000 $000 

8(a) Expenses From Ordinary Activities Excluding Borrowing Costs and Bonuses 

Cost of assets sold 

– Transportation equipment 697,175 915,562 1,268,449 

– Real estate 82,047 41,630 – 

– Semiconductor equipment 18,276 – – 

– Subsidiaries and associates 75,463 – 16,176 

Salaries and employee costs 108,737 111,444 95,116 

Professional fees 52,667 36,274 32,405 

Depreciation and amortisation 41,258 38,641 38,176 

Occupancy 26,604 25,442 23,747 

Transaction fees 32,238 26,532 41,167 

Travel 15,445 25,243 17,218 

Other 57,007 40,951 52,721 

Total Expenses From Ordinary Activities Excluding 

Borrowing Costs and Bonuses 1,206,917 1,261,719 1,585,175 

Salaries and employee costs exclude bonuses paid to employees because Babcock & Brown will be implementing 

a new incentive compensation plan following its equity raising that differs from the plan used for the presented 

periods. 

Other expenses include asset management fees paid on aircraft, railcars and real estate and property, insurance, 

communication and IT related charges. 

2003 2002 2001 

$000 $000 $000 

8(b) Other Disclosure Information 

Borrowing costs expense 

Interest expense 43,732 40,888 50,677 

Other borrowing costs 720 320 160 

Total Borrowing Costs Expensed 44,452 41,208 50,837 

Depreciation of transportation equipment 32,995 29,298 29,388 

Property and equipment depreciation 5,071 6,326 7,285 

Other depreciation and amortisation 3,192 3,017 1,503 

Total Depreciation and Amortisation Expenses 41,258 38,641 38,176 

Foreign exchange gain/(loss) – Realised (26) 339 1,973 

Foreign exchange gain/(loss) – Unrealised 4,796 (1,094) (1,241) 

Realised gain/(loss) on interest rate hedges – (3,224) – 

Unrealised gain/(loss) on interest rate hedges 1,819 (1,194) – 

Total realised and unrealised gain/(loss) on foreign exchange 

and interest rate hedges 6,589 (5,173) 732 

192


9. GAINS ON ASSET SALES 

Transportation equipment 

2003 2002 2001 

$000 $000 $000 

– Proceeds 739,762 985,707 1,346,500 

– Cost of sales (697,175) (915,562) (1,268,449) 

– Net gain 42,587 70,145 78,051 

Real estate 

– Proceeds 108,328 45,250 – 

– Cost of sales (82,047) (41,630) – 

– Net gain 26,281 3,620 – 

Semiconductor equipment 

– Proceeds 29,538 – – 

– Cost of sales (18,276) – – 

– Net gain 11,262 – – 

Subsidiaries and associates 

– Proceeds 143,094 26,317 25,599 

– Cost of sales (75,463) – (16,176) 

– Net gain 67,631 26,317 9,423 

Net gain on asset sales 147,761 100,082 87,474 

Babcock & Brown has an agreement with Nomura Babcock & Brown Co., Ltd. (NBB), a third party, that 

provides for the payment by Babcock & Brown to NBB of a fee based on income earned on the sale, 

management and leasing of certain aircraft. Charges from NBB under this fee agreement were $12.0 million, 

$15.7 million and $38.6 million for the years ended 31 December 2003, 2002 and 2001, respectively. 

Babcock & Brown recorded a 2002 gain of $26.317 million on the sale of an associate that resulted from the 

listing of the associate. Babcock & Brown sold no part of the interest in the associate but did recognise a gain 

equal to the increase in its share of the associate’s net assets. 

10. CASH AND SHORT TERM TRADING SECURITIES 

2003 

$000 

Cash at bank 541,599 

Short-term securities 29,134 

Total cash and short-term trading securities 570,733 

Approximately $82.0 million of Babcock & Brown’s cash was restricted, primarily for deposits and amounts 

pledged as collateral against notes payable 

193


11. FEES RECEIVABLE FROM FINANCING TRANSACTIONS 

2003 

$000 

Fee receivables (current) 47,202 

12. OTHER RECEIVABLES 

2003 

$000 

Trade debtors 34,376 

Amounts receivable from related parties (i) 15,589 

Reimbursable expenses 5,009 

Rent receivable on leased assets 3,788 

Employee advances 3,224 

Other 2,482 

Total other receivables (current) 64,468 

(i) Amounts receivable from related parties 

Director-related entities 

– Director-related entity 3,962 

Other related parties 

– Associated companies 11,627 

15,589 

13. NOTES RECEIVABLE 

Interest bearing notes 

2003 

$000 

– Third party 126,239 

– Associates 18,054 

– Employees 10,970 

Non-interest bearing notes 

– Third party 9,914 

– Associates 691 

Provision (1,438) 

Total notes receivable 164,430 

Current 66,406 

Non-current 98,024 

Total 164,430 

194


14. INVESTMENTS IN FINANCIAL ASSETS 

2003 

$000 

Shares in listed entities – current 24,373 

Shares in unlisted entities – current 21,539 

Shares in unlisted entities – non-current 12,739 

15. INVESTMENTS ACCOUNTED FOR USING THE 

EQUITY METHOD 

58,651 

Ownership 

interest by 

Balance consolidated Carrying Principal 

Name date entity value activity 

$000 

Babcock & Brown PFI Partners LP 31 Dec 2003 33% – (i) 

Life Receivables Holdings LLC 31 Dec 2003 50% – (ii) 

Plaza 246 Co., Ltd. 31 Dec 2003 22% 2,979 (iii) 

Beaujolais Co., Ltd. 31 Dec 2003 66% 3,524 (iv) 

Investment in TKs – various 31 Dec 2003 66% 356 (v) 

Earthlease Limited 31 Dec 2003 50% – (ix) 

Sentient Global Resources Fund 1, LLP 31 Dec 2003 7% 5,254 (vi) 

Sentient GP 1, L.P. 31 Dec 2003 42% 347 (vi) 

Sentient 2 GP, L.P. 31 Dec 2003 42% 72 (vi) 

Sentient (Aust) Pty Limited 31 Dec 2003 25% – (vi) 

Sentient Executive GP 1 Limited 31 Dec 2003 25% – (vi) 

Sentient Executive 2 GP Limited 31 Dec 2003 25% – (vi) 

The Sentient Group Limited 31 Dec 2003 25% 715 (vi) 

Brightmore Pty Ltd 31 Dec 2003 24% 6,000 (vii) 

Ferrier Babcock Pty Ltd 31 Dec 2003 25% – (vii) 

Southern Oil Pty Ltd 31 Dec 2003 29% 1,546 (ix) 

Harrison Street Partners LP 31 Dec 2003 1% 22 (vii) 

MTM Funds Management Limited 31 Dec 2003 50% 753 (viii) 

Citta Property Group Pty Ltd 31 Dec 2003 40% 3,881 (viii) 

Bellagio Homebush Bay Trust 31 Dec 2003 50% 2,255 (viii) 

International Infrastructure Fund 31 Dec 2003 33% – (ix) 

International Infrastructure Management Pty Ltd 31 Dec 2003 33% – (ix) 

Torquay Developments Unit Trust 31 Dec 2003 45% 4,608 (viii) 

Babcock & Brown Renewable Power Investment 

Pty Ltd atf Babcock & Brown Renewable Power 

Investment Trust 31 Dec 2003 50% – (ix) 

