May 09, 2008 12:00am THE Centro deal is sensible and both reasonably and finely balanced. Both in terms of achieving a best-case outcome and in sharing the costs. And the benefits versus 'the alternative'.
There is of course no alternative. Or no sensible alternative.
Pulling the plug would impose huge and completely unnecessary costs and create a complex nightmare.
Importantly, you wouldn't opt for the 'staying alive' course but for the fact that not only is the underlying business a real one.
But it - shopping centres - generates strong and reasonably predictable cash flows.
Centro didn't get into this mess by going insolvent in the classic Micawber fashion - money out exceeding money in. But simply because it got squeezed by the sub-prime meltdown.
So, the first step is to sensibly just keep things in place.
For long enough for certainty and stability. But not too long, to avoid working to a real resolution.
So the $2.8 billion in loan facilities will be extended to mid-December. But in return Centro has to provide more security over and above the specific property assets.
The old 'floating charge' over all of Centro's assets.
This might seem punitive to shareholders and any other small creditors not covered. But they should understand it gives them a good chance of getting something back.
The 'alternative' would give them nothing.
Ahead of this there is an end-May deadline to finalise Centro's necessary liquidity facility, for operational business effectiveness.
Now the costs. There is no additional cost upfront, over and above the 1.75 per cent interest margin already announced. The liquidity facility will attract a heftier (up to) 3.75 per cent margin.
All that, especially the 1.75 per cent, seems a reasonable mid-point. For a penalty for facilities in default.
But also ones that are pretty secure in essential underlying cash-flow terms. And so strikes a reasonable balance in how punitive the cost will be for shareholders.
However a really punitive additional 5.5 per cent will be applied if these extension arrangements are terminated following an event of default.
That's a bit theoretical. Because if the extension is terminated, the roof falls in. Metaphorically speaking of course.
Now all of this is a fine holding position. But if continued too long it would mean the entire Centro business working just for the lenders.
That might be good for them. But it would not be good for the business, which would decay. Or for shareholders - with their end-point, nothing.
So the 'staying alive' process has to enable everyone to disentangle all the complex financial relationships. To realise assets and pay down and simplify debt.
And hopefully recreate a company with some real value for its owners. This is Centro's first best - and only - hope.
CNP Price at posting:
0.0¢ Sentiment: LT Buy Disclosure: Held
