Well, I'm back. Did you get my postcard in the mail?Firstly,...

Well, I'm back. Did you get my postcard in the mail?

Firstly, let's cover off the holiday... It was great. Relationship Partner (RP) and I disappeared to the middle of nowhere for about 10 days in total which was long overdue and much needed. Supercat on the other hand was incarcerated at the local kitty hotel for the duration - we picked her up last night and she hasn't spoken to us since. Cats, like most investors, have a short memory so in a day or so she will have forgotten how bad it all was... until next time.

We spent the final 2 days of our holiday in the nation's capital. It was a major hike from where we had been staying but what the hell; RP had never been before and I went because fuel for Thunderbird 2 was cheap - two birds, one stone. I had the CNP announcement read out to me over the phone yesterday and the note I fumbled to TP on my mobile phone (thanks for posting it TP !) was done whilst standing in front of parliament house before we went on the tour. Because it took so long to type, there were some strange looks over my shoulder from Federal Plod whilst doing so. I was going to type "I hope the mention of the hybrid security issue doesn't cause the SP to bomb" but thought better of it. In my experience the mention of 'security' and 'bomb' in the presence of the AFP these days is just bad form.

Anyway, down to business...

It's difficult not to feel slightly peeved at Glenn and the gang for the communication that came out yesterday. It feels like we've had a couple of 'heads up' in the last week or so - firstly the SEC filing for Centro NP and secondly the little gem from yesterday. The phrase "In response to media speculation" was an insult, even if it was true. There have been numerous opportunities to comment on media speculation previously, was it just coincidence that they decided the time was right 4 days before YE results? On the one hand I am pleased Centro came out with something, but the guise under which they claimed to do it was disappointing.

I dropped a note about the Centro NP filing when it came out but the media (unsurprisingly) focused on some of the phrases contained within about the ongoing concern status of the entity. Overnight, they did the same about the uncertainty surrounding debt extensions. As you know, these phrases have been used for the past 8 months and if you look at previous SEC filings and earlier ASX announcements, they were present there too. It shouldn't have come as a surprise to anyone who has been around for a while but for outsiders, it just fuelled the bad news angle.

Anyway, my take on the announcement that came out is as follows and in no specific order:

1. The announcement that US$195m of assets has been sold is good. It's unclear whether this includes the US$90m or so that were being marketed a couple of weeks ago but I doubt it. There is no mention of the remainder of CAWF and I imagine this will be a focus on Friday.

2. There has been interest in equity injection, but the company and lenders have concluded it's not in the best interests of everyone concerned. I still reinforce that if the lenders wanted out quickly, they would have forced acceptance of an offer or fire-sold assets at deep discount.

This point is very much a reflection on the current business environment. Those 'injectors' who are interested in Centro and have the means to do so will want a bargain. Those who are interested but don't have the means, cannot raise money in the current environment to do so. Despite there being no end to the current malaise in sight, this situation will not continue indefinitely and conditions will improve over time. Centro realise this and if the bankers are smart, they will too.

3. I believe we will see the debt being extended even further, possibly beyond the current December deadline. The lenders are in a very difficult position and there is still swathes of debt unsecured. I believe the alternative is completely unpalatable for everyone concerned and the banks know it. ANZ seems to be the only bank to have made a provision and Mike Smith is going to want to be able to write that back to P&L in the future to make himself look like a saviour at the blue bank. Any other bank making a provision for loss against Centro in the coming months will get absolutely walloped by the market and they will want to avoid this if at all possible.

4. On the hybrid issue, I am OK with this so long as the terms are at least reasonable. I can see Centro proposing to issue, say, $1bn in hybrid securities (probably to the unsecured lenders) which pay the holder a coupon and have an option to convert (at a discount) to equity in the future after a predetermined point. This gives lenders some downside protection and a share of the upside in the future. It also establishes a market for the securities which means the holders have some liquidity in their positions, which they currently don't. I'm not overjoyed at the prospect, but I'd suggest being open to look over any proposal that may come up. Note that this is not a rights issue and there is a huge difference.

If you think the announcements are Friday are going to be stellar for CNP, you're probably kidding yourself. There will be property write-downs, expenses relating to the debt extensions and advisor fees, we might see some legal provisions and some further impairment charges. On the upside though, we'll get to see how the cashflow is going and undoubtedly see proof that Centro is still covering interest repayments comfortably. We'll also get a revised NTA which will still be considerably higher than the current SP. We also get a feel for the 'services business' which the market has basically discounted to ZERO but we know holds value while the company is kept whole.

I have been more positive on CER for some time now and I think the picture for holders will be a little more rosy (still not great though) with the first full half of CER/CSF merged results and a reduced but still comfortable NTA.

The current sentiment is woeful and it looks like CNP is setting some new lows. For those who have been on the good ship Centro for some time, I actually think we have seen worse (remember the late-night debt extensions?) but in the current environment this is carrying little weight. At the end of the day, your investment is based on whether Centro will survive or not. I am still firmly of the opinion that it will - it may take some time and some more pain, but I think we'll get there. If you've DYOR and agree, hang in there.... and consider a holiday. It works wonders.