Eagle III Syndicate LLC 31 Dec 2003 33% 5,130 (i) 

195


Ownership 

interest by 

Balance consolidated Carrying Principal 

Name date entity value activity 

$000 

Felix Apartments Pty Ltd 31 Dec 2003 33% 600 (viii) 

Ruskin Street Unit Trust 31 Dec 2003 50% 481 (viii) 

Addison Street Unit Trust 31 Dec 2003 50% 756 (viii) 

Digital Harbour Holdings Pty Ltd 31 Dec 2003 25% 1,000 (viii) 

Schofield Properties Pty Ltd 31 Dec 2003 50% 32 (viii) 

Prime Infrastructure Management Ltd and 

Prime Infrastructure Trust 31 Dec 2003 9% 28,338 (ix) 

Optimal Fund Management Pty Ltd 31 Dec 2003 16% 2,019 (vii) 

Coomera Unit Trust 31 Dec 2003 43% 3,804 (viii) 

Site 3 Development Co. Pty Ltd 31 Dec 2003 50% 1,399 (viii) 

40 Market Street Trust 31 Dec 2003 50% – (viii) 

Ascot Vale (Victoria) Property Trust 31 Dec 2003 50% 553 (viii) 

B&B Insurance Pty Ltd. 30 Sept 2003 28% 2,572 (ii) 

Eaglet III Ltd. 31 Dec 2003 50% 1,874 (i) 

Seqant 31 Dec 2003 19% 87 (vii) 

Life Receivables Euro, LLC 31 Dec 2003 50% – (ii) 

Nibbiano Pty Ltd 31 Dec 2003 33% 1,705 (v) 

Momentum Fund Management Pty Ltd 31 Dec 2003 25% – (vii) 

Primelife Corporation Limited 31 Dec 2003 20% 31,036 (viii) 

B&B Fors Investment Pty Ltd atf B&B Fors 

Investment Trust 31 Dec 2003 33% 1,069 (x) 

Blue Canyon Windpower LLC 31 Dec 2003 11% 11,720 (ix) 

Eurus Combine Hills 1 LLC 31 Dec 2003 15% 7,948 (ix) 

Sweetwater Wind 1 LLC 31 Dec 2003 14% 8,515 (ix) 

Sentient Coal Resources, LLC 31 Dec 2003 6% 739 (vi) 

Global Wind Partners Management Pty Ltd 31 Dec 2003 17% 83 (ix) 

Babcock & Brown atf Global Wind Partners Trust 31 Dec 2003 17% 9,412 (ix) 

Babcock & Brown Insurance Trust 30 Sept 2003 8% 514 (ii) 

Fulcrum Capital Mgmt Ltd 31 Dec 2003 50% 243 (i) 

Momentum Ventures Pty Ltd atf Momentum 

Ventures Unit Trust 31 Dec 2003 10% 1,544 (x) 

Espresso Broadband Ltd 31 Dec 2003 8% 44 (x) 

PMJI Inc. 31 Dec 2003 1% 135 (x) 

Pace Cargo Enterprises I, LLC 31 Dec 2003 50% 3,056 (iv) 

Pace Cargo Enterprises II, LLC 31 Dec 2003 50% 3,056 (iv) 

Pace Cargo Enterprises III, LLC 31 Dec 2003 50% – (iv) 

161,776 

196


For entities where the equity interest is greater than 50%, Babcock & Brown jointly control the financial and 

operating decisions of the entities, together with unrelated third parties. 

Principal activity: 

(i) United Kingdom real estate 

(ii) Purchaser of life insurance policies or investor in insurance companies. 

(iii) Japan real estate 

(iv) Aircraft operating leasing 

(v) Special purpose financing entity 

(vi) Natural resources 

(vii) Investment management 

(viii)Australia real estate 

(ix) Infrastructure assets 

(x) Misc. service business 

2003 

$000 

Share of associates’ profits 

Share of associates’: 

– net profits before income tax 11,361 

– income tax expense attributable to net profit (163) 

– net profits after income tax 11,198 

– profits on extraordinary items after income tax – 

Share of associates’ net profits 11,198 

Share of associates’ assets and liabilities 

Current assets 80,763 

Non-current assets 419,635 

Current liabilities (61,318) 

Non-current liabilities (277,304) 


16.TRANSPORTATION EQUIPMENT 

2003 

$000 

Aircraft – current 442,707 

Aircraft – non-current 101,920 

Accumulated depreciation (41,129) 

503,498 

Babcock & Brown, through special-purpose subsidiaries, owned a total of 15 passenger aircraft as of 31 December 

2003.The aircraft are pledged as collateral on notes payable. 

197


17. REAL ESTATE 

Land Buildings Total 

2003 2003 2003 

$000 $000 $000 

German real estate 66,911 225,431 292,342 

Japanese real estate 19,610 13,502 33,112 

Japanese golf course 2,933 3,328 6,261 

United Kingdom real estate 5,925 40,575 46,500 

Australian real estate 3,900 6,556 10,456 

German Real Estate 

99,279 289,392 388,671 

Babcock & Brown owns approximately 6,000 residential apartment units and 34 commercial units.The real estate 

is pledged as collateral against a real estate note payable.The property is generally leased for terms of less than one 

year. 

Japanese Real Estate 

Babcock & Brown owns two multi-use rental real estate properties.The real estate is pledged as collateral against 

real estate notes payable. 

Japanese Golf Course 

Babcock & Brown holds an equity interest in a group of companies that owns and manages a golf course in 

Japan. 

United Kingdom Real Estate 

Babcock & Brown owns a single tenant real estate property in the United Kingdom, which is leased back to the 

seller through March 2026.The real estate is pledged as collateral against a real estate note payable. 

Australian Real Estate 

Babcock & Brown owns two movie theatres and adjoining retail space in Australia. Babcock & Brown operates 

the movie theatres and the retail space is leased on a short-term basis for rents of approximately $1 million a year. 

18. SEMICONDUCTOR EQUIPMENT 

2003 

$000 

Semiconductor manufacturing and testing equipment (current) 4,720 

Babcock & Brown purchases semiconductor equipment for trading.The equipment is typically held for less than 

one year and is sometimes refurbished prior to being offered for sale. 

198


19. PROPERTY AND EQUIPMENT 

Furniture and Equipment 

2003 

$000 

At Cost 28,502 


Net 7,325 

Leasehold Improvements 

At Cost 18,679 


Net 11,383 

Computer Equipment and Software 

At Cost 8,669 


Net 831 

Total Property and Equipment 19,539 

20.ASSETS UNDER DEVELOPMENT 

2003 

$000 

Anaerobic digester facility 15,049 

Real estate projects 42,837 

Wind farm projects 6,342 

Other 1,337 

Total assets under development (all non-current) 65,565 

Anaerobic Digester Facility 

Babcock & Brown, through a subsidiary, is constructing an anaerobic digester facility (the Facility) on a leased site 

in Australia.The Facility has been designed to process waste products and produce fertiliser and methane gas to 

fuel a co-generation plant that is being built as part of the development. Construction of the Facility started in 

December 2001 and was expected to be substantially completed in July 2003 with final handover from the 

contractor in October 2003.The Facility did not meet stipulated performance standards and it is expected that 

additional funds will be needed to make the Facility operational. It is unclear how much of the additional 

construction costs will be borne by the contractor. 

