centro faces 100m action

http://www.theaustralian.news.com.au/story/0,25197,22961325-643,00.html

CENTRO Properties Group will be sued, possibly for hundreds of millions of dollars, over its failure to make proper disclosure of more than $1 billion of debt in the months leading up to its implosion on Monday.

The threat came as it was revealed that the "error" in Centro's August accounts masked a $450 million funding hole, which would have shown the company was unable to pay its short-term debts.

Plaintiff law firm Maurice Blackburn yesterday confirmed it would proceed with legal action against the shopping centre giant and said it had been in "discussions" with several of Centro's major institutional investors regarding the class action.

Maurice Blackburn lawyer Martin Hyde said the company had also been flooded with calls from Centro's "mum and dad" investors and the case looked "very strong". Following a query from the ASX, Centro on Thursday admitted it had "incorrectly" classified $1.097 billion of current debt as "non-current" in its unaudited June 30 full-year accounts, which were released to the market on August 9.

As a result, Centro's current assets were stated as $1.3 billion and its current liabilities as $656 million.

Had the $1.097 billion debt been correctly classified as "current", the June 30 accounts would have shown Centro's current liabilities were $450 million more than its current assets, which would have meant the company was unable to pay its short-term debts.

"In Centro's audited accounts $1.1 billion miraculously appears in interest-bearing current liabilities, but there is no accompanying announcement from the company, which we think is unusual, especially in the context of the credit crunch," Mr Hyde said yesterday.

"The company, we think, has just slipped it under the radar, which is cause for serious concern.

"If it's proved there has been a failure by the company in terms of fulfilling its disclosure obligations in August, then the claim group will likely involve all the people who traded from that time to this week," Mr Hyde said.

If the case is successful it will further erode Centro's value, which has fallen by about $5 billion since Monday when the company announced it had been unable to refinance $3.9 billion in short-debt because of the global credit crisis. Slater & Gordon is also considering a potential class action against Centro. Both law firms said it was too early to estimate the value of potential damages claims against Centro, but it is understood they could run to more than $200 million.

Mr Hyde would not disclose which institutional investors the firm was dealing with.

However Barclay's Group, Macquarie Bank and UBS Nominees all are expected to participate in the action.

Macquarie Bank yesterday announced it was no longer a substantial shareholder in Centro, while Barclay's Group has made paper losses of about $340 million and UBS Nominees is $210 million in the red compared to Monday's open price.

Despite those huge losses, Mr Hyde said retail "mum and dad" investors had been hardest hit.

"The human cost of this ... is devastating to some," he said. "It's a pretty awful Christmas present." The "error" in Centro's preliminary full-year accounts was identified by auditors PriceWaterhouseCoopers, and Centro corrected the figure in its audited version of accounts, released on September 6.

But aside from correcting the figure, Centro failed to issue a statement that it had changed the number. Class action lawyers Maurice Blackburn believe this caused investors to continue to be misled about the state of the company after September 6.

Centro was not available for comment yesterday, but in its Thursday letter to the ASX, the company said it did not know of debt funding problems until 12 December, the night before it placed itself in a trading halt.

"On Wednesday evening 12 December it became apparent to Centro that the margins on the refinancing would likely be sufficiently more than the margins on debt being refinanced," Centro wrote.

"As the negotiations with the financiers continued, on or about Friday 14th December Centro became aware that it would have material difficulties in obtaining the 13 month refinancing package before open of market on Monday 17 December."

Centro said its understated current liabilities posting was identified by "PricewaterHouseCoopers and management".

Australian Shareholders Association president Stephen Matthews said Centro's incorrect disclosure meant investors in Centro were provided with a picture of a "company in a much sounder financial position than it, in fact, was".

"The difference between non-current and current assets is very basic stuff and you'd have to ask yourself how and why the mistake was made," Mr Matthews said. "Centro's admission of the incorrect figure goes to show they were using short-term borrowings to finance long-term assets, which is very, very risky."

If Centro falsified the accounting for its current liabilities for non-current liabilities it could suggest the company was aware of its short-term debt-funding problems at least four months before it placed itself in a trading halt 10 days ago.

The Australian Securities and Investments Commission declined to comment about Centro, when contacted by The Australian yesterday.

If legal action is taken against Centro's key executives, they will not be forced to pay to defend that action because of a company-funded professional indemnity insurance that covers them from paying for the defence of "any civil and criminal actions that may be brought against them".

Following Monday's announcement, Centro shares have collapsed from $5.60 to close at $1.12 yesterday.

Those losses are likely to be magnified for shareholders as a result of a $120 million black hole in the company's accounts due to a generous employee benefits scheme. Under the scheme, 531 current employees have been given interest-free loans to buy 27.9 million shares and those loans do not have to be repaid if the Centro share-price collapses.

In addition to those costs, shareholders will have to pay more than $18 million if they vote to remove Centro's senior management for anything other than "gross misconduct".

Chief executive Andrew Scott could walk away with a $7 million "golden handcuff" payout, despite having taken the company to the brink of collapse.

Centro's US banks have given the company a reprieve until February 15 to find alternative sources for its $3.9 billion in short-term debt.

If the company is successful in refinancing the loans, it is expected to be forced to pay considerably higher interest rates because of the credit crisis caused by the US sub-prime fallout.

Centro may also be forced to pay more for some of its domestic debt after ratings agency Moody's Investors Service said it could downgrade $900 million of Centro's bonds which were issued to investors and backed by several of Centro's shopping centre assets.

The bonds were issued by 12 different arms of Centro and Moody's said it had launched the ratings review as a result of Centro's "overall exposure to refinancing risk".