Why Centro is still kicking Robert Gottliebsen 5:50 AM Apr 15, 2008
Given the state of the Australian and US share markets there is very little chance that by the April 30 banking deadline a proposal will be put before Centro directors and bankers that offers a big equity payout. Most of the proposals that have been put forward so far have been either for parts of the operation, or very complex in the way they structure any rewards for shareholders.
But at Centro we are seeing a remarkable illustration of shareholder power backed by some courageous directors and a CEO who is running the business well. In addition, the attitude being shown by banks is totally different to previous disaster periods. If the year were 1990, Centro would be in receivership irrespective of the consequences, but in 2008 it is highly likely that the banks will extend their deadline from April 30 to September 30. And they may have to go further.
The Centro shareholder power game works like this. In the base company, Centro Properties, the banks are owed some $4 billion, unsecured. Given the complexity of the group, one of the most valuable assets of Centro Properties is the right to manage the shopping centres of the entire Centro group. The contract yields more than $200 million each year – and rising.
If the banks exercise their security and appoint an administrator to Centro Properties, it will automatically trigger the disintegration of this fantastic asset. The banks are therefore stymied – they can't exercise their security without destroying their key asset. That gives shareholders and directors much more power than is normal in such situations because they must approve any reconstruction proposal.
If the bankers were to ask shareholders to approve a fire sale which gets the banks off the hook but leaves little for shareholders, then it's likely to be rejected by shareholders. (The real equity value of the shopping centre network has not been reduced anywhere near as much as Centro's market capitalisation, which fell from a peak of $8 billion to the current $300 million). The banks can't take their money and run because if they appoint a receiver they destroy their management contracts – their ticket to avoiding loss.
The Pelorus Property Group tried to get members of several Centro syndicates to sack Centro as manager. Here I must disclose that my superannuation fund has two small investments in Australian Centro syndicates – both have been brilliant investments. This year we received much greater disclose which showed that most of the $8.5 billion syndicate network is in good shape, not highly leveraged and performing much better than the share market.
This high level of performance is the key reason why Pelorus' attempt to dislodge the syndicate mangers failed. The failure would have given the banks confidence in the solidity of the management contract,
In the US the banks are owed around $2.4 billion in unsecured loans to the so called Super LLC and Shopping Centre America joint ventures. The US banks do not have the same management contract constraints as the Australian banks and official management of the American joint ventures would not trigger a break up of the whole management group. But the US banks have worked out that they would suffer heavy losses if they were forced to manage and sell a large group of shopping centres.
As things now stand, unless the Australian shareholders receive worthwhile rewards, the Australian banks will take a bath on the collapse of the management agreement.
I can't recall seeing anything like this.
The other difference between Centro and "normal" crashes is that the assets all produce income and that income is being used to pay bank interest and distributions to syndicates as well as to complete capital development projects to enhance asset value. And food retailers are about the most defensive asset you can find.
So the Australian banks are likely to extend until September 30. The US banks have already signalled that they will do the same if the Australian banks go down that path.
By September 30 I am not sure that much will have changed. What the banks may have to do is recapitalise the business themselves and become partners with the shareholders.
The banks can still remember that they took haircuts in the crashes in the 1990s that were totally unnecessary because the underlying assets were good.
Ends.
Cheers, Pie :-)
CNP Price at posting:
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