The Friday Interview:Babcock & Brown Air chief Colm Barrington has ambitious plans for the company, writes Arthur Beesley, Senior Business Correspondent
Colm Barrington is chief of Babcock & Brown Air, a plane-leasing business spun out last autumn from Eircom owner Babcock & Brown Ltd, the Australian investment group. There's aviation in his DNA for sure - he worked previously for Guinness Peat Aviation (GPA) and Aer Lingus - but he races yachts when he's off work.
Barrington has plenty of other extra-curricular activities - he is on the board of the Dublin Airport Authority (DAA) and Eircom's ultimate holding company, and was part of a group that advised Mary Harney last year on restructuring the health insurance sector - but he has been preoccupied of late with Babcock & Brown Air.
The firm was floated on the New York Stock Exchange last October at $23 per American Depository Receipt (ADR), giving it a market capitalisation of $772.9 million (€528.6 million). The share price has fallen to around $16 since then, amid exceptional volatility on international stock markets.
So is he disappointed with the performance so far? "I'm disappointed with all share price performances," he says. "It's been an awful time for everybody who owns shares."
Babcock & Brown Air works like a managed fund. It generates revenues from the monthly rents it receives from leasing planes to airlines, but the fleet itself is managed by an affiliate company based in San Francisco.
The genesis of the organisation was in the period immediately after the 9/11 attacks on the US, when Babcock & Brown Ltd and its affiliates developed a fleet of planes for lease after aircraft values fell in light of the downturn in the airline business.
"We've established that capital is the major driving force for aviation. These things [ planes] are quite expensive and if you can lay your hands on capital you can do quite well in this business.
"What we've done over the years is put deals together for third-party investors, mainly in Japan, because we can find cheap equity in Japan because of tax benefits . . . There's more out there than the Japanese can support."
While Babcock & Brown Ltd still has a significant leasing operation in its own right, the business now run by Barrington began life last autumn.
Babcock & Brown Air started out with a fleet of 47 aircraft, which was acquired at a cost of some $1.5 billion from Babock & Brown affiliates Jet-i and Double Black Diamond.
The company had $1.6 billion at its disposal after raising $750 million in equity and a $850 million debt securitisation.
On the strength of the $100 million in free cash that it retained after that expenditure, the company went on to raise a $1.1 billion revolving credit line in November. The combined sum of $1.2 billion will be used to finance the acquisition of new aircraft.
While the purchase of seven new planes in December brought the fleet to 54, Barrington says the company plans to buy between 20 and 30 new aircraft each year to generate enough new cash flow to support its commitment to increase its annual dividend by 15 per cent each year.
The company declared a maiden quarterly dividend of $0.50 per share last month, a sum that equates with a $2 per share annual dividend.
The initial investment case assumed the company would offer an annualised dividend yield of 8.7 per cent at the flotation price.
While no company likes to see its share price fall, Barrington points out that the drop serves to increase the yield. "Two bucks on $16.87 - it's a pretty good yield. At today's price, it's pretty attractive," he said this week.
The acquisition of seven new planes last December cost some $250 million, says Barrington. At that rate, the company could be in line to buy another 14 planes in its current fiscal year.
"Our strategy is to grow the portfolio by about $750 million per year. With our focus and pipeline we're quite confident we can do that within the initial year . . . The plan is to grow the portfolio pretty significantly, so hopefully we'll have some more announcements in the coming months."
The funds currently at the company's disposal mean it should be able to increase the fleet to 100 before raising any new money.
Barrington says problems with the credit ratings of monoline insurers, who guarantee bond repayments, mean that the firm may not be able to use the securitisation model when next it requires money. "Because of the way capital markets are, we're looking at other alternatives at the moment to securitisation . . . Putting together groups of banks is a possibility," he says.
"I don't see any reason why we shouldn't grow this company by $750 million-plus [ annually], which is, give or take, 20-30 airplanes per year for the next five years. That's well within the scale of feasibility. That is our plan. We've told the market we're going to grow the company by $750 million-plus per year for the foreseeable future and that's what we're planning to do."
Babcock & Brown Air is in a quiet period at the moment in advance of its first quarterly results next month. However, Barrington says the figures will not reflect the true extent of performance due to an "accounting anomaly".
While the company took in rental cash from its planes from October 2nd, the date of its stock market listing, it is not entitled to account for profits from the rent until after it full legal ownership of planes. In the case of some planes, this was long after October 2nd.
"The first quarter is going to be quite strange. We won't show a normalised profit for the first quarter. The result we publish in March will be a little strange. I think we've primed the market for that."
He says the company might well make acquisitions in the future, but there's nothing like that on the immediate horizon.
"We'd love to be acquiring another company, even now the way the market is, but we think we're probably a little bit too young to do that yet . . . It's not in the prospectus."
Barrington has long been Babcock's point man in Ireland, but he dismisses the notion that it was he who alerted his ultimate masters to the opportunity to acquire Eircom. "I was in the aerospace side. It came on radar and they asked me what I thought." That's all he has to say about Eircom.
As a DAA board member, it's no surprise that he sides with the airport authority when asked about Ryanair's frequent attacks on the organisation. But as a frequent airport-user - flying from and to Dublin at least once per week - he agrees that the place was woefully underdeveloped for years.
"It deserves to be criticised because nothing happened for 15 years," he says. "They've squeezed every last inch of the existing place. Now with the new Pier D open and Terminal Two started, we can see some light at the end of the tunnel."
Criticism of costs at the airport from Ryanair chief Michael O'Leary does not hold water, he argues. "He bitches and moans about it but he actually pays a lot more in other airports. He pays more at Stansted than Dublin. His criticism of the new terminal is ill-founded. It will not be a gold-plated building. The airport is groaning with under-capacity and not everybody wants to be herded into a Nissen hut."
As for the health insurance industry, he says the Government has not gone far enough yet to reform the sector.
"If the Government wants to have an open and vibrant health insurance industry, which is what I understand it does, it seems strange that a Government agency - which is what the VHI is, being wholly-owned by the Government - continues to have a dominant and some might even say predatory position," he says.
"Mary Harney made some immediate changes in the risk-equalisation area and there have been financial advisers appointed to see how the VHI can independently have the capital to ensure that it has same financial requirements as independent companies.
"I don't think they've gone far enough. I think we need to look at ways of spinning the VHI out of public ownership if we want an open and vibrant private health insurance market."
Barrington says he'd like to do more and more yacht-racing , but he shows no sign of slowing down on the work front. Not at all.
ON THE RECORD
Name:Colm Barrington.
Job:Chief executive, Babcock & Brown Air.
Age: He turned 62 on New Year's Day.
Family:Married with three children.
Why is he in the news:Babcock & Brown Air will pay its maiden dividend on February 20th.
Something you might expect:An aviation fiend, he went into Aer Lingus in the 1960s because he saw it as "outward looking and international".
Something you might not expect:He currently holds the course record for the Round Ireland Yacht Race.
