Lead Manager

BABCOCK & BROWN PROSPECTUS
• 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.
2002 compared with 2001
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.
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