When Centro Properties Group lined up the expiry for all of its $5 billion of debt facilities on the same day in December, December 15 to be precise, it created a "moment of truth," not just for itself but for its lenders.
In the wake of the formal collapses of Allco Finance Group and ABC Learning there has been almost a sense of resignation in the market that Centro will be the next big domino to fall. The circumstances of ABC’s demise are confused but the Allco experience would have been quite thought provoking for both Centro and its lenders.
Essentially, it was the Allco directors who gave up the fight to keep the group alive rather than the banks, although the banks’ approach to keeping Allco on the tightest and most punitive of leashes was a contributing factor to the unwillingness of Allco's board to continue to expose themselves to personal liability when the prospects of salvaging shareholder value were so slim and diminishing on a daily basis.
The directors the Centro group aren’t quite in that position, indeed within Centro Retail, for instance, there may well be a conviction that there is material value to be salvaged. But, worn down by the continual effort of negotiating short term extensions at the cost of higher rates and penalty payments the directors are approaching their "Allco moment."
It is quite apparent that Centro can’t make major asset sales in this environment. To the extent there are any buyers, they want to buy at prices so distressed that they would worsen Centro’s position, not improve it.
Centro has the additional problem that any large-scale sale of its retail properties diminishes the income from and value of its management rights, which are central to their adding any significant positive value in the group.
Attempts to devise a recapitalisation solution with third parties have floundered for similar reasons – that Centro hasn’t been able to complete major asset sales – and there aren’t the investors willing to inject equity on terms that would make sense for Centro or its lenders.
Thus, come December 15, Centro’s directors have a decision to make that is as critical as the decisions that will be made by their lenders. Is there anything salvageable for shareholders within the group to justify the effort and risk they are taking by keeping it out of administration?
The answer is "possibly yes." As my colleague Robert Gottliebsen has noted on a number of occasions, Centro directors and shareholders have some leverage of their own because a formal administration would almost certainly blow up the value of the management rights, which generate more than $200 million of income a year.
Also, putting Centro under would almost certainly see a raft of its best executives disappear. One suspects that there aren’t too many insolvency practitioners that would have the resources or expertise to manage one of the world’s larger retail property portfolios on two continents and that the banks would be very nervous about the damage they would do to their own interests if they lost Centro’s management team.
For the Australian banks in particular, there would also be the fear that having the Centro portfolio hanging over the property market would crack the Australian property market and cause a significant fall in values that would destabilise their own balance sheets.
Because there have been few, if any, large retail property deals since the credit crisis began to provide price discovery, values have softened only slightly.
All those factors suggest that the banks have to find a way to avoid putting the Centro directors in the same position that the Allco board found itself. They have to create incentive and hope to offset the risk.
For much of the latter part of this year Centro’s management, led by Glenn Rufrano, have been increasingly focused on a debt-for-equity swap as they realised the impossibility and destructiveness of asset sales or third-party equity injections in the current environment.
What they want/need is some longer term stability that keeps Centro intact until the crisis passes and sensible values can be realised, directly or indirectly. They also need to get out of the predicament that Allco was in, where every spare cent of cash was soaked up by its bank and the directors had to beg for working capital and, each time it was provided, provide a fresh and specific window of liability.
That points to the need for the banks to adopt a genuine "take and hold," strategy, one where they convert a significant proportion of their debt to equity or hybrid equity and give Centro years, not months, to trade its way to stability.
That sort of solution wouldn’t provide any great value for existing equity holders – in effect it would massively dilute and crystallise their position in today’s environment – but it would leave them something and provide some upside. And, for directors and lenders, avert an "Allco moment."
CNP Price at posting:
6.5¢ Sentiment: None Disclosure: Held
