In a strange way the global financial crisis has helped Centro’s position. Six months ago Centro was a unique problem. Now it is part of a much broader problem, and because it is being well managed there are more pressing problems for the banks to worry about.
In discussions with Business Spectator and other media outlets Centro has now set out a clear map of the future, which I will outline in five steps.
First, I believe the inability of Centro to sell its shopping centres at anything like book value is a sign of the problems that the entire Australian and US commercial property markets now face. Centro has excellent properties, but finance is simply not available to support the old Centro valuation levels, except in a small number of centres.
Current developments in the commercial property market have been expected for some time and already foreshadowed (Don't ignore property warnings, July 28). The good news for Centro is that most of its banks now understand that Centro is part of something much bigger. A few months ago many did not fully realise what was taking place across all sectors of the property market.
Second, Centro shares are now down to levels where the market is saying that there is limited value in the equity on a net tangible asset basis. The value to shareholders comes from the fact that the banks cannot logically appoint an administrator because, if they do, the management contracts explode which leaves the banks heavily exposed.
Despite silly reports in the print media, there was never any real doubt that the banks would not extend the Centro's debt to December 15.
Third, the banks need to put to shareholders an arrangement that the shareholders will find attractive. Given the low prices of the Centro shares, no share equity can be raised. Centro Retail and Centro Properties will develop separately. In Centro Properties the banks may swap some of their debt for hybrid stock which would carry a much lesser rate of interest but would have the right to convert to Centro Properties equity. The Centro hybrid would rely on the existing bank securities.
Back in early May, Centro gave a floating rate security to the banks, including rights over the shopping centre management contracts as part of the time extension. Accordingly, if the Centro class action is successful they will not be able to touch the banks' security.
Fourth, under the plan being discussed, for the loans that are not converted to hybrid, the banks will extend the debt maturities to between one and three years.
And fifth, if, in the hybrid conversion terms, the banks offer shareholders an effective pittance, then they will tell the banks to go jump. Similarly these crazy three-to-six-months loan extensions must stop. So the Centro Properties board, acting on behalf of shareholders, has a fascinating game of bluff ahead. Centro Retail may not be required to issue any or as much hybrid as Centro Properties.
The fact that Centro has been able to maintain the presence of Glenn Rufrano as chief executive along with a board that includes Paul Cooper (AXA director), Graham Goldie (ex-Myer), Sam Kavourakis, Peter Wilkinson (ex-David Jones CEO) and Jim Hall (ex-Orica finance director) is remarkable. And because they stayed around, management staff have also been kept together. And that’s why the banks are being paid all their interest.
But if agreement is not reached by December 15, or very close to it, then I think the whole Centro game will go up in smoke. You cannot run a company of that size limping from quarter to quarter. Everyone has to understand that the property market has fallen both in the US and Australia and the situation may get worse before it gets better.
But if the properties are well managed, in time they will recover. The hybrid conversion rights will be valuable. These days banks are finding far worse problems than Centro, which is still paying all its interest. That’s why the crisis has helped.
Meanwhile Rufrano, who has done a remarkable job, seems prepared to stay on, but would prefer to be based in the US.
CNP Price at posting:
10.5¢ Sentiment: Hold Disclosure: Held
