Babcock Fund

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AUDITORS : PricewaterhouseCoopers

BACKGROUND

Babcock & Brown Structured Finance Fund Limited ("The Fund") is a mutual fund company incorporated in Bermuda on 24 April 2006 and managed by Babcock & Brown Structured Finance Management Pty Ltd. The Company's key investment objective is to invest in a portfolio of assets and economic exposures which provide its Shareholders with an attractive yield and a competitive rate of return by paying regular dividends and achieving capital growth. The Company plans to achieve its investment objectives and policies through further acquisitions, active portfolio management as well as financing and risk management. The Company provides investors with the ability to invest, through the Company, in asset classes which are not readily accessible to most investors in a listed form. The Company invests in assets in three target sectors: -

1. 
   
   Operating Lease Assets;


2. 
   
   Loan Portfolio and Securitisation Assets; and


3. 
   
   Alternative Assets.

The Company intends to invest in assets in three target sectors to create a portfolio with predictable cash flows, potential for long term capital growth and diversity across each target sector and across geographies and currencies.

1. Operating Lease Assets

The fund owns assets, other than property, with long useful lives and leaes these assets to 3rd parties (such as commercial aircraft to international commercial airlines). The fund does not take passenger traffic or oil price risks, which are operational risks undertaken by the owner of the airline biz. The fund typically incur debt to purchase the asset.

The leases are generally short-term (6 mths to 12 mths). At the end of the lease, the fund can lease to existing lessee again or sell the asset to repay the loan and thus, release the value inthe asset which has been created during the lease term.

How to earn $ => funds purchase of assets with equity and debt and use the rent to repay debt and also div to shareholders.

2. Loan Portfolio and Securitisation Assets

Loan portfolio assets

The fund buys loans that have already been advanced from the original lender, such as loans secured against real estate, inventory or intellectual property. After the purchase, the fund becomes the lender. Typically, these loans are small value, secured loans within a target asset class and there are a number of borrowers.

Securitisation assets

The fund buys high yield bonds which are secured by multiple obligor loans. Such loans are created where a 3rd party has undertaken a restructure of the loans to crate various layers of risk and reward from a reaonably generic loan portfolio, that is, a securitisation. This is a std financing tool used by banks and companies to ensure that they have optimal funding for their assets. These loans are typically secured on the assets of the borrower.

Securitisation is the creation and issuance of debt securities whose principal and interest payments are derived from the cash flows of the underlying pool of assets. For e.g, a lender may have provided $10M of housing loans to home owners and it will receive cash flows over the next 25yrs from these loans. If the lender sells the rights to the cash flows from the loans to someone else, it could transform that income stream into a lump sum today (to receive today, present value of a future cash flow).

A suitably large pool of secured loans/receivables are grouped to form a securitisation pool and this pool will be diversified to ensure that default on one loan does not result in default in others.

Why the fund invest in this?

=> have potential to produce strong stable cash flow (in IPO the fund says expected 13.6% of ROA from this class)

Risk

• borrower default
• loans mature and proceeds cannot be reinvested at a rate wanted (reinvestment risk)

To mitigate the risks, the fund trys to be conservative in its assumptions and diversify, do its due diligence.

3. Alternative asset

Assets which have not become mainstream and the fund expect them to demonstrate value opportunities. The fund is concentrating on few asset classes -

• music copyright assets - receive income when songs are produced or performance of songs happened or when songs are used with visual images (ads)
• secured loans in renewable fuels sector - receive interest income from secured loans made to finance renewable energy assets. There's opportunity because the industry is in a state of rapid growth accompanied by changing pricing impacts, which allows a non-bank to participate in the secured lending at attractive risk/reward potential.
• single obligor structure finance loans - the fund is able to access global secured lending opportunities which are not available to the broader community because of relationship with Babcock & Brown Group.