Subsequent to 31 December 2003, Babcock & Brown arranged for improvements costing approximately 

$5 million that it believes will bring the plant’s performance up to satisfactory standards. 

Real Estate Projects 

Babcock & Brown, through a subsidiary, is developing residential real estate property in Australia. 

Wind Farm Projects 

Babcock & Brown, through a subsidiary, is constructing wind farms on leased property in Australia. Construction 

of the wind farms started in June 2003 and is expected to be substantially completed in June 2005. 

199


21. OTHER ASSETS 

2003 

$000 

Prepaid expenses 8,310 

Loan fees 8,539 

Rental deposits 4,826 

Other deposits 3,837 

Other 3,456 

Total other assets 28,968 



22. INCOME TAXES 

28,968 

2003 

$000 

Current tax payable 7,524 

Provisions for deferred tax liabilities 5,150 

Future income tax benefit 68,591 

Tax Consolidation 

Following the restructure and IPO, Babcock & Brown International Pty Limited will form a tax consolidated 

group with its 100% owned Australian subsidiaries. 

The estimated liability of $3.4 million from resetting tax values as a consequence of the Restructure has been 

included in the pro-forma adjustments detailed in note 4. 

23. INTANGIBLE ASSETS 

2003 

$000 

Goodwill 725,733 

24.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 

2003 

$000 

Trade creditor 114,144 

Accrued benefits payable to employees 126,939 

Provisions 3,765 

Total (current) 244,848 

200


25. DEPOSITS 

2003 

$000 

Aircraft operating lease maintenance deposits 36,081 

Security Deposits 12,350 

Total deposits held (current) 48,431 

In the normal course of leasing aircraft under operating lease agreements, Babcock & Brown receives deposits as 

rental security, deposits in advance of sale and monies to be applied against future maintenance of the aircraft. 

These deposits are generally refundable if unapplied and are recorded as deposits held. 

26. DEFERRED INCOME 

2003 

$000 

Unearned rental income 15,669 

Unearned fees 16,428 

Total deferred income 32,097 



Unearned Rental income 

32,097 

Babcock & Brown, in conjunction with its operating leasing business, receives certain rental payments in advance 

of the period for which they are earned.The income is recognised using the straight-line method over the 

applicable lease term. 

Unearned Fees 

Babcock & Brown has received fee payments or recorded fees receivable for financing transactions that have 

contingencies that may result in Babcock & Brown returning fee payments received or cancelling receivables 

recorded in its financial statements.These items have been recorded as unearned fee income. 

Babcock & Brown received certain management fees in advance of its providing management services.These fees 

will be recorded as income as Babcock & Brown provides the related management services. 

201


27. INTEREST BEARING LIABILITIES 

2003 

$000 

Aircraft notes payable 505,888 


Secured by notes receivable 67,853 

Secured by investments in wind farm associates 23,393 

Margin loans 17,766 

Payable to NBB 10,680 

Payable to related parties 4,183 

Other 7,720 

979,100 



Aircraft Notes Payable 

979,100 

Babcock & Brown finances aircraft purchases with short-term and long-term borrowings from various banks.The 

notes payable are obligations of special purpose subsidiaries established to own aircraft.The lenders have recourse 

only to the assets of the subsidiaries and, in some cases, these notes are guaranteed by NBB. Interest accrues at 

fixed rates between 2.075% and 7.155%.The short-term notes are renewed monthly pending sale of the aircraft. 

The long-term notes mature at various times through 2011. 

Real Estate Notes Payable 

Babcock & Brown finances real estate purchase with medium- and long-term borrowings.The real estate notes 

payable are secured by various Babcock & Brown real estate properties.The 31 December 2003 balance consists 

of the following: 

(a) $275.9 million borrowing consisting of two notes payable secured by German real estate properties. Interest 

payable on the notes are European Interbank Offered Rate (EURIBOR) plus 1.10% and EURIBOR plus 

2.00%. Interest is due every year on each note with principal amortisation of 2% of the outstanding note 

balance commencing in June 2004. Final maturity is in 2013. 

(b) $17.3 million borrowing consisting of a note payable secured by Japanese real estate.The interest rate is 

3.909%. Principal is due at maturity in 2004. 

(c) $48.3 million borrowing secured by United Kingdom real estate.The interest rate is 6.39% and final note 

maturity is in 2026. Principal and interest are due quarterly. 

Secured by Notes Receivable 

Babcock & Brown has notes payable that are secured by notes receivable. Interest rates range from 6.69% 

to 8.37%. 

Secured by Investments in Associates with Wind Farm Investments 

Babcock & Brown has a note payable secured by investments in three wind farm projects located in the US. 

The interest rate is LIBOR plus 1.75%. Principal and interest are due quarterly with final maturity in 2011. 

202


Margin Loans 

Babcock & Brown has margin loans that are secured by marketable securities. One of the marketable securities 

is accounted for using the equity method because of the size of Babcock & Brown’s ownership interest. Interest 

accrues at rates ranging from 8.75% to 10%. All of the loans mature in 2004. 

Payable to NBB 

Babcock & Brown has notes payable to NBB that are secured by the investments in several associates.The notes 

bear interest at 7.5% and are due in 2009 and 2010. 

Payable to Related Parties 

Babcock & Brown has unsecured notes payable to related parties. 

28. SHAREHOLDER DISTRIBUTIONS PAYABLE 

2003 

$000 

Distributions payable to Shareholders (current) 12,981 

Shareholder distributions payable consists of distributions due to Babcock & Brown Holdings Inc. shareholders. 

29. OTHER LIABILITIES 

2003 

$000 

Other liabilities (current) 6,038 

30. CONTRIBUTED EQUITY 

Contributed equity at 31 December 2003 comprises: 

Number of shares 2003 

$000 

Shares allocated to existing executives 152,899,275 764,496 

Subscriptions from existing executives 10,900,725 17,598 

Subscriptions from public 110,000,000 550,000 

Allocations to Employee Trusts 12,500,000 – 

Shares to HVB 38,700,000 193,500 

325,000,000 1,525,594 

Less:Transaction Expenses – (27,000) 

Subtotal 325,000,000 1,498,594 

Less: BBIPL Minority Interest (97,503,584) (449,595) 

227,496,416 1,048,999 

At IPO date, Babcock & Brown will issue 23.5 million options to pre IPO Executive Stakeholders. Refer to 

Section 4 of the prospectus for further details of the terms and conditions associated with these options. 

203


31. OUTSIDE EQUITY INTERESTS 

2003 

$000 

Outside equity interest in BBIPL 449,595 

Other 37,782 

487,377 

US Executives will hold their interests in Babcock & Brown through Babcock & Brown International Pty 

Limited (BBIPL), the holding company for Babcock & Brown’s operations. Each share held in Babcock & Brown 

Limited and BBIPL will have materially equivalent economic rights. BBIPL shares may be converted to Babcock 

& Brown Limited shares on, essentially, a one-for-one basis. Further, over time the one-for-one basis reduces to 

encourage the exchange of BBIPL shares for Babcock & Brown Limited shares. 

