robert gottliebsen business spectator article

Since know one has posted this article i thought it might be a good read.Rob G understands the situation better than most writers/journalists/news presenters and stock analysts out there.

Commentary
9:32 AM, 27 Aug 2008



Robert Gottliebsen


Centro Properties shareholders need to fasten their safety belts and get ready for a brinkmanship ride to the edge of the cliff. Centro directors will require a clear resolve if Centro shareholders are to come back from the edge with a worthwhile punt on the future.

The simple facts are that unless the banks do a deal with Centro Properties shareholders, they will have to write off in the vicinity of $3 billion in unsecured loans, on which they are currently receiving every cent of interest that is owed. This gives the Centro directors real and rare power. And there is now a mountain of property waiting to be sold.

At the Australian Leadership Retreat at Hayman, the figure being touted for properties in the selling queue was around $15 billion. The actual amount of property that has a 'for sale' sign on it is much less. However, there is a vast amount of property where the owner really does not want to hold and is looking for a buyer.

At the same time, globally there are some of the tightest credit conditions that I have ever seen. Australian banks will get the back end of that squeeze, so it's a very bad time to be selling property. Those currently buying are mostly looking for bargains or are only interested in strategic purchases. The listed property trust market has adjusted stock prices to allow for a big fall in property valuations, although the market may have gone too far.

At Centro Properties most of the $4.5 billion owed to the banks is unsecured and, given the tough conditions in the property market, the Centro banks are relying on the value of the shopping centre management contracts to be paid. If receivers are appointed to either Centro Properties or Centro Retail, then those management contracts are worthless and the banks can kiss their Centro money goodbye.

The current idea is that the banks will convert, say, $1 billion of their Centro Properties debt into a form of equity where the banks would rank ahead of the current Centro shareholders. If the bank debt is reduced by the equity conversion, then presumably the banks would not have to make a provision against the rest of the debt and would have clear upside. The trouble is, for banks, equity positions like that must be backed with capital and bank capital is very valuable. The Centro banks might be better to write off part of the loan.

But if the banks are greedy and make an offer to Centro shareholders than is worth, say, five cents a share, then shareholders might tell the banks to “put it up their jumper”. Unless Centro shareholders gain a worthwhile share of the upside, then they need to be prepared tell the banks to go off and lose their billions – that’s the edge of the cliff.

We are looking at one of the best public games of bank brinkmanship that Australia has ever seen. In the earlier Centro shopping centre sale game, a proposal was received from a consortium of Lend Lease, Goldmans and The Private Collection.

The consortium would have bought into the Centro operation, which would have been good for all concerned, but there was a snag. If the deal went pear-shaped, the consortium’s money would have ranked ahead of the Centro banks. The banks did not like the idea. The consortium is gambling that if the brinkmanship game gets too tough, they will be able to return to Centro. Alternatively if the banks decide to blow $3 billion or more, there will be some very cheap shopping centres. It’s a buyers market.