From BusinessSpectator, a tribute to...

From BusinessSpectator, a tribute to GR,

http://www.businessspectator.com.au/bs.nsf/Article/Glenn-Rufranos-triumph-EFBFS




Commentary
6:34 PM, 8 May 2008



Stephen Bartholomeusz

Glenn Rufrano's triumph
There is nothing that is simple about the Centro group and its struggle for survival. Neither the process nor the outcome of the negotiations that should lead to its banks committing to an extension of its funding until December 15 are as straightforward as it might appear.

Commonsense – an agreement to give Centro a decent amount of time to devising a plan to recapitalise and simplify the teetering group rather than put it under and guarantee massive losses for all – almost went out the window when two banks played their own games right up to the final tick of yesterday’s deadline.

Germany’s WestLB was the cause of a one-week extension of the original deadline. It has its own considerable problems – its chairman and vice chairman have resigned after the bank lost about $2.6 billion last year and it had to be bailed out, at a cost of $8 billion, by its state government – and that may have made it difficult for it to get the requisite sign offs from head office.

Its loans to Centro of about $200 million are quite modest in the context of the group’s funding so it may also have hoped the other banks would buy it out to avoid jeopardising the entire $4 billion worth of bank loans.

The other threat to the extension was Commonwealth Bank, which made a last-minute demand that threatened what was otherwise an agreed deal. It took a 11th-hour phone call from the local chairman of one of the bigger creditors, JP Morgan’s Sir Rod Eddington to CBA chief executive Ralph Norris yesterday to avert that threat.

The outcome of the negotiations is that Centro has apparently extended the moratorium on repayment of $2.3 billion it owes its Australian lenders and $US450 million it owes US note holders and will now seek to convince its US banks to extend their $1.2 billion of facilities from the September 30 deadline previously agreed with them until December 15.

Except that it hasn’t quite done that, or at least not yet. There are two intermediate deadlines that have to be met in order to extend its stay of execution until December 15.

To convince the banks to extend, Centro agreed to provide more security over its Australian and US retail property assets to the banks. To the credit of new CEO Glen Rufrano and his advisers, however, they achieved something in return.

Centro is negotiating with the Australian banks and the note holders for a $100 million increase in its liquidity facility, mainly to fund capital expenditure, higher borrowing costs and the advisers’ fees.

If the banks don’t provide the liquidity facility by May 30, along with a raft of consents among themselves for refinancings, asset sales and the way any proceeds will be distributed, the extension could be terminated – and the banks wouldn’t get their security.

That was apparently the issue which almost derailed the negotiations, with CBA said to have demanded that it retain security even if the liquidity facility and inter-creditor arrangements weren’t finalised by May 30. The ability to withdraw that security if the banks don’t get their act together gives Centro some leverage to keep the process moving in the right direction and provides some comfort that it will get the moratorium extended to December.

The other intermediate deadline is September 30. At that point the local banks and US note holders have to be satisfied with Centro’s progress and the US banks have to agree to again extend their facilities for Centro to be given the extra time until mid-December.

Time – and some pragmatism and patience from its lenders – is fundamental for Centro if it is to salvage something significant for equity holders from the effects of the sub-prime crisis and repay its lenders.

It is in the lenders’ interests to co-operate, as long as they retain faith in Rufrano and his team, not only because they need a team to manage the retail centres but because if they called in their loans they would all face heavy losses as the value of Centro’s management rights evaporated.

The financial and structural leverage in the group is such that even quite modest leakages of value – and the value of the management rights isn’t modest – could see big losses for the banks.

The US lenders have been particularly co-operative, despite – or perhaps because of – the fact that they are exposed mainly to US retail centres in the midst of a downturn in the US economy and falling values for US retail properties. Dumping Centro’s portfolio into that market at this minute would be unpalatable and could cause knock-on effects for their other US exposures.

If Centro gets past the May 30 deadline, on past performance the US banks will extend their facilities until December.

Centro confirmed today that it has had offers for both its Australian and US wholesale funds and received indicative offers from a number of "qualified investment groups" for a recapitalisation or stabilisation of the entire group. It is looking at selling smaller portfolios of Australian assets and still negotiating with a number of parties interested in the US fund.

If Centro does push the deadline back to December 15 – which now looks highly probable, if not certain – it buys more time to work its way through the options but, more particularly, it removes negotiating leverage from potential buyers seeking to use the deadlines to buy assets at distressed prices.

Since Rufrano arrived from the US to take on the daunting task of saving Centro from the wrecker’s ball, he has been forced to spend an inordinate amount of his time and attention trying to placate the multitude of banks and negotiating the series of extensions that have kept the group alive.

Now it appears he will have a whole seven months to focus on Centro and the options for salvaging value for its lenders and equity holders. There would be relief and some excitement within the Centro camp that they have finally achieved some breathing space.