Commentary12:35 PM, 25 Aug 2008 Stephen Bartholomeusz Centro's...

Commentary
12:35 PM, 25 Aug 2008



Stephen Bartholomeusz

Centro's payment plan
TOP News




The fate of Centro Properties Group remains on a knife edge and, as it has been since the onset of the credit crisis overwhelmed it last year, in the hands of its bankers. It is apparent from today’s update that Centro hasn’t been able to make the progress it hoped for in executing its strategic plan to ease the anxiety of its banks.

Centro has made some progress – last month it announced the $US714 million sale of almost all the properties in the Centro America Fund and it has also sold a further $US195 million of US properties – but not enough to ensure that its lenders will extend their facilities beyond September 30. Its Australian banks and US noteholders had agreed to extend until December 15, provided they were satisfied that it was making progress in implementing its strategic plan.

The key elements of that plan were asset sales and the development of a restructuring plan, including some form of recapitalisation.

Centro said today that the sales process continues and that it was in discussions with a number of potential purchasers of assets within its Centro Australia Wholesale Fund.

It also said it had received and evaluated a number of proposals for new equity but had concluded that no proposal received to date provided an acceptable outcome. It said it believed that in the current difficult capital market conditions it was unlikely an acceptable proposal capable of being implemented by December 15 would be forthcoming.

In the absence of a recapitalisation solution in the short term, its objective was to obtain a longer term debt extension from the lenders. It had started discussions with the lenders on possible terms and it was likely those terms would include a requirement for the conversion of a portion of the debt into some form of hybrid security – a debt for equity swap.

It perhaps isn’t surprising that Centro is struggling to attract acceptable proposals either for the asset sales it has been pursuing or an equity injection. Conditions in both capital markets and, more particularly the property markets, have been deteriorating steadily over the course of this year.

Centro does have some very attractive retail centres but it is difficult to maximise the price when even those buyers with the capacity to make large-scale acquisitions are confronted with higher borrowing costs and sliding property values.

There are two other dilemmas for Centro. One is that the structure of the group was so financially and structurally leveraged to the boom times that even very large asset sales would produce only a trickle of cash at the head stock level and therefore won’t materially reduce the debt in Centro Properties. The other is that a large proportion of the latent value in Centro Properties is tied up in its service businesses. Large-scale liquidations of its retail property portfolios would reduce the value of its service businesses.

If Centro is to retain any influence over its own destiny it needs to convince its banks that an informal approach remains the best chance of minimising their losses, even if that means the banks have to be locked into their Centro exposures for the medium term.

Dumping a lot of retail centres into the Australian property market in the current environment, where there are few buyers, would destabilise the market further and exacerbate the damage to the banks’ own interests.

The logic of Centro’s position is quite sound. Because of the value of the service businesses, whatever outcome which managed to holding the core assets together would have to be better than the results of a formal liquidation.

With such a large and diverse group of lenders, some of whom will have been scorched and unsettled by their other exposures and by the continuing malfunctioning of credit markets, however, it can’t be simply assumed the lenders will behave rationally.

So far Centro’s Glenn Rufrano and his team have done exceptionally well to keep the lenders calm and to dissuade them from acting precipitously. Now they are going to have to convince them again that it is in their best interests to extend their facilities, not for a few months but into the longer term.