Source: www.theaustralian.news.com.auCentro Properties Glen...

Source: www.theaustralian.news.com.au

Centro Properties Glen Rufrano remains bluff king
Matthew Stevens | August 30, 2008

GLENN Rufrano is running Australia's highest stakes poker game.

Rufrano is the New Jersey-born property guru trying to extract value for the bankers to, and owners of, a trans-Pacific, shareholder wealth-munching calamity called Centro Properties.

Centro survives at the whim of an unlikely collection of Australian and international bankers. They have lent just over $15 billion to Centro against serious retail property here and, latterly and disastrously, in the US.

For about seven months now, Rufrano has successfully bet his reputation and what little shareholder equity there is left in the Centro pot that the financiers cannot afford to fold 'em and walk away. At least not yet.

Indeed, you sense that the tougher the markets get, the more Rufrano feels he can win his $15billion game of bluff and double bluff.

Centro yesterday joined some seriously ugly company in confirming it lost $2.06 billion over 2008.

This was predominantly the nasty product of the consolidation of Centro's corporate structure, and it flows from $1.19 billion of write-downs in values of US and, worryingly, Australian retail property portfolios and a $772 million write-off of goodwill acquired in the ill-starred US acquisition that bought Rufrano to the company in the first place.

In February last year, Centro agreed to pay $6.2 billion for a business called New Plan.

The deal tripled the volume of Centro's US retail floorspace and made it the No2 in the US retail property business. And within seven months, the deal had ruined Centro.

The problem, according to Rufrano, is not the price that was paid but the way the deal was then capitalised by Centro. Centro and its 51 per cent management subsidiary, Centro Retail, each injected equity into the new deal. But neither injected enough. The head stock stumped up $750 million of equity, while Centro Retail put in $250 million. The balance of the transaction was debt funding.

The idea was that the properties would be on-sold through a web of Centro satellite funds. The sustaining equity was to come from the asset flick-pass, which is the mark of the asset management model.

But between deal completion in April and asset distribution, the sub-prime ice age dawned and credit markets shut. The assets could not conveniently cascade out of the headstock, taking debt with it. The Centro model was dead.

Sometime within 72 hours of the Geelong Football Club becoming the latest back-to-back AFL premiers, Rufrano has to convince five US banks, eight Australian banks and 12 US insurance houses to hold hands and head once more into the breach with dear Centro.

By close of business on September 30, Rufrano has to convince these three discrete financing cohorts to extend deadlines on more than $6 billion worth of maturing finance until at least December 15.

By then, Rufrano needs to have made some real progress on plans to re-capitalise his headstock company, Centro Properties. He needs licks of equity big enough to convince the September syndicates, and a fourth banking group owed a further $2.8 billion, to accept longer horizons for their funding tranches.

Centro is taking two distinct paths to finding new security upon which to secure some sort of future. Rufrano has scoured the world for new equity investors, but has so far found only vultures wanting to suck value disproportionately from the bank and shareholders.

So, while equity discussions continue with at least two parties, Rufrano has confirmed a campaign to get some of the headstock's banks to swap debt for some kind of high-coupon hybrid equity.

The idea would be to switch about $2 billion of debt into cash-flow saving preference equity. It has been widely reported that Rufrano has asked his Australian bankers to translate about $1 billion of their debt to hybrid equity.

Given the matching size of the US debt requirements, it would be a fair bet that Rufrano is asking his US bankers to do the same.

What is interesting here, given it runs counter to the idea of leverage and the risk of not rolling over, is that it seems Rufrano's reception has been tougher in Australia than it has been in the US.

At first glance you would reckon that Centro's biggest problem would be in convincing the insurance groups to hang-in for the haul. After all, there are 12 of them with a total exposure of only $US450 million. All things being equal, one or all of them could walk without making a material loss. And Rufrano knows that one breach in the wall of support might be enough to end this game.

The same could be said for the US banks. Yes, there are only five of them and $2.5 billion is a fair bit more to have on the line. But, as Rufrano said yesterday, when the likes of Merrill Lynch are writing off $US5 billion a quarter, the numbers here are not scary in US terms.

But it seems it is in Australia that the talking is toughest. And that, it seems, is because the local syndicate is actually very, very international.

Yes, the Australian funding includes CBA, NAB and ANZ and they are unlikely to throw in their cards as long as debts are being serviced. And two other banks, JP Morgan and Royal Bank of Scotland, are in both the local and the US syndicates. So they too are unlikely to fold.

But the intentions of the remaining troika are harder to pick. They include Germany's WestLB, France's BNP Paribas and Japan's Sumitomo Mitsui Banking Corporation.

Rufrano's problems, of course, are more layered than just dealing with his banks. For example, there is a small fleet of satellites that have suspended redemptions and owner-income streams, and a pair of class actions to stare down.

Then there are the Centro Retail issues. Even if Centro could sell supermarket malls at acceptable prices -- and it can't at the moment -- Rufrano's hands would be tied to some degree. You see, the most financially sustainable part of Centro right now is the property management business.

It earns fees for running Centro Properties. When you sell the property you run the risk that the new owner will want to change the management and thus end the fee flow. That, in turn, denudes the value of your best performing business. And further down the chute you go.

Then there is the issue of tenure. His contract runs out in February and while he wants to finish the job of stabalising Centro, his wife would rather he did that from New York than Sydney. Which leaves Centro's probably already depressed board with a serious dilemma.

And finally there are the rumours.

Rufrano dismissed with indignant good humour suggestions that his mission at Centro was personal and that he was acting in his own rather than shareholders' interests.

The idea, which has done the rounds for a little while now, is that Rufrano would somehow find a way of un-bundling Centro on geographic lines and then buy back the New Plan assets he helped sell to Centro, but at a mind-blowing discount.

"I have heard that," Rufrano said. "I suppose I find the idea probably a little bit offensive and a little bit flattering.

"Offensive in that you have to be a bit immoral to work for yourself into a break up of a $22 billion business and to then to take away $15 billion for myself.

"But flattering because I would have to be a genius to do it. And I am denying that now."


Ends.


Cheers, Pie :)