not moving much either way of late, page-16

'The assets are not the problem......the refiancne of short term debt is.'

This does not make sense. So why won't they relend? They would have absolutely no issue lending if what they lend is safely covered by the underlying assets.

The model you are talking about - which is a direct borrowe-lender relationship - is not the situation that Centro currently finds itself in. I suggest anyone who is interested in buying, or has bought shares, in Centro to read a book call "Liar's Poker" by Michael Lewis. It gives an inside story to one of the high-flying debt market player in the 80s - Sol Brothers. Most applicable reading in the book relates to an instrument call CMO (collateralised mortgage obligations - as opposed to CDO but same concept).

In Centro's case, it is not their asset that is in question, but their debt structure. My understanding, simply put, is that they are servicing a long term debt with short term debt instruments. Let's say they have 20m worth of properties over 30 year terms. Instead of servicing it out of cashflow, they have refinanced 1/3 of it by issuing short term debt instruments - such as a 2 year CMO). Since there is a wide gap between the borrowing gap between US and OZ, the spread between they borrowing rate in OZ, and what they pay for the issue of those short term debt instruments in the US, can be quite large. In doing so, it has enabled them to free up cashflow to purchase more properties, thus becoming even more highly-geared. This highly-geared model is fine while the money market is full of readily-available capital. However, with the credit squeeze, the US debt market has effectively shut down. Thus, their problem with finding money to replace those short term maturing debt. Why? The benefit of CDOs is that everyone (Citigroup, JPM, etc) can buy debt and then "repackage" them at a slightly higher price before offloading them to other debt buyers. This can be a very profitable business considering the volume of debt they are dealing with. The downside, however, is its lack of transparency. if the traditional lender-borrower model, the lender knows exactly what lies behind the debt. With the repackaging of these CDOs, you'd be lucky to know half the assets which lies behind the debt. So when the subprime issue came along, all the debt buyer effectively closed shops as they have no idea how exposed they already were to the subprime defaults.

So even though the NTA value of a borrower (such as Centro) may remain the same, they are suddenly faced with a money market that effectively dried up overnight, leaving them exposed to a number of huge maturing debt that they can't refinance.

In Centro's case, their model had simply assumed that the money market will always be there for them. Whether this is bad management, or a lack of foresights, I will let you decide. What they are trying to do now, with with insistence of the new would-be lender, is to restructure the company model so that it will be more resilient to the wild fluctuating sentiment of the money market. There are multiple ways to do this - the two obvious ways would be to strengthen their balance sheet by reducing short term debt via asset sale, and to convert some of their medium term debt to long term debt. This will obviously have enormous impact on the net margin of the business, as well as implications of what assets will be left after the asset sale. So when they do regain their footings, they may not be the growth machine it once was, but it will at least be a much stronger and steadier machine.

Given that the debt in question lies in the mother company while some of the assets likely to be sold lies in the bottom tier company, the immediate tricky part, of course, is to tear through their multi-tier structure and work out which assets to sell without destabilising the entire model.

In short, having understood more about the debt market and their dilemmas/issues, even a full breakup of the company should return me a modest loss at worst case.

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