32. STATEMENT OF CASH FLOWS 

Reconciliation of profit from ordinary activities before bonus expense and income tax expense 

attributable to both members and outside equity interests to net cash flows from operating 

activities 

2003 2002 

$000 $000 

Net profit 261,767 271,463 

Depreciation and amortisation expense 41,258 38,641 

Asset write-offs 12,124 2,750 

Gain on sale of transportation equipment (42,587) (70,145) 

Gain on sale of real estate (26,281) (3,620) 

Gain on sale of semiconductor equipment (11,262) – 

Gain on sale of subsidiaries and associates (67,631) (26,317) 

Share of associates profits (11,198) (2,700) 

Unrealised gain on marketable securities 6,642 3,836 

Deferred income 26,103 (4,069) 

(Increase)/Decrease in Assets 

Other receivables (12,129) 4,100 

Other assets (3,545) 14,676 

Receivable from associates 4,960 (18,096) 

Increase/(Decrease) in Liabilities 

Other liabilities (17,023) 24,005 

Net cash flows from operating activities 161,198 234,524 

204


33. RELATED PARTY TRANSACTIONS 

Members of Babcock & Brown Limited hold investments and management interests in a large number of entities 

and investment vehicles (affiliates). 

Such investments may comprise equity investments, quasi equity, debt, or a combination thereof. Babcock & 

Brown’s interest may be either as the majority holder, as a minority holder, or shared as an equal participant with 

one or more other parties. In addition, members of Babcock & Brown may borrow from or lend to such 

affiliates, enter management or profit share arrangements with them, generate fees from provision of services to 

them or incur expenses to them. Infrequently, Babcock & Brown may guarantee or underwrite obligations of the 

affiliate or indemnify third parties in respect of those obligations. 

With respect to many of these affiliates, executive officers and other employees of Babcock & Brown (related 

parties) also have direct or indirect minority or majority investment interests and they may hold director or 

officer positions in the affiliate. 

In the opinion of management, all transactions with related parties, whether between Babcock & Brown and the 

related party or an affiliate and related party, are conducted on terms, conditions and at prices which fully reflect 

the terms, conditions and prices which could be achieved if such transactions were conducted between third 

parties, and all transactions in which related parties have participated could have been concluded without the 

related parties’ participation on substantially the same terms with third parties. 

34. CONTINGENT LIABILITIES 

In certain financings that it has arranged and assets that it has sold, Babcock & Brown has indemnified parties to 

the financings and asset purchase for expenses that the parties could incur should certain events occur. Babcock & 

Brown believes that the probability of them incurring a material loss as a result of the indemnifications is remote 

and that any potential liability is not material. 

Babcock & Brown has completed financing transactions that may result in future fee or income payments to 

Babcock & Brown in addition to those received at the financing closing. Because the future payments are 

contingent with a risk that no additional payments will be received by Babcock & Brown, such payments are not 

recorded in Babcock & Brown’s financial statements until they are received. For most of these items, Babcock & 

Brown has committed to make additional payments to current and former employees and owners if and when 

Babcock & Brown receives additional payments. Liabilities to make such payments, including Babcock & Brown’s 

liability to BBH under the employee secondment agreement with BBH, are recorded in Babcock & Brown’s 

financial statements at the same time Babcock & Brown records the related receipts. 

The US Internal Revenue Service (IRS) is currently conducing an examination in connection with Babcock & 

Brown’s advisory business during 1993 to 1999 to determine whether Babcock & Brown should have made 

certain filings and registrations required under US tax law in relation to corporate tax shelters that may have been 

used by Babcock & Brown’s clients in that period.The IRS has not commenced proceedings, nor has it issued an 

assessment for liability under the relevant provisions. After consultation with its legal advisers, Babcock & Brown 

has made such provisions, as it considers appropriate in its financial statements in respect of this matter. 

Because of the nature of its business activities, Babcock & Brown is occasionally subjected to legal actions, 

contractual disputes, employment claims, and assessments of tax deficiencies.The contingencies typically arise in 

the normal course of Babcock & Brown’s business and as a result of regular, periodic reviews by taxing 

authorities. In the opinion of management, after consultations with legal counsel, the ultimate resolution of these 

matters will not have material adverse effect on the consolidated financial statements. 

A related party real estate developer has an obligation to pay $2.8 million to an unrelated third party upon 

reaching certain development hurdles. An Australian subsidiary of Babcock & Brown has guaranteed this 

payment.The subsidiary entity has no reason to believe the related party will fail to make this payment, which is 

expected to fall due on or before March 2005. 

205


A related party real estate developer has entered into a joint venture to develop a project with an estimated cost 

of $126.4 million. One of Babcock & Brown’s Australian subsidiaries has underwritten the obligations of this 

related party in respect of this project.The potential exposure is currently estimated not to exceed $25 million of 

which $12.5 million could be recovered from other transaction parties. As at the date of this report, no matter or 

circumstance has come to the attention of Directors which would indicate that the underwriting obligations of 

the subsidiary will be called upon. 

As at 31 December 2003 Babcock & Brown had provided letters of credit totalling $55.2 million. As at 

31 December 2003 no amounts had been drawn against these letters of credit. 

35. CAPITAL EXPENDITURE – COMMITMENTS 

2003 

$000 

(a) Capital Expenditure Commitments 

Estimated capital expenditure contracted for at reporting date, but not provided for, payable: 

