centro your time starts now

www.businessspectator.com.au/bs.nsf/Article/Can-Centro-reverse-its-fortunesIs-our-crisis-Centr-JX6JU?OpenDocument&src=sph


In a strange way the global financial crisis has helped Centro’s position. Six months ago Centro was a unique problem. Now it is part of a much broader problem, and because it is being well managed there are more pressing problems for the banks to worry about.

In discussions with Business Spectator and other media Centro has now set out a clear map of the future, which I will outline in five steps.

Firstly, I believe the inability of Centro to sell its shopping centres at anything like book value is a sign of the problems affecting the entire Australian and US commercial property markets. Centro has excellent properties, but finance is simply not available to support old Centro valuation levels, except in a small number of centres.

The current developments in the commercial property market are exactly what had been expected for some time, was foreshadowed earlier (Don't ignore property warnings, July 28). The good news for Centro is that most of its banks now understand that Centro is part of something much bigger. A few months ago many did not fully realise what was taking place across all sectors of the property market.

Secondly, Centro shares are now down to levels where the market is saying that there is limited value in the equity on a net tangible asset basis. The value to shareholders comes from the fact that the banks cannot logically appoint an administrator because, if they do, the management contracts explode which leaves banks exposed to losing many billions.

Despite silly reports in the print media, there was never any real doubt that the banks would not extend the Centro debt time to December 15.

Thirdly, the banks need to put to Centro Properties shareholders an arrangement that the shareholders will find attractive. Given the low prices of the Centro shares, no share equity can be raised. Centro Retail and Centro Properties will develop separately. In Centro Properties the banks may swap some of their debt for hybrid stock which would carry a much lesser rate of interest but would have the right to convert to Centro Properties equity. The Centro hybrid would rely on all the existing bank securities.

Back in early May, Centro gave a floating rate security to the banks, including rights over the shopping centre management contracts as part of the time extension. Accordingly if the Centro class action is successful they will not be able to touch the banks security.

Fourthly, under the plan being discussed the banks will extend those loans that are not converted to hybrid to debt maturities of between one and three years.

Fifthly, if in the hybrid conversion terms, the banks offer the Centro Properties shareholders an effective pittance then shareholders will tell the banks to jump. Similarly these crazy three-to-six-months loans extensions must stop. So the Centro Properties board, acting on behalf of shareholders has a fascinating game of bluff. Centro Retail may not be required to issue any or as much hybrid as Centro Properties

The fact that Centro has been able to maintain the presence of Glenn Rufrano as chief executive along with a board that includes Paul Cooper (AXA director), Graham Goldie (ex-Myer), Sam Kavourakis, Peter Wilkinson (ex-David Jones CEO) and Jim Hall (ex-Orica finance director) is remarkable. And because they stayed around the base management staff has been kept together and that’s why the banks are being paid all their interest.

But if agreement is not reached by December 15, or very close to it then I think the whole Centro game will go up in smoke. You cannot run a company of that size limping from quarter to quarter. Everyone has to understand that the property market has fallen both in the US and Australia and the situation may get worse before it gets better. But if the properties are well managed in time they will recover. The hybrid conversion rights will be valuable.

These days banks are finding far worse problems than Centro, which is still paying all its interest. That’s why the crisis has helped.

Meanwhile Rufrano, who has done a remarkable job, seems prepared to stay on but would prefer to be based in the US.