chanticleer afr , page-12

...and alas drsaboune - here is that 'Chanticleer' article to which you refer:-
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Source: The Australian Financial Review newspaper
Date: August 30-31, 2008

Chanticleer [Pages 64, 61]

Centro Debt masks strong shopping centres

Based on operating results presented for the year to June 2008. Centro Properties Group would appear to possess well-structured portfolios of shopping centres, one in each of Australia and the US, that remain well tenanted and reasonably well insulated from the worst ravages of depressed consumer sentiment and retail spending.

The US properties, which make up 59 per cent of the value of Centro's total properties, generated 1.9 per cent growth in net operating income (NOI) fort heyear to June 2008, and remain 91.9 per cent occupied. More impressive is that NOI growth for the last six months was a little higher at 2 per cent, in spite of softening economic conditions and rising unemployment in some parts of the US. For comparison, consider that the US property portfolio of Westfield Group reported NOI growth of 1 per cent for the six months to June 30 and were 92.8 per cent occupied.

Net operating income of Centro's Australian properties grew 3.7 per cent for the year but only 2.7 per cent for the second half. Centro's centres are 99.5 per cent occupied. Westfield's Australian centres grew operating income 4.8 per cent in their latest half year and are more than 99.5 per cent occupied.

This contrasts with perception that Centro as a corporate basket case. What separates the Centro companies from some of the other troubled empires is that its problems have nothing to do with poorly performing assets or financial engineering. Instead, the group finds itself in its current predicament courtesy of an exceptional example of hubris from its previous management that was compounded by boardroom complacency. The culpable management has been changed, with former chief executive Andrew Scott punted in January, when the board asked Glenn Rufrano to take over. Rufrano was running the US subsidiary at the time, which largely comprises the assets of New Plan Excel Realty Trust, which he helped sell to Centro for $US5 billion ($6.3 billion at the time) in April 2007.

Apart from the new CEO, Centro also has a new chief financial officer, as well as a couple of other key executives who weren;t part of the previous head office. However, while former chairman Brian Healey retired in June, there have been no other changes in the boardroom. Paul Cooper took over as chairman, having joined the board in October 2006 and been a member of the audit and risk management committee.

The collective poor judgement of the former executive, sanctioned by the board, means Centro finds itself buried under a $17.4 billion mountain of debt, roughly half of which is categorised as due within 12 months and a hefty chunk of which is technically past due.

Consequently, it means Centro is in effect operating on a day-to-day basis only with the consent of its bankers. The "Australian" bank syndicate - so-called not because of its nationality but because this is where the loans and underlying security sit - even had to provide a special liquidity facility for working capital, of which the $65 million left will take Centro through to the end of September. It will need to be renegotiated along with a further extension of the already extended and newly maturing debt.

Such is life for Rufrano and his key head office executives, who spend at least half their time on such matters.

***

It was the failure of a $1.3 billion refinancing in December that caused the brown stuff to hit the fan at Centro, and it's still being sprayed around. The quantum of debt now subject to extension agreements or about to be, has risen to $5 billion, and the cost of continuing to seek such accommodations from the banks is now costing the equivalent of more than a few shopping centres.

Among a raft of one-off items that turned a reduced but still respectable $242 million underlying operating profit for Centro in 2008 into a headline loss of $2.1 billion is some $70 million of "bank extension fees" - money paid to Centro's banks as a consequence of the group's inability to pay or refinance maturing debt. It's turned into a Groundhog Day exercise - the first such extension was in December, then February, then April. Another is currently under way and scheduled to be concluded by the end of next month, and yet another is due in December.

It will continue to go on like this for quite some time until an appropriate circuit breaker is found - whether that is some sort of success with one of many recapitalisation proposals that continue to be put before the company and its banks (two are under discussion right now) or whether it results from a fracturing of the extraordinary unanimity among Centro's extended group of creditors - eight in its Australian syndicate that is owed $2.3 billion of the extended debt and another five in the US one that is owed $US1.4 billion. There's also close to a couple of dozen insurance companies and pension funds that have provided $US450 million through a US private placement note issue that is also part of the Australian extension deed.

Centro's financial performance before interest, tax and the one-offs wasn't too bad. Earnings before interest and tax rose 8.8 per cent to $570.7 million in 2008, but that's pretty much where the good news stops. Higher interest payments and other financing costs - including $81 million associated with removing various hedges - conspired to strip 27.8 per cent from underlying profit, dragging it down from $335.3 million in 2007 to $242 million.

The the really ugly non-cash adjustments kick in - $1.2 billion of downward revaluations to property investments (a positive $174 million adjustment in 2007) and $772 million of impairment charges (mostly writing off goodwill associated with New Plan takeover). There was also $60 million of cash paid out as restructuring costs as well as the $70 million paid to banks (they call it extension fees, but it's been called nastier things in other industries in past times).

One of the things that hurts most, though, is $181 million of mark-to-market losses (non-cash) relating to various currency and interest rate hedges. Losses or profits on these will be realised only when they mature, but the volatility of Centro's exposure is shown in a post-balance date move. Market movements in the seven weeks from June 30 to August 15 reduced the book loss from $762 million to $475 million.

The balance sheet mark-to-market losses don't include $81 million of hedge removal costs (real cash) incurred when various of Centro's banks and other counterparties refused to extend contracts that formed part of the back-to-back positions that Centro had entered into to hedge protection provided to various downstream syndicates or other entities. The volatility of Centro's mark-to-market positions, though, is exacerbated by its hedge book not being as balanced as it was.


Ends.

Cheers, Pie :)