– not later than one year 

– associated companies 14,115 

– joint venture – 

– other 64,595 

– later than one year and not later than five years – 

– other 33,688 

Aggregate capital expenditure commitments at reporting date 112,398 

(b) Lease Expenditure Commitments 

Minimum lease payments 

– not later than one year 15,505 

– later than one year and not later than five years 56,773 

– later than five years 70,716 

Aggregate lease expenditure contracted for at reporting date 142,994 

206


36. INVESTMENT IN CONTROLLED ENTITIES 

Country of Percentage of equity 

incorporation interest held by the 

consolidated entity 

Ascot Vale (B & B) Investments Pty Ltd Australia 100% 

40 Market Street Pty Ltd Australia 100% 

41 Hindmarsh Square Developments Pty Ltd Australia 100% 

41 Hindmarsh Square Investments Pty Ltd Australia 100% 

41 Hindmarsh Square Investments Trust Australia 100% 

450 Chapel Street Developments Pty. Ltd Australia 100% 

450 Chapel Street Developments Unit Trust Australia 75% 

Aerolen Pty. Limited Australia 100% 

Agebale Pty. Limited Australia 100% 

Agso Property Pty Limited Australia 100% 

Alchemy Investment Holdings Pty Ltd Australia 100% 

Alomarl Pty. Limited Australia 50% 

Ascot Vale (B & B) Investments Trust Australia 100% 

Atitrim Pty. Limited Australia 100% 

B & B Chapel Street Investments Pty Ltd Australia 100% 

B & B Chapel Street Investments Trust Australia 100% 

B & B Fors Investment Pty Ltd Australia 100% 

B & B Real Estate Asset Services Pty Ltd Australia 100% 

B & B Services Nominee Pty Ltd Australia 100% 

B&B Aircraft Finance (No 1) Pty Limited Australia 100% 

B&B Biotech Pty Ltd Australia 100% 

B&B Commander Pty Ltd Australia 100% 

B&B Insurance Pty Ltd Australia 100% 

B&B Life Investments Pty Ltd Australia 100% 

B&B NZ Holdings Pty Limited Australia 100% 

B&B Prime Securities Pty Ltd Australia 100% 

B&B Wind Nominees Pty Ltd Australia 100% 

B. & B. Leasing (Vic.) Pty. Ltd. Australia 100% 

Babcock & Brown Windpower Pty Ltd Australia 100% 

Babcock & Brown A.S. Holdings Pty Ltd Australia 100% 

Babcock & Brown Australia Pty Ltd Australia 100% 

Babcock & Brown Barton Pty Ltd Australia 100% 

Babcock & Brown Developments Pty Ltd Australia 100% 

Babcock & Brown Direct Investment Fund Limited Australia 100% 

Babcock & Brown Eagle Nominees Pty Ltd Australia 100% 

Babcock & Brown Ecogen Nominees Pty Ltd Australia 100% 

Babcock & Brown Felix Pty Ltd Australia 100% 

207





Babcock & Brown Financial Services Pty Ltd Australia 100% 

Babcock & Brown Investor Services Limited Australia 100% 

Babcock & Brown Lease Management Services Partnership Australia 100% 

Babcock & Brown Nominees Pty Ltd Australia 100% 

Babcock & Brown Properties Pty Limited Australia 100% 

Babcock & Brown Pty Ltd. Australia 100% 

Babcock & Brown Real Estate Finance Pty Ltd Australia 100% 

Babcock & Brown Real Estate Finance Trust Australia 100% 

Babcock & Brown Real Estate Pty Ltd Australia 100% 

Babcock & Brown Real Estate Trust Australia 100% 

Babcock & Brown Securities Pty Ltd Australia 100% 

Babcock & Brown Series C Pty Ltd Australia 100% 

Babcock & Brown Series D 2002 Pty Limited Australia 100% 

Babcock & Brown Services Pty Ltd Australia 100% 

Babcock & Brown Tidal Power Pty Ltd Australia 100% 

Babcock & Brown Transaction Holdings Pty Ltd 

(formerly Cannon Hill Holdings Pty Ltd) Australia 100% 

Babcock & Brown Transactions Pty Ltd Australia 100% 

Babcock & Brown Transactions Unit Trust Australia 100% 

Babcock & Brown TS Finance No. 2 Pty Ltd Australia 100% 

Babcock & Brown TS Finance Pty Ltd Australia 100% 

Babcock & Brown TS Finance Trust Australia 100% 

Bainton Pty Limited Australia 100% 

Bass Hill No.1 Pty Limited Australia 100% 

Bass Hill No.2 Pty Limited Australia 100% 

BBAM Aircraft Holdings 100 Pty Ltd Australia 100% 

BBAM Aircraft Holdings 99 Pty Ltd Australia 100% 

BBWS Finance Pty Ltd Australia 100% 

Belconnen Nominees Pty Limited Australia 100% 

Bellagio Apartments Pty Ltd Australia 100% 

Bellagio Apartments Trust Australia 100% 

Bellagio Homebush Bay Pty Ltd Australia 100% 

Bellenville Proprietary Limited Australia 50% 

Bowbowl Pty Ltd Australia 25% 

Bringelly Developments Pty Limited Australia 100% 

Bunleigh Pty Ltd Australia 100% 

CL-NQ Nominees Pty Ltd Australia 100% 

Crylone Pty Ltd Australia 50% 

208





Cutter Pty. Ltd. Australia 100% 

Dalyatic Pty. Limited Australia 100% 

Deitech Pty Ltd Australia 100% 

Delmere Pty. Limited Australia 100% 

Deodory Pty. Limited Australia 100% 

Deonan Pty. Limited Australia 100% 

Digital Harbour Investments Pty Ltd Australia 100% 

Digital Harbour Investments Trust Australia 100% 

Doltime Pty. Limited Australia 100% 

Doplea Pty. Limited Australia 100% 

Eakout Pty. Limited Australia 100% 

Earthpower Holdings Pty Limited Australia 77% 

Earthpower Technologies Sydney Pty. Ltd Australia 71% 

East Melbourne Investments Pty Ltd Australia 100% 

East Melbourne Investments Trust Australia 100% 

Ecopoint Management Pty Ltd Australia 100% 

Ecopoint Murranmarang Pty Ltd Australia 100% 

Ecopoint Myall Shores Pty Ltd Australia 100% 

Edam Pty. Ltd. Australia 100% 

Edgrove Propriety Limited Australia 100% 

Ellard Pty Ltd Australia 100% 

Ennahart Pty. Limited Australia 100% 

Environmental Infrastructure Limited Australia 77% 

ESIC Power 3 Pty Ltd Australia 100% 

ESIC Sudaw Holdings Pty Ltd Australia 100% 

Everjill Pty. Limited Australia 100% 

Exhibition Street Projects Pty Ltd Australia 100% 

Exhibition Street Trust Australia 100% 

Felix Consortium Pty Ltd Australia 100% 

Felix Consortium Trust Australia 100% 

Felix Management Pty Ltd Australia 100% 

Fourth Belliston Pty. Ltd Australia 100% 

Fullworth Propriety Limited Australia 100% 

Galviston Pty Ltd Australia 100% 

Galviston Trust Australia 100% 

Geofold Pty Ltd Australia 100% 

Gersh Babcock Real Estate No 1 Trust Australia 100% 

Gersh Babcock Real Estate No. 1 Pty Ltd Australia 100% 

209





Giramax Pty Ltd Australia 100% 

Glen Waverly Investments Pty Ltd Australia 100% 

Glen Waverly Lending Co Pty Ltd Australia 100% 

Glenn Innes Windpower Pty Ltd Australia 100% 

Glenseem Pty. Limited Australia 100% 

Goglid Pty Ltd Australia 100% 

Gomoat Pty. Limited Australia 100% 

Goulburn Street Borrowing Co. Pty Ltd Australia 100% 

Goulburn Street Property Pty Ltd Australia 100% 

Gowarne Pty Limited Australia 100% 

Gratulere Pty. Ltd. Australia 100% 

Grenfell East Pty Ltd Australia 100% 

Grenfell East Trust Australia 100% 

Gunyar Pty Ltd Australia 100% 

GW Hotel Holdings Pty Limited Australia 100% 

