Revised Target Price/Rating — Following on from the 17th December announcement and today’s trading halt and the tone of recent company releases which indicates further uncertainty regarding its short-medium capital structure plus a plethora of outstanding issues effecting both equity and debt investors we have reduced our Target Price and revised our Risk rating from High Risk to Speculative. Revised Valuation — We would expect that any sale of the business would be done on a break-up of the entity rather than on a going concern basis. Applying a 65% discount to the US assets and after adjusting for the carried distribution ($152m) offset by the payout of Exchangeable Note holders ($600m),we derive a revised Target Price of $1.04. Valuation Methodology — Given the uncertainty regarding the quantum and timing of any future distributions and the outcomes from the strategic review we have opted for a SOTP valuation as the primary approach. This is consistent with our previous published analysis. Recommendation — We rate CNP a HOLD with a 2S Rating and a Target Price of $1.04.
Centro has gone into a trading halt prior to an announcement on the 15th January less than four weeks since its prior announcement also post a trading halt when it announced it had failed to secure bridging finance ($2.7bn) and was undertaking a strategic review of the business. Whilst no details have been issued regarding the current trading halt the previous trading halt was as a result of funding issues so we would not be surprised to see issues with lenders as the reason for the trading halt. Discussions with regulators would not generally warrant a trading halt. Given that Centro still had approximately four weeks to complete its strategic review, today’s announcement suggests that matters in terms of complexity and debt security have deteriorated to the extent that issues with lenders have overtaken the strategic review process. Whether or not the announcement by Tuesday leads to the business being offered for sale, continues operating or put into liquidation remains a point of conjecture. What is clear is that the ultimate outcome from shareholders is predicated on a series of events that will alter over time as disclosures as well as lenders degree of comfort or otherwise becomes clearer. The string of events since the 17th December culminating in a second trading halt leads us to believe that Centro is effectively dealing with issues on several fronts which could ultimately conspire to undermine the strategic review process. If there was positive news by way of recapitalization or even some progress on asset sales a market update and not a trading halt would suffice. Whilst potential bidders for the business may see value it is the view of lenders both offshore and domestic that is critical in this intervening period. More recent news of its inability to extend maturing interest rate hedges is a further sign that Centro is struggling to win lender support. The inability of Centro to roll maturing hedges brings into question lender’s view of Centro’s credit. The convergence of issues from all quarters including lenders, rating agencies and regulators in the relatively short space of time since Centro’s first announcement suggests that resolution of just bridging finance has carried over into a broader review of the operation which goes beyond a single stakeholders’ control resulting in a second trading halt that could be seen as the start of a new phase for Centro. The debate now sits around whether or not lenders are motivated to continue to have Centro operate as a going concern. Certainly placing Centro into liquidation brings costs and reporting issues for lenders that have wider implications for the market unless material information leaves them no alternative. On the one hand, lenders of secured financing can point to assets that at very least provides a floor to the extent of any losses they may incur and a managed selldown of these assets would likely follow.
On the other hand the complexity and nature of each funding structure within and between Centro related entities clouds the ability of lenders to access and liquidate any exposure without triggering other events or impacts on other lenders which may make a uniform approach by lenders more difficult to execute. Given further that domestic and offshore banks do not always share views on how to deal with debt exposures if an offshore lender breaks ranks and moves to liquidate assets then other banks may be forced to act accordingly. At the time of the 17th December announcement, Centro alluded to asset sales as a de-gearing option, however, in vehicles such as CWAF the crosscollateralized nature of the debt may inhibit any immediate sale unless holders of the CMBS paper are given additional comfort by its issuers. This issue is further compounded by the fact that if as advised by Centro the redemptions/applications for the DPF/DPFI are lifted on the 15Th February then the means by which investors can be cashed out via asset sales in the case of the DPF with a 50% equity stake in CWAF ($2.6bn) looks a challenge. Any collaterized debt facilities shared between Centro and Centro Retail Group only adds another layer of complexity and a potential stand-off in the event of any asset selldown. The recapitalization of Centro by way of an outright bid for the vehicle by an alternative manager as a going concern would subject to the terms of the offer engage Centro’s lenders in working with an alternative management team but again if debt covenants within the Centro entity have been found to have been breached then this may work against a full bid for the business being achieved. We had previously derived a break-up valuation applying higher investment yields on Centro’s equity stakes in the various vehicles with no valuation ascribed to the Services Business. We have subsequently reviewed this approach applying revised downward valuations for each FUM entity within Centro which has the effect of reducing Centro’s residual equity within each vehicle. We have ascribed a notional payment for the syndicate business (CMCS) of $80.6m to recognise that this entity within the overall Centro FUM platform is the most likely to have appeal to a third party and could be offered relatively cleanly. The multiple swing factors that could both positively and negatively impact Centro’s share price requires us to value the stock under a distressed seller scenario. This came about both in terms of statements by the company that it would look at an outright sale and the attitude by the market that lenders would remain uncomfortable in an environment of weakening asset valuations particularly in the US if de-gearing of the entity remains a challenge. The complexity within the operating platform and the capital structure that sits underneath removes a significant level of confidence as to how the Centro strategic review will play out reliant as it is on lender support. Overlaid with this is the uncertainty of which stakeholders within the Centro platform could and would launch class actions against the Group regarding representations it made let alone actions undertaken by any regulatory authority.
The timing of the class actions may delay any disposals which would have a more material impact from a lenders perspective than perhaps the dollar value of any claim. Revised Valuation We have reviewed Centro’s published equity interests profile published on the 17th December which in the absence of further detailed capital structure has to serve as the template to test for likely residual shareholder value under various selldown scenarios. As with our previous analysis, this approach excludes any residual value for the services business except for the CMCS business on an ongoing basis. We have assumed that Centro Retail Group (CER) is liquidated given that cross ownership interests cause it to be sold-off. It is our view that any selldown particularly of the US assets will see achieved sale prices at a discount to the FUM valuations included in the 17th December presentation. From a lender’s perspective, the longer the period for disposing of the US assets the more likely the further devaluation. As for the Australian assets we have discounted the values by 15% and then held them constant thereafter to recognise that any “fire sale” would most likely incur a discount but not to the extent that we would expect to see for the US assets. Included in our assumptions are (a) Exchangeable Notes are cashed out at par ($600m) b)adviser fees of $40m c) a notional additional cost of $100m to reflect any further costs of either a class action nature or otherwise and d) the sale of the CMCS business on a going concern basis. Irrespective that Centro has stated it will provide an update on its distribution for FY08e we have excluded any distribution payment from our total return calculation. We derive an indicative valuation of $1.04 per share and have a HOLD/Speculative recommendation.
CNP Price at posting:
0.0¢ Sentiment: Sell Disclosure: Not Held
