"The unlikely hero Centro", Business Spectator &...

"The unlikely hero Centro", Business Spectator & www.money.ninemsn.com.au

By Robert Gottliebsen, 28th October 2009

Who in Australia should be given the credit for this country avoiding a technical recession and making Australia one of the fastest countries in the world to begin recovery?

Among those that played an important role is small a group of people who are now under a cloud.

But first let’s go to the more obvious players. We can thank former Treasurer Peter Costello, who with the aid of the brilliant report of Stan Wallis, helped Australia lead the world in banking and finance regulation. But current Treasurer Wayne Swan also played a key role so credit is shared between both sides of politics.

In essence, Australia emerged as one of the few countries with a banking system where the assets were basically intact. Both the bank regulators and bank boards can share the credit for this.

Our main trading partner, China, may have stumbled but came back very quickly to boost commodity prices and Australia’s bottom line. Our stock market raised over $100 billion and recapitalised our larger companies in a remarkable way. Many of our companies are now being recognised on the world stage for their management ability.

My list of those who deserve credit is not exhaustive and readers may seek to add more people via the Business Spectator conversation pages and later I will comment on those additional groups.

But I would like to add to the list the group under a cloud – the boards of Centro Properties and Centro Retail. I do not seek to defend the incredibly complex structure that the boards assembled during the boom, except to say that many of Australia’s best superannuation fund managers and banks poured money into the myriad shopping centre securities that were on offer which contributed to the complexity and enormous gearing.

The directors of Centro in 2007 have now been charged with alleged offences that relate to whether about $2 billion of the massive $18 billion in Centro debt should have been classified as a long-term liability or as a current liability (liable to be paid within a year). The facts of the case and whether the directors are guilty or innocent of the charges is now entirely a matter for the courts. If Centro directors have committed an offence while saving the company then the courts must decide the appropriate penalty.

However, if in 2007, 2008 or early 2009 Centro had collapsed about $10 billion worth of Australian shopping centres would have been thrown on the market. The vast commercial shopping centre market in Australia would have been decimated causing falls in values of a vast number of shops and enormous bank losses and business collapses. Australia would have experienced a recession and we would be still struggling to get out of it. Centro was held together by a remarkable board, a first class CEO in Glenn Rufrano, and (after some indecision) the banks.

The shares of Centro Properties are now priced at 33 cents albeit a fraction of their original worth, but at least they are solvent. Interestingly the Chinese appear to be looking at refinancing the current bank loans at lower interest rates while the rise in the Australian dollar has helped. One way or another the banks look set to get their Centro money back and the enormous losses faced by our superannuation funds have been minimised. The damage to shop and shopping centre values has been contained.

Now of course I must emphasise again that the Centro directors are before the courts because it is alleged that they misled shareholders and lenders.

While I don’t seek to reduce the seriousness of the charges facing past Centro directors I want to record their role and remind everyone that without people like this we may stumble next time there is a crisis.

If a company has good basic assets and is managing those assets well its best not to appoint official administrators. Yet it is a lot safer for directors to walk away. I hope the Centro directors' insurance holds up and that they are not forced to pay for their defence out of their own pocket.

This article also appears at www.money.ninemsn.com.au