GW Hotel Investments Pty Ltd Australia 100% 

GW Leasing Co Pty Ltd Australia 100% 

Hartvass Pty. Limited Australia 50% 

Hobart Central Pty Ltd Australia 100% 

Hursthill Proprietary Limited Australia 50% 

Ilion Holdings Pty Ltd Australia 100% 

Ilion Investments Pty Ltd Australia 100% 

Jacaranda Pty Ltd Australia 100% 

Jazconn Pty Limited Australia 100% 

Jep Investments Pty Ltd Australia 100% 

Kayang Pty Ltd Australia 100% 

Kirtap Pty. Ltd. Australia 100% 

Layfin No. 2 Pty Limited Australia 100% 

Layfin Pty Limited Australia 100% 

Leviton Pty Ltd Australia 100% 

Limirand Pty Ltd Australia 100% 

Lyne Pty Limited Australia 100% 

Magilp Pty Ltd Australia 100% 

Malfan Pty. Limited Australia 100% 

Mangani Pty. Limited Australia 100% 

Marlin Woden Properties Pty Ltd Australia 50% 

Matandu Pty Ltd Australia 100% 

210





Maurdoc Pty. Limited Australia 100% 

Melbourne East Developments Pty Ltd Australia 100% 

Miller-Pohang Nominees Pty Ltd Australia 100% 

Morgild Pty. Limited Australia 100% 

MTM Entertainment Trust Australia 83% 

Murramarang Borrowing Co Pty Limited Australia 100% 

Murramarang Operations Co Pty Limited Australia 100% 

Myall Borrowing Co Pty Limited Australia 100% 

Myall Operations Pty Limited Australia 100% 

No.5 Nominee Pty Ltd Australia 100% 

Normanton Leasing Pty Ltd Australia 100% 

Omnibus Leasing Pty. Ltd. Australia 100% 

Ortensia Pty Ltd Australia 100% 

Percy Street Borrowing Company Pty Ltd Australia 100% 

Percy Street Pty Ltd Australia 100% 

Pipeworks Investment Trust Australia 100% 

Pipeworks Investments Pty Ltd Australia 100% 

PL Retirement Holdings Pty Ltd. Australia 100% 

Polkilt Pty. Limited Australia 100% 

Pollan Pty Ltd Australia 100% 

Pomace Pty Ltd Australia 100% 

Port Melbourne Investments Pty Ltd Australia 100% 

Port Stephens Investments Pty Ltd Australia 100% 

Port Stephens Investments Trust Australia 100% 

PPP Solutions Pty Limited Australia 100% 

Predella Pty Limited Australia 100% 

Presgreat Pty Ltd Australia 100% 

Prime Energy Investor Services Pty Ltd Australia 100% 

Prime Infrastructure (DBCT) Investor Services Pty Ltd Australia 100% 

Pupplea Pty. Limited Australia 100% 

Quayside Balmoral Pty Ltd Australia 100% 

Red Soil Pty Ltd Australia 100% 

Renewed Fuel Pty Limited Australia 67% 

Renewed Pty Ltd Australia 67% 

Renewed Rubber Pty Ltd Australia 67% 

Revy Investments Pty Ltd Australia 100% 

211





Revy Investments Syndicate No. 2 Pty Ltd Australia 50% 

Rildane Pty. Limited Australia 100% 

Rodcell Pty. Limited Australia 100% 

Rondway Pty Ltd Australia 100% 

Roving Star Pty Ltd Australia 100% 

Saif No. 2 Pty Ltd Australia 100% 

Saif No. 1 Pty Ltd Australia 100% 

Sashi Pty Limited Australia 100% 

Sharwhite Pty. Limited Australia 100% 

Silverwater Borrowing Company Pty Ltd Australia 100% 

Site 3 (B&B) Co. Pty Ltd Australia 100% 

Site 3 (B&B) Unit Trust Australia 100% 

Southern Cross Water Pty Ltd Australia 100% 

Station Investments Pty Ltd Australia 100% 

Sudaw Developments Pty Limited Australia 100% 

Sudaw Rail Operations Pty Ltd Australia 100% 

Sudaw Railway Company Pty Ltd Australia 100% 

Sulone Pty. Limited Australia 100% 

Sunderton Pty Ltd Australia 100% 

Technology Mark Pty Ltd Australia 100% 

The Waterloo Trust Australia 100% 

The World’s Biggest Screens Pty Limited Australia 83% 

Threehold Pty Ltd Australia 100% 

Tipchoy Pty Ltd Australia 100% 

Torquay Properties Pty Ltd Australia 100% 

Torquay Property Trust Australia 100% 

Tripletail Pty Ltd Australia 100% 

V.P. Investments No. 1 Pty Ltd Australia 100% 

Volblue Pty. Limited Australia 100% 

Waltham Cross Pty. Ltd. Australia 100% 

Wenzhou Pty Limited Australia 100% 

Wharves 8-10 Pty Ltd Australia 100% 

Wittol Pty Ltd Australia 100% 

Yengala Pty. Limited Australia 100% 

Zaymoat Pty. Limited Australia 100% 

Babcock & Brown GmbH Austria 100% 

The Dalrymple Bay Coal Partnership Bermuda 100% 

Sky Trek Ltd. Cayman Islands 100% 

212





Aultmore Ltd. Cayman Islands 100% 

Balblair Ltd Cayman Islands 100% 

Brora Ltd Cayman Islands 100% 

Clynelish Ltd Cayman Islands 100% 

Dailwhinnie Ltd. Cayman Islands 100% 

Dalmore Ltd. Cayman Islands 100% 

Edradour Ltd. Cayman Islands 100% 

BBAM Aircraft Holdings 67 Ltd Cayman Islands 100% 

Crawley Co Ltd Cayman Islands 100% 



Fjord Co., Ltd Cayman Islands 75% 

Mullhouse Co., Ltd Cayman Islands 100% 

BBAM Aircraft Holdings 69, Ltd Cayman Islands 100% 














BBAM Aircraft Holdings 103, Ltd. Cayman Islands 100% 

BBAM Aircraft Holdings 104, Ltd. Cayman Islands 100% 

Forest North Co Ltd Cayman Islands 59% 

BB YK One Holdings Inc. Cayman Islands 100% 

Tiger One, Ltd Cayman Islands 25% 

Babcock & Brown Reef Limited Cayman Islands 100% 

West Sussex Cayman Islands 100% 

Babcock & Brown (UK) Holdings Limited England 100% 

Babcock & Brown Limited (UK) England 100% 

Babcock & Brown Investment Fund Ltd England 100% 

Offshore Energy Resources Limited England 100% 

213





Willenhall (STM) Developments Limited England 100% 

Willenhall Developments Limited England 100% 

Babcock & Brown Investment Management Ltd England 100% 

Babcock & Brown SARL France 100% 

Babcock & Brown GmbH Germany 100% 

Goniatit GmbH Germany 94% 

Herkules 14 Germany 100% 

Herkules 20 Germany 100% 

Babcock & Brown Limited Hong Kong 100% 

Fatewood Limited Ireland 100% 

Babcock & Brown Ireland Limited Ireland 100% 

Babcock & Brown Limited Ireland 100% 

Obdell Limited Ireland 100% 

Prodell Limited Ireland 100% 

Alpha Aircraft Management Limited Ireland 100% 

Bravo Aircraft Management Limited Ireland 100% 

Charlie Aircraft Management Limited Ireland 100% 

Dinglewood Limited Ireland 100% 

Duntington Limited Ireland 100% 

Engaly Limited Ireland 100% 

Fatewood Limited Ireland 100% 

Glenhagen Limited Ireland 100% 

Halvana Limited Ireland 100% 

Jerritt Limited Ireland 100% 

Kirrett Limited Ireland 100% 

Larrett Limited Ireland 100% 

Trosa Co., Ltd Ireland 100% 

Paynesfield Limited Ireland 100% 

Mindell Limited Ireland 100% 

Nundell Limited Ireland 100% 

Iolar Financial Services Limited Ireland 100% 

Paloma Developments Limited Ireland 100% 

Tarquin Limited Ireland 100% 

Babcock & Brown Srl Italy 100% 

Babcock & Brown Electronics Management Co., Ltd. Japan 100% 

Babcock & Brown Japan Holdings Co., Ltd Japan 100% 

La Gratte-ciel Y.K. Japan 100% 

Babcock & Brown Co Ltd. Japan 100% 

214





Espacio Shinjuku Co., Ltd Japan 25% 

J-Club Holding Co., Ltd Japan 25% 

Kabushiki Kaisha JBPI Japan 25% 

J-Club Investment Co., Ltd Japan 25% 

Kiel Property Investments S.a.r.l. Luxembourg 100% 

