Revised Target Price/Rating — Following on from the 17th December
announcement and today’s trading halt and the tone of recent company
releases which indicates further uncertainty regarding its short-medium capital
structure plus a plethora of outstanding issues effecting both equity and debt
investors we have reduced our Target Price and revised our Risk rating from
High Risk to Speculative.
Revised Valuation — We would expect that any sale of the business would be
done on a break-up of the entity rather than on a going concern basis. Applying
a 65% discount to the US assets and after adjusting for the carried distribution
($152m) offset by the payout of Exchangeable Note holders ($600m),we derive
a revised Target Price of $1.04.
Valuation Methodology — Given the uncertainty regarding the quantum and
timing of any future distributions and the outcomes from the strategic review
we have opted for a SOTP valuation as the primary approach. This is consistent
with our previous published analysis.
Recommendation — We rate CNP a HOLD with a 2S Rating and a Target Price
of $1.04.
Centro has gone into a trading halt prior to an announcement on the 15th
January less than four weeks since its prior announcement also post a trading
halt when it announced it had failed to secure bridging finance ($2.7bn) and
was undertaking a strategic review of the business.
Whilst no details have been issued regarding the current trading halt the
previous trading halt was as a result of funding issues so we would not be
surprised to see issues with lenders as the reason for the trading halt.
Discussions with regulators would not generally warrant a trading halt.
Given that Centro still had approximately four weeks to complete its strategic
review, today’s announcement suggests that matters in terms of complexity and
debt security have deteriorated to the extent that issues with lenders have
overtaken the strategic review process.
Whether or not the announcement by Tuesday leads to the business being
offered for sale, continues operating or put into liquidation remains a point of
conjecture. What is clear is that the ultimate outcome from shareholders is
predicated on a series of events that will alter over time as disclosures as well
as lenders degree of comfort or otherwise becomes clearer.
The string of events since the 17th December culminating in a second trading
halt leads us to believe that Centro is effectively dealing with issues on several
fronts which could ultimately conspire to undermine the strategic review
process. If there was positive news by way of recapitalization or even some
progress on asset sales a market update and not a trading halt would suffice.
Whilst potential bidders for the business may see value it is the view of lenders
both offshore and domestic that is critical in this intervening period.
More recent news of its inability to extend maturing interest rate hedges is a
further sign that Centro is struggling to win lender support. The inability of
Centro to roll maturing hedges brings into question lender’s view of Centro’s
credit.
The convergence of issues from all quarters including lenders, rating agencies
and regulators in the relatively short space of time since Centro’s first
announcement suggests that resolution of just bridging finance has carried
over into a broader review of the operation which goes beyond a single
stakeholders’ control resulting in a second trading halt that could be seen as
the start of a new phase for Centro.
The debate now sits around whether or not lenders are motivated to continue to
have Centro operate as a going concern. Certainly placing Centro into
liquidation brings costs and reporting issues for lenders that have wider
implications for the market unless material information leaves them no
alternative. On the one hand, lenders of secured financing can point to assets
that at very least provides a floor to the extent of any losses they may incur and
a managed selldown of these assets would likely follow.
On the other hand the complexity and nature of each funding structure within
and between Centro related entities clouds the ability of lenders to access and
liquidate any exposure without triggering other events or impacts on other
lenders which may make a uniform approach by lenders more difficult to
execute.
Given further that domestic and offshore banks do not always share views on
how to deal with debt exposures if an offshore lender breaks ranks and moves
to liquidate assets then other banks may be forced to act accordingly.
At the time of the 17th December announcement, Centro alluded to asset sales
as a de-gearing option, however, in vehicles such as CWAF the crosscollateralized
nature of the debt may inhibit any immediate sale unless holders
of the CMBS paper are given additional comfort by its issuers. This issue is
further compounded by the fact that if as advised by Centro the
redemptions/applications for the DPF/DPFI are lifted on the 15Th February then
the means by which investors can be cashed out via asset sales in the case of
the DPF with a 50% equity stake in CWAF ($2.6bn) looks a challenge.
Any collaterized debt facilities shared between Centro and Centro Retail Group
only adds another layer of complexity and a potential stand-off in the event of
any asset selldown.
The recapitalization of Centro by way of an outright bid for the vehicle by an
alternative manager as a going concern would subject to the terms of the offer
engage Centro’s lenders in working with an alternative management team but
again if debt covenants within the Centro entity have been found to have been
breached then this may work against a full bid for the business being achieved.
We had previously derived a break-up valuation applying higher investment
yields on Centro’s equity stakes in the various vehicles with no valuation
ascribed to the Services Business. We have subsequently reviewed this
approach applying revised downward valuations for each FUM entity within
Centro which has the effect of reducing Centro’s residual equity within each
vehicle. We have ascribed a notional payment for the syndicate business
(CMCS) of $80.6m to recognise that this entity within the overall Centro FUM
platform is the most likely to have appeal to a third party and could be offered
relatively cleanly.
The multiple swing factors that could both positively and negatively impact
Centro’s share price requires us to value the stock under a distressed seller
scenario. This came about both in terms of statements by the company that it
would look at an outright sale and the attitude by the market that lenders would
remain uncomfortable in an environment of weakening asset valuations
particularly in the US if de-gearing of the entity remains a challenge.
The complexity within the operating platform and the capital structure that sits
underneath removes a significant level of confidence as to how the Centro
strategic review will play out reliant as it is on lender support. Overlaid with this
is the uncertainty of which stakeholders within the Centro platform could and
would launch class actions against the Group regarding representations it
made let alone actions undertaken by any regulatory authority.
The timing of the class actions may delay any disposals which would have a
more material impact from a lenders perspective than perhaps the dollar value
of any claim.
Revised Valuation
We have reviewed Centro’s published equity interests profile published on the
17th December which in the absence of further detailed capital structure has
to serve as the template to test for likely residual shareholder value under
various selldown scenarios. As with our previous analysis, this approach
excludes any residual value for the services business except for the CMCS
business on an ongoing basis. We have assumed that Centro Retail Group
(CER) is liquidated given that cross ownership interests cause it to be sold-off.
It is our view that any selldown particularly of the US assets will see achieved
sale prices at a discount to the FUM valuations included in the 17th December
presentation. From a lender’s perspective, the longer the period for disposing
of the US assets the more likely the further devaluation.
As for the Australian assets we have discounted the values by 15% and then
held them constant thereafter to recognise that any “fire sale” would most
likely incur a discount but not to the extent that we would expect to see for the
US assets.
Included in our assumptions are (a) Exchangeable Notes are cashed out at par
($600m) b)adviser fees of $40m c) a notional additional cost of $100m to
reflect any further costs of either a class action nature or otherwise and d) the
sale of the CMCS business on a going concern basis.
Irrespective that Centro has stated it will provide an update on its distribution
for FY08e we have excluded any distribution payment from our total return
calculation. We derive an indicative valuation of $1.04 per share and have a
HOLD/Speculative recommendation.
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