Lots of media talk today about Centro's announcementStephen...

Lots of media talk today about Centro's announcement
Stephen Bartholomeusz's article today adds a bit more enlightemment to earlier reports.

The great Centro liquidation sale

The great Centro Properties liquidation sale is finally about to get underway, with $12 billion to $13 billion of retail property up for grabs. The convoluted structure of the group, however, means the sale and the ultimate outcome may be anything but clean or straightforward.

For the past 10 months Centro chief executive Robert Tsenin has been working with advisers on various options for simplifying the group and dealing with its mountains of debt, all the while receiving approaches from tyre-kickers and potential acquirers of some or all of the group�s assets.

He had some breathing space to work his way through the myriad of complexities created by the tangled structure of the Centro group and the reality of a $2 billion deficiency in net assets within the head stock, Centro Properties itself. His predecessor, Glenn Rufrano, had successfully convinced the group�s lenders to accept a moratorium and a partial debt-for-equity swap rather than dump Centro�s properties into the market and destroy the property markets on two continents.

That time has been valuable, not just in enabling Tsenin to get his mind around the various options and their implications but more importantly it has brought some stability and indeed improvement in the external conditions.

Financial markets are stronger, the market for retail centres in Australia has been resilient and the US economy and commercial property market, while still weak, have at least stabilised. Centro Retail is also being helped by the strengthening of the Australian dollar, which is steadily reducing the liabilities associated with its foreign exchange hedges to negligible levels.

Hence the decision to start the process of selling around two-thirds of the Centro group�s $18 billion portfolio, or around 500 of its 600 properties in the US and an unspecified number of its 100 or so Australian centres.

It should be noted that while Centro might be prepared to liquidate the bulk of its asset base it denies it is embarking on a fire sale or that it has experienced anything more than the normal pressure from lenders who would presumably be anxious to get their funds back.

There is credibility to that denial. The bankers, having been sensible and patient to this point, aren�t stupid enough to force a fire-sale in circumstances where the entity with $16.6 billion of debt has a $2.1 billion deficiency. That would simply exacerbate their losses.

Equally, Centro�s assertion that it has been receiving credible approaches from credible parties expressing interest in various assets and businesses appears reasonable. The state of the markets, the radical recapitalisation of the A-REIT sector and the emergence of mergers and acquisition activity in the sector in the US mean that there is potential for deals at acceptable prices.

Indeed, yesterday�s announcement by Westfield of the spin-out of Westfield Retail Trust and an associated capital raising of up to $3.5 billion may well be designed to position the vehicle to participate in the carve-up of Centro�s high-quality Australian portfolio. Stockland may have lost money � more than $200 million � on its mid-crisis investment in GPT when it sold its once-strategic stake recently, but it did release more than $650 million of cash. Lend Lease has a solid balance sheet and Colonial First State isn�t short of firepower.

The Centro