BBAM Aircraft Holdings 98 (Labuan) Ltd Malaysia 100% 

Babcock & Brown Asia Pacific Malaysia 100% 

Babcock & Brown S.A. de C.V. Mexico 100% 

Babcock & Brown Holding Inc United States 100% 

Yarrow LLC United States 100% 

Isis Investments Inc. United States 100% 

Babcock & Brown PFI LLC United States 100% 

Babcock & Brown GP LLC United States 100% 

Babcock & Brown Investment Management Partners LP United States 100% 

Babcock & Brown Stone Acquisition LLC United States 100% 

Coho Finance Corporation United States 100% 

BBIMP Credit Holdings LLC United States 100% 

Babcock & Brown Coal Partners LP United States 100% 

Babcock & Brown Coal LLC United States 100% 

Harrison Partners LLC United States 100% 

Sterling Energy Associates LLC United States 100% 

Kings Park Energy, LLC United States 100% 

Babcock & Brown Ski Lift LLC United States 100% 

Baylease Technology LLC United States 100% 

Babcock & Brown LP United States 100% 

BBLP Credit Holdings LLC United States 100% 

Babcock & Brown Electronics Management LLC United States 100% 

BBEM-NBB 1 LLC United States 83% 

BBEM-NBB 2 LLC United States 79% 

Babcock & Brown TSEL Semiconductor Equipment I LP United States 56% 

Babcock & Brown Power Operating Partners LLC United States 100% 

BBOP Wind Investment LLC United States 100% 

Babcock & Brown Combine Hills 1 LLC United States 100% 

Babcock & Brown Sweetwater 1 LLC United States 100% 

Babcock & Brown Blue Canyon 1 LLC United States 100% 

Babcock & Brown Rail Management LLC United States 100% 

Babcock & Brown Rail Funding LLC United States 100% 

BBRM Sub #1 LLC United States 100% 

215





BBRM Pledge Holding LLC United States 100% 

BBRM Pledge Holding #2 LLC United States 100% 

BBRM Title Holding SPC #1 LLC United States 100% 


Last Train Ltd United States 100% 

Rail Wagon Ltd United States 100% 

The Clarkesville Leasing Partnership United States 100% 


Babcock & Brown Rail Leasing Co. United States 100% 

Babcock & Brown Operating Partnership GP LLC United States 100% 

Babcock & Brown Operating Partnership, L.P. United States 100% 

Babcock & Brown Alchemists LLC United States 100% 

Babcock & Brown Operating Partnership Credit Holdings LLC United States 100% 

Babcock & Brown Citta Co. LLC United States 100% 

Babcock & Brown Irish Power Holdings LLC United States 100% 

BBILP LP LLC United States 100% 

Babcock & Brown Infrastructure Fund LP United States 100% 

Babcock & Brown Technology Finance LLC United States 100% 

Babcock & Brown Solway LLC United States 100% 

Babcock & Brown Blue Wind LLC United States 100% 

Phoenix Holdings Partners LLC United States 100% 

Desdemona UK Property Development LLC United States 100% 

Babcock & Brown Kiel Investments LLC United States 100% 

Babcock & Brown Aircraft Management LLC United States 100% 

BBAM Aircraft Holdings Three LLC United States 85% 

BBAM Aircraft Holdings Five LLC United States 100% 

BBAM Aircraft Holdings 75 LLC United States 100% 

BBAM Holdings A1 LLC United States 100% 


Puget Investments one LLC United States 100% 


Puget Investments Two LLC United States 100% 






Haifa LLC United States 100% 

216





BBAM Aircraft Holdings 101, Ltd. United States 100% 

Babcock & Brown Ireland Holdings LLC United States 100% 

Babcock & Brown Administrative Services LLC United States 100% 

Babcock & Brown Management Co. LLC United States 100% 

Babcock & Brown Latin America LLC United States 100% 

Babcock & Brown Financial Co. LLC United States 100% 

Babcock & Brown Investment Adviser LLC United States 100% 

Babcock & Brown Malaysia LLC United States 100% 

Babcock & Brown Far East LLC United States 100% 

Dynamo Investments Inc. United States 100% 

Mondy Investments Inc. United States 100% 

Bulwark Investments, Corp United States 100% 

Castle Investments, Corp United States 100% 

Babcock & Brown Reef LLC United States 100% 

Misto Investments Inc. United States 100% 

Satellite Trading Co. I LLC United States 100% 

Satellite Trading Co. II LLC United States 100% 

BBILP GP LLC United States 100% 

Japan Bank Fund LP United States 100% 

Quantitative Lease Consulting LLC United States 100% 

For entities where the equity ownership interest is less than 50%, Babcock & Brown controls those entities via 

the capacity to dominate voting rights. 

217


37. INVESTMENTS IN UNINCORPORATED JOINT 

VENTURES 

Ownership 

interest by Carrying 

Balance consolidated value 

Name date entity 2003 

$000 

Number 3 Joint Venture (i) 31-Dec-03 60% (82) 

Aldoga Property Joint Venture (ii) 31-Dec-03 50% – 

Tribeca Finance Joint Venture (iii) 31-Dec-03 22.50% (3,059) 

Tribeca Developments Joint Venture (iv) 31-Dec-03 50% 25 

The Perth Joint Venture (iv) 31-Dec-03 50% 2,015 

Tribeca Joint Venture (iv) 31-Dec-03 50% 2,516 

Schofield Joint Venture (v) 31-Dec-03 50% 474 

1,889 

Principal activity: 

(i) Lease management services 

(ii) Land owner leased to aluminium smelter 

(iii)Provide financing to property development joint venture 

(iv)Property developer 

(v) Land holder and property developer 

2003 

$000 

Share of joint venture’s profits/(losses) 

– Revenues 13,848 

– Expenses (17,499) 

Share of joint venture’s net profits/(losses) (3,651) 

Share of joint venture’s assets and liabilities 

2003 

$000 

Current assets 2,200 

Non-current assets 85,055 

Current liabilities (38,501) 

Non-current liabilities (46,865) 


218


38. SEGMENT INFORMATION – PRIMARY SEGMENT 

Segment revenues, expenses, assets and liabilities are those directly attributable to a segment or the relevant 

portion that can be allocated to that segment on a reasonable basis. 

Primary Segment – Business Group 

The Business Groups are defined by the nature of activities engaged in by Babcock & Brown.These business 

activities include: 

• Real Estate – principal investment and investment management activities in the real estate sector worldwide 

• Infrastructure and Project Finance – financial advisory, principal finance and funds management activities in 

the global infrastructure and project finance sector 

• Structured Finance – creation and marketing of highly specialised structured finance products 

• Operating Leasing – asset acquisition and syndication and ongoing management of portfolios of aircraft, 

railcars and semiconductor equipment 

• Corporate Principal Investment and Funds Management – origination, structuring and participation in 

principal investments and interests in third-party fund managers 

Secondary Segment – Geographic Information 

Geographic segmentation of revenue is based on the location of the people where the revenue is recorded. 

