Lead Manager

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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