the situation so far.

Folks, below are some of my thoughts on the Centro situation so far.

I have a very long, very painful position in CNP but the following points help me sleep at night.

In no specific order……

The old CEO was fired. To be honest, I think everyone agreed he had to go given the mess the company found itself in. The guy has steered the ship for a number of years and from the times I have heard him speak, he certainly seemed to be at the top of his game. In the end though, reputation risk took over and the board did the right thing. A very positive move.

Rufrano comes with great credentials and was a good appointment in my opinion. He has a history of turnarounds and he saw both sides of the Centro acquisitions in the US. As soon as he turned up, there was more confidence from the market in a resolution. His press conference before going to the US was very timely and cemented his position as someone who can lead the company through. Witness the market reaction as a result.

The company has 6 independent, non-executive directors (plus the CEO) sitting on the board. Throughout the entire crisis, none of the directors has resigned or been replaced. It is not unusual in a rapidly sinking ship for one of the board to bail out, especially if there has been infighting or they suspect mismanagement has taken place. The independent directors are usually the first to go. They are well aware that directors in Australia who do the wrong thing in situations like this or let companies trade whilst insolvent go to jail

In addition to this, with the exception of the CEO going, none of the senior management team has resigned or been sacked. Again, this tends to happen if there has been mismanagement, infighting or a major disagreement about the way forwards. The CFO is apparently on sick leave, but I’m not sure what we can read into this. Rufrano has taken control and used the existing, experienced management team to work with him.

The company has appointed a strong advisory team and has gone about the process is a very structured way. They announced a process for considering offers from external parties which (in my opinion) stops potential suitors playing games. I imagine anyone who has approached Lazards is under a very strict non-disclosure agreement which has prevented any leaking of information to the market thus far. It feels to me like the company has taken the upper hand in controlling the expressions of interest.

The company has been adamant that there were three options they would consider. There would be no fire sale of assets and it appears only the CAWF and CAF are on the table at this stage. Recapitalisation or external equity injections are also being considered. Can the situation really be that dire? Surely you’d be flogging assets left, right and centre if it was.

We know cashflow within CNP is strong and nothing that has happened so far will have impacted their rental revenue. The company has said twice now that the underlying business is performing well. Performance fees will doubtless be impacted this year but these will rebound over time. According to the 2007 results announcements, Australia (where the economy is strong) represents 2/3 of their income. The services business had a 58% increase in income.

Not paying the December distribution retained $170m in working capital in the business – a very smart move (unpopular though). If they didn’t pay any distributions for the next 2 periods, they would have retained roughly $0.5bn in the business in total. That’s a whole lot of money to take some debt load off the balance sheet. Given this, it’s ironic that the current market cap of the company is only around $460m.

As the company themselves said in the presentation on the 17th December, if they have to source lending at higher rates, a 100bp increase in Australian lending rates and 120bp increase in US lending rates, will only have a 2.7c per share impact on distributions. An additional 100bp on $3.9bn of debt would mean a lender with the right appetite would make an additional $39m in interest charges per year above their current rate.

As far as press is concerned, when the situation first broke, the papers were all over this like a rash. Anyone able to write was bagging the company and suggesting it was the end of Centro. In the last couple of weeks, with the exception of coverage regarding the effect of margin lenders reducing the LVR on CNP, there has been little or no press coverage. Everyone has moved on to Valad, BHP or whatever is currently in vogue. There were a few days where the AFR did not even have mention of Centro. Where is all the scuttlebutt and inside gossip about how bad things are at Centro?

There has been no action by any regulators – either ASIC, ASX or any other. There were rumours of meetings with ASIC and we have all seen a copy of the ASX enquiry letter that the company responded to. If there was a hint of trading whilst insolvent or issues regarding continuous disclosure to the ASX, we would have seen regulatory intervention by now. Regulators get very jumpy when it comes to corporate collapses, especially where investors lose a lot of money.

There have been no major adverse comments from banks. Don’t you find that strange? Apparently the banks appointed a liquidator to look over the Centro books but we have heard nothing further. No bank (to my knowledge) has even mentioned "negative exposure to an ailing Centro", nor have they withdrawn any other funding from the group and there have been no announcements to the market of provisions for loss. In the AFR p61 today, (quote) “Westpac revealed that it had about $8bn in exposures related to lending for commercial property but a review following difficulties with a high-profile player (understood to be Centro Properties Group), had found no issues in Westpac’s portfolio” (end quote) Whilst we cannot assume that Westpac has actually lent money to CNP, I imagine all of the banks have done a similar review yet none of them has made any mention of exposure. Rufrano has said that the best outcome for lenders is to let the group continue trading – maybe the lenders actually agree.

The issue the banks do have revolves around the re-rating down of the company. This has increased the amount of Basel II capital required for lending. But this is a catch-22 situation. If Centro can get back on its feet quickly, it will be re-rated up again, thus reducing the amount of bank capital required. The banks already know this and would have factored it into any lending equations.

Given all this, I don’t believe the company is in such a bad state. In a nutshell, I am stating the obvious when I say this all comes down to whether Rufrano can source a funding lifeline for the company. If he can do it without too large an impact to earnings (either through higher lending rates or asset sales), the SP will hit between 6 and 7 times earnings very quickly. By my revised calculations, that would put it into the $3-3.50 range. Higher earnings multiples will come in the long run once the dust has settled and credibility and earnings stability have been demonstrated.

Rufrano has committed to announcing the strategic plan by next Friday, which is 7 trading days away. As I have said before, they’ll want to be on the front foot so I’m pitching for a Monday / Tuesday trading halt and a Wednesday / Thursday announcement instead. I genuinely believe it’s going to be neutral-to-good news, either an extension to the deadline or detailed plan to get them through. The only way the SP is going to take a huge hit after next week is if it's game-over.

Hope you sleep as well as I do tonight.