219


Business Segments 

Infra- 

Corporate 

structure 

principal 

and 

investment 

Real project Operating Structured and funds 

estate finance leasing finance management Consolidated 

2003 2003 2003 2003 2003 2003 

$000 $000 $000 $000 $000 $000 

Revenue 

Revenue from external parties 197,487 179,258 891,706 152,319 73,649 1,494,419 

Share of net profit of equity 

accounted investments 1,075 5,171 2,082 (254) 2,991 11,065 

Total segment revenue 198,562 184,429 893,788 152,065 76,640 1,505,484 

Direct Expenses (127,568) (91,146) (805,646) (14,304) (33,893) (1,072,557) 

Net Revenue 70,994 93,283 88,142 137,761 42,747 432,927 

Operating Costs (18,342) (33,624) (34,447) (32,229) (8,735) (127,377) 

Net segment result 52,652 59,659 53,695 105,532 34,012 305,550 

Non-segment revenues 

and expenses 

Interest revenue 6,465 

Unallocated revenue 1,188 

Interest expense (7,792) 

Unallocated expenses (52,375) 

Net profit before BBIPL 

outside equity interests 253,036 

Assets 

Segment assets 597,935 114,181 595,563 4,049 110,682 1,422,410 

Non-segment assets 

Unallocated assets 1,450,135 


Liabilities 

Segment liabilities 450,704 28,102 583,072 12,606 12,468 1,086,952 

Non-segment liabilities 

Borrowings 6,880 

Non-allocated liabilities 242,337 


220


Other Segment Information: 

Infra- 

Corporate 

structure 

principal 

and 

investment 


estate finance leasing finance management Unallocated Consolidated 

2003 2003 2003 2003 2003 2003 2003 

$000 $000 $000 $000 $000 $000 $000 

Equity accounted 

investments 

included in 

segment assets 29,354 67,564 9,989 – 54,869 – 161,776 

Depreciation and 

Amortisation 548 – 32,995 – 746 6,969 41,258 

Non-cash expenses 

other than 

depreciation 

and amortisation – 9,107 – – 3,017 – 12,124 

Business Groups 

Infra- 

Corporate 

structure 

principal 

and 

investment 



2002 2002 2002 2002 2002 2002 

$000 $000 $000 $000 $000 $000 

Revenue 

Revenue from external parties 102,549 106,568 1,106,930 217,703 29,613 1,563,363 

Share of net profit/(loss) of 

equity accounted investments (4,081) 1,976 2,344 (552) 3,189 2,876 

Total segment revenue 98,468 108,544 1,109,274 217,151 32,802 1,566,239 

Direct expenses (64,337) (16,358) (998,813) (8,776) (16,294) (1,104,578) 

Net Business Group revenue 34,131 92,186 110,461 208,375 16,508 461,661 

Non-Business Group revenues 


Unallocated revenue 796 

Total consolidated Net Revenue 469,812 

221


Business Groups 

Infra- 

Corporate 

structure 

principal 

and 

investment 



2001 2001 2001 2001 2001 2001 

$000 $000 $000 $000 $000 $000 

Revenue 

Revenue from external parties 71,417 65,419 1,500,540 250,784 24,886 1,913,046 

Share of net profit of equity 

accounted investments (7) 2,942 (5) (1,731) (650) 549 

Total segment revenue 71,410 68,361 1,500,535 249,053 24,236 1,913,595 

Direct expense (28,475) (8,735) (1,386,100) (9,423) (25,626) (1,458,359) 

Net Business Group revenue 42,935 59,626 114,435 239,630 (1,390) 455,236 

Non-Business Group revenues 


Unallocated revenue (1,762) 

Total consolidated Net Revenue 462,766 

SECONDARY SEGMENT 

Geographic Segments 

Asia 

North 

Pacific America Europe Consolidated 

$000 $000 $000 $000 

Segment revenue 2003 355,657 967,142 182,685 1,505,484 

Segment revenue 2002 187,735 1,275,587 102,917 1,566,239 

Segment revenue 2001 132,876 1,688,779 91,940 1,913,595 

222


39. FINANCIAL INSTRUMENTS 

The consolidated entity’s exposure to interest rate risks and the effective interest rates of financial assets and 

financial liabilities, both recognised and unrecognised at the reporting date, are as follows: 

Total 

carrying 

amount Weighted 

Fixed interest rate maturing in: as per the average 

Floating Over More Non- statement effective 

Financial interest 1 year 1 to 5 than interest of financial interest 

instruments rate or less years 5 years bearing position rate 

2003 2003 2003 2003 2003 2003 2003 

$000 $000 $000 $000 $000 $000 % 

(i) Financial assets 

Cash and short term 

trading securities 

Australian dollar 446,570 – – – – 446,570 4.77% 

United States dollar 90,009 – – – – 90,009 0.73% 

British pounds 2,674 7,110 – – – 9,784 2.80% 

Other 7,507 – – – – 7,507 1.72% 

Non-interest bearing – – – – 16,863 16,863 N/A 

Fees receivable from 

financing transactions – – – – 47,202 47,202 N/A 

Other receivables – – – – 64,468 64,468 N/A 

Notes receivable – – 

Australian dollar 17,315 48,298 72,532 – – 138,145 8.80% 

United States dollar 8,781 6,118 – – – 14,899 3.73% 

Other – 781 – – – 781 1.09% 


Investments in 

financial assets – – – – 58,651 58,651 N/A 

Total financial assets 572,856 62,307 72,532 – 197,789 905,484 

223


Total 

carrying 

amount Weighted 

Fixed interest rate maturing in: as per the average 

Floating Over More Non- statement effective 

Financial interest 1 year 1 to 5 than interest of financial interest 

Instruments rate or less years 5 years bearing position rate 

2003 2003 2003 2003 2003 2003 2003 

$000 $000 $000 $000 $000 $000 % 

(ii) Financial liabilities 

Accounts payable and 

accrued liabilities – – – – 244,848 244,848 N/A 

Deposits 

United States dollar 26,316 – – – – 26,316 0.48% 



Australian dollar 23,620 1,743 65,688 – – 91,051 4.14% 

United States dollar 294,211 – 44,270 201,479 – 539,960 4.23% 

British pound – – – 48,310 – 48,310 6.39% 

Eurodollar – – 167,242 108,707 – 275,949 3.53% 

Japanese yen 570 17,307 – – – 17,877 3.82% 


Total financial 

liabilities 344,717 19,050 277,200 358,496 272,916 1,272,379 

224


CORPORATE DIRECTORY 

Registered and Head Office 


Level 39,The Chifley Tower 


Sydney NSW 2000 Australia 

Directors 

James Babcock (Executive Chairman) 

Phillip Green (Managing Director) 

James Fantaci 

Ian Martin 

Elizabeth Nosworthy (Deputy Chairman) 

Martin Rey 


Company Secretary 

Paul Ferguson 

Legal Advisors 

Baker & McKenzie 

AMP Centre 

50 Bridge Street 


Auditors and Independent Accountant 

Ernst & Young 



Lead Manager 

UBS AG 

Level 25, Governor Phillip Tower 

1 Farrer Place 


Co-Lead Managers 

Tricom Equities Limited 

Level 9, 10 Bridge Street 


Wilson HTM Corporate Finance Limited 

Level 21, 123 Eagle Street 

Brisbane QLD 4000 Australia 

Co-Managers 

Bell Potter Securities Limited 

Level 33, Grosvenor Place 

225 George Street 


UBS Private Clients Australia Limited 

Level 27, Governor Phillip Tower 

1 Farrer Place 


Independent Accountant on Pro-forma Forecast 


Ernst & Young 



Share Registry 

ASX Perpetual Registrars Limited 

Level 8, 580 George Street 


Babcock & Brown Share Offer Information Line 1800 883 072 

Monday to Friday 8.30am to 5.30pm

Lead Manager

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