Well, we're back from Melbourne. I forgot how much I liked the...

Well, we're back from Melbourne. I forgot how much I liked the city and in some ways felt a bit homesick for it, especially after visiting a couple of my favourite restaurants. As I said earlier in the week, if there is a financial crisis in Australia, it wasn't very evident in Victoria.

Anyway, on to important matters at hand..

Do you ever hear a song and it sticks in your head for a couple of days after? Of course you do.. we all do. It can be so frustrating, especially when others around you start
getting infected with the same tune. I wonder what the evolutionary or biological reason is for this? If anyone knows, I suggest we start another thread.

So, there I was in a supermarket earlier in the week and "Echo Beach" by Martha and the Muffins starts playing.. you know the song "Echo beach, far away in time...".. with the Sax. There was a sense of deja vu, because I'm sure this has happened before and I may well have written about it previously. For about 3 days, all I had in my head was this bloody song. I tried to get rid of it by whistling "Copacabana" by Barry Manilow, but my mind obviously decided Martha was the lesser of two evils. In hindsight, I agree.

Well, fast forward to Wednesday and good old Business Spectator got rid of Martha in one swoop with the article "Centro debt explodes". Reading it, of course got me thinking about a "Debt bomb", which in turn led me (as it would any sane person) to start singing the 1999 Tom Jones classic "Sex bomb" but replacing the words with "Debt bomb" instead. If you would like to recreate this experience at home, just spend the next 24 hours singing "Debt bomb, debt bomb, you're a debt bomb / You can give it to me when I need to come along". You'll be hooked in no time I promise; as will those around you.

I also had a vision of Rufrano on stage in leather pants with all the female investors throwing their undergarments at him. I shuddered and quickly thought about something else.

The premise of the BS article was that not only do banks have exposure to the Centro debt, but the hedge contracts covering the fx exposure are now out of the money. I was struggling to see the point of the article to be honest, other than to whip up a little more fear. The issue of course is the unsecured debt; the secured debt should net out in the event of a forced sale. If anything, the fact that the banks have both unsecured exposure and hedge risk would encourage them to find a longer term solution. If Centro goes under, they risk losing on the unsecured debt AND the hedging. Tony Boyd forgot to mention that point of course.

On to happier matters. As I said last week, I am now firmly of the opinion that the debt extension will be granted and the news from House of Babcock yesterday strengthens my view. We all know the saying that if you owe a lender $1m, you are in trouble but if you owe the lender $1bn, the lender is in trouble. I was reading the announcement whilst having a coffee, got to the part where the banks have allowed B&B to "pay if you can" and did the 'laugh while you have a mouthful of coffee' thing. Pay if you can? The lender's in trouble.

"Debt bomb, debt bomb... you're a debt bomb"... c'mon, sing along.

This highlights the fact that banks are willing to see value in a work-out, which is really the only way they stand to get money back. Putting a BNB or CNP into administration destroys the company, not just the structure but the overall fabric. Key people leave (nobody wants to play for the C team) and those that stay have little reason to put in 100%. Nobody can deal with the company and the focus is simply on selling assets which in the current environment is done at a deep discount. I would also point out that neither banks nor administrators are that good at running the assets, which destroys even more value; this is a job best left to the experts. In addition, management time at the banks is being occupied with an ever increasing number of credit-related problems and for the first time in many years, bankers are reaslising how painful this process is. They are going to prefer pain avoidance where possible.

On the flip side, directors have personal and reputational risk to consider and as we saw in the case of AFG and ABS, they will drop the company into administration when they cannot see a way through to protect both. What we witnessed with BNB in the last couple of weeks and what I suspect is going on behind closed doors with CNP, is a similar game playing out - either the lenders support the work-out or the directors pull the pin. I would also reinforce the fact that nobody with a financial interest in a company will benefit from it going bust.

The banks may have made provisions for loss but they are going to want to do everything to make sure these are written back to P&L in the next couple of years when earnings are looking light. A D2E swap, which is being proposed for both CNP and BNB, is a lot kinder to the overall bank capital position than distressed or bankrupt assets and this seems to be one of the emerging drivers for it being considered.

Whilst I was away, I caught up with a friend who knows a lot more about corporate recoveries than I do. He raised a point which has come up a few times already: fatigue. When a business has been distressed for a prolonged period, fatigue sets in with everyone - shareholders, directors, managers, staff, lenders, customers, etc. He raised the point (which Centro have themselves reiterated) that a way needs to be found to remove the cause of fatigue (which is typically fear-based, "The company is going bust", "I will lose my job", "The lenders will call in their loans", "My shares are worthless", etc) and allow the company to recover or be taken over. If this cannot be achieved, the best course of action is to end it, quickly. We witness a relief for Babcock and I am confident we will see the same, via a long term extension, with CNP. (As an aside, with BNB people are overlooking the Jim Babcock factor - the guy has a 33 year emotional attachment with the company that he still has a large shareholding in and still bears his name. I reckon he'll be back.)

Where does all this leave us with CNP? Well, Centro told us that none of the banks have said the wouldn't extend; the results from Centro around occupancy and rent are very good in the current environment; in the last 12 months the directors and managers have not pulled the pin; lenders seem increasingly willing to support a work-out as a way to recover their money and finally, there is a team and platform in place to run the assets.

For me, it's less about whether an extension will be granted (with or without D2E swap), it's more about whether the terms will remove the cause of fatigue and allow the company to generate long-term shareholder value. If they do, everyone concerned will be very well off.

I continue to feel a lot better about CER than CNP as I have said a number of times but this is simply a risk-based assessment. If all goes well, CNP has significantly higher upside. Debt can kill you on the way down, but accelerates recovery on the way up. If things get a lot worse, CER will probably pull through with the NTA cushion it current has. CER is also likely to announce a dividend in 2 weeks time, which will give a much-needed boost. Both are probably a bargain, but of course the Centro name and lack of buyers are holding both back. There's not a soul around..

I think the key is to look far away in time, past the current financial crisis, past the crap that is being written in the media (I see both The Age and SMH editors have been fired recently), past the doom and gloom on the sharemarket. The current malaise will not last forever and there will come a time when Centro returns to favour once more, albeit in a very different incarnation. Until then, it's a waiting game - firstly for 15/12 and then the post-fatigue months that follow.

Long term investing is often a long, long waiting game, especially in the current environment. To be honest with Centro, the only thing that helps me pass the time away, is knowing I'll be back at Echo Beach some day...