short sell, page-5

SuperLLC is really the major cause of the current woes we are seeing with Centro. It's not the only cause, but it's certainly the big one.

On 20th April 2007, Centro Group bought New Plan Excel Realty Trust, a US owner of shopping centres. This was structured as a joint venture between CNP and CER. To facilitate the purchase, Centro used short term financing and the inability to refinance this (and some other debt) last December is the reason we find ourselves here today.

p23 of the half year report shows a breakdown of the CNP interest in SuperLLC and as you will see, they took a $578m impairment provision against the investment effectively leaving CNP with only $146m of equity on $2.3bn of assets.

With asset values in the US falling, the issue here really revolves around the liability for the SuperLLC entity.

CER are in a strong position - if SuperLLC falls over, CER is limited only to the amount it borrowed for the purchase. The liability is 'ringfenced' and in effect, CER can 'walk away' (it'd be a bit more complex, but you get the idea) from the situation. This would take a chunk out of the CER NTA. At the Dec half, which is the latest official figures we have to go on, it would take NTA from $1.65 to $0.97. Even with revised analyst estimates, there is still a big safety margin between the current CER SP and the NTA.

The CNP situation is not so good. The company fessed up last half that CNP has guaranteed a large chunk of the SuperLLC debt. This means that if SuperLLC falls over, lenders can reach out to the CNP balance sheet to recover the debt. I personally don't think it will come to this, but the prospect is what weighs the stock down.

So, CNP has to find a way out of the SuperLLC problem. There are a few options:

1. Sell SuperLLC at a discount and take a one-off hit.
2. Do a gradual sale of assets over time.
3. Recapitalise with an external investor.
4. Wait until asset prices recover.

The debt has been extended to December so the pressure is off for the time being. Like all of the Centro assets, SuperLLC is generating income and this means the debt repayments are being made. Lenders have also said that if Centro is making progress on asset sales (CAF and CAWF) then there is a good chance the debt will be extended further.

My personal view, for what it's worth, is that CAF and CAWF sales coupled with a stabilising environment and demonstrated proof that the group is returning to health will be enough to reassure lenders and option 4 will be taken. Despite what we all might read, economic downturns do not last forever and in time, the assets will recover in value and occupancy rates climb again. GR spoke about this in the half year presentation. We know too that the US centres are well anchored and well tenanted.

If SuperLLC was to be sold or an external investor found then the market reaction would be proportional to how good the deal was. I for one would feel a lot more comfortable seeing CNP as just an owner of Australian assets and would certainly support a deal, so long as the terms were reasonable.

I think GR has been spending a lot of time in the US recently and it wouldn't surprise me if, now CAF is sold, SuperLLC was high on the agenda. We might reasonably expect an update on the situation soon, at the very least we will hear something in the annual reports in August.