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1:27 PM, 2 Jun 2008 Robert Gottliebsen
Beware Centro furphies



Some daily press journalists covering the Centro affair are having great difficulty understanding the key issues facing the Centro Group and its CEO Glenn Rufrano. The articles are often inspired by those who are looking to buy key Centro shopping centres cheaply or who want to manage a slice of the group.

If Centro offers a large number of its shopping centres to rival shopping centre managers, the likelihood is that ANZ, Commonwealth, National Australia Bank, St George and the other banks who have loaned more than $2.5 billion to Centro Properties, unsecured, would receive a battering. The only way they can get their money back is to sell the shopping centres to investors who will allow Centro to continue to manage them. That retains value in the Centro shopping centre management operation which in time can be realised to enable the banks to be repaid and/or end up with partial Centro equity.

The value of Centro shares comes from the fact that if the banks pull the rug and appoint an administrator then the Centro shopping centres management contracts will fold and become worthless. The banks will lose a fortune. So they have to find a way that offers Centro Properties and Centro Retail shareholders value, so as to retain value in the banks’ unsecured loans to Centro.

There was never any doubt that the banks would agree to the latest extension, although one or two of the smaller lenders may still have trouble grasping their predicament and hope the major Centro bankers will buy them out. The lesson for all those involved in Centro is that when they read an article in the daily press that does not take account of the forces outlined above, be wary – it’s likely that it contains error.

Of course I must emphasise that Centro is a very delicate game and there is a lot than can go wrong, because a way has to be found to restructure the Centro group. Reconstruction is made possible because Centro is actually a excellent shopping centre manager both in Australia and the US. However, longer term the shareholder writs will be a destabilising force.