bobby gottleibsen's take

A good read, as usual from Bobby. The last few paras are particularly useful around CER.

I read several sites every morning; business spectator is one.

http://www.businessspectator.com.au/bs.nsf/Article/Centros-good-news-week-$pd20090116-NC3V5?OpenDocument&src=sph

cheers,

ned

1:03 PM, 16 Jan 2009

Robert Gottliebsen

Centro's dire warning

Centro has delivered some good news for its shareholders, superannuation fund investors and syndicate holders – in the longer term, unlike in the 1990s, the big banks may make a lot of money. But Centro has also delivered some disturbing news for other troubled Australian companies – times are going to get even tougher in the US as more retailers go broke and those that survive demand lower rentals.
Centro’s US shopping centre management is going to be tested. Westfield, which has huge discretionary spending malls in the US, will face an even bigger test.
Let’s start with the bad news. In a sense Centro was lucky that it hit the ropes early. Centro CEO Glenn Rufrano says that because there were so few companies in trouble when Centro could not roll over its debt, there was stability among the decision makers in the banks handing problem loans. Rufrano says that with the increase in the number of companies in difficulty, “there is now much more instability in banks and its harder to get decisions".
I would add to Rufrano’s remarks by pointing out that in today’s banks, few people handling troubled loans have experience in the area and they are often way out of their depth. Centro was so complicated that the banks would have pulled the plug, even though it would have resulted in them losing many billions.
That is what has happened at Allco, which would have survived had it got into serious trouble when the banks were not overstretched. Of course in those early days it was also possible to raise capital, which the boards did not do.
From all indications, the bank that it most stretched in terms of administering troubled accounts is the Commonwealth.
In six weeks Centro will revalue its shopping centres as at December 31. Assuming the values are realistic, it will not be pleasant, with big write-downs. But the Centro reconstruction did remove the need for Centro Properties and Centro retail to make large discounted asset sales, secured Centro Properties shopping centre management contracts and turned the Centro group into a cash flow machine that for the next few years will be devoted to reducing debt. Some of the Centro Australian syndicates (and remember my superannuation fund has a small holding into two) will have to suspend or reduce distributions so that they can spend money on their centres but the pressure to sell has been removed by lifting the bank lending valuation limits. Some of the syndicates would have been in trouble on their limits because of the write downs coming.
In Australia, Centro shopping centre occupancy at June 30 was around 99 per cent and the Rudd stimulus packages are helping sales particularly in the non-discretionary areas when Centro specialises.
In the US the situation is tough, because some Centro retail tenants are collapsing. Occupancy was at 92 per cent at June 30, but it has since fallen. What Centro has to do is to go out there and scout for tenants. It's times like these when you find out how good your shopping centre management people are. Centro has a problem in that its CEO wants to live in New York – not ideal. But Centro will need Rufrano’s talents given the problems in the US.
As for Centro shareholders, they have salvaged something and what they have is a highly-leveraged play, betting that in the long term the US and Australian stimulus plans work and that the banking systems finds a way to return to financing property purchases. There is a very good chance that longer term the play will work, with the banks as the biggest winners. And it sure beats going broke and having a worthless assets.