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SECTION 3 BUSINESS OVERVIEW 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
BABCOCK & BROWN PROSPECTUS 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
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