could get more ugly, page-9

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The difference between Rams and Centro is huge. Rams was effectively split into two components: new franchise opportunities (bought by Westpac) and existing debt (currently the centre of discussions for refinancing). The existing debt has an LVR running-off on a curve, like most MBS, and therefore time actually increases the security value. I expect Rams to be able to refinance this fully this month; although admitedly the terms are not exactly "value acretive" from a capital perspective, hence the erosion in share price.

In the case of Centro, however, a certain proportion of the securities are specifically linked to assets - that is, they are asset-backed securities secured by fixed charge. In all liklihood, as it often the case, it is the better quality assets that are used for securitisation, which leads me to believe that the remnants (of the asset base) are ultimately the collateral for the unsecured debt.

The recent withdrawal or dimunition of the off balance sheet lines (assumption based on recent announcement regarding lowering of interest rate hedge ratio) demonstrates a lowering or degrading of confidence by the banks: they are withdrawing or reducing lower-tier credit lines to Centro (these OBS lines generally have a lower credit charge and lower capital charge for the banks, and given the spreads currently available in the market is real cause for concern IMO). So far as the ability to refinance the unsecured portion of the debt, the lack of revaluation transparency associated with commercial property valuation (ref: LPT "rolling" schedules usually used for LPTs, for example) means that financiers need to "discount" security/asset valuations quite markedly, meaning the amount of finance available is severely reduced.

IMO Centro will have extreme difficulties refinancing the unsecured debt. These "collateral" issues, along with increasing broader concern about the structure of the asset/liability mismatch, hardly provides comfort to any banks with cash to stump up. In Rams case the specific asset charges (that is, assigned security) makes it very transparent what assets a lender has to call on in the case of default: this is not the case with Centro.

I remain very bearish on Centro despite popular opinion to the contrary. Relying purely on NTA/Share as a basis for buying equity fails, in my opinion, to consider the changes in economic value that can take place in the near future as a result of asset writedowns, security revaluations, and PV on future income streams.

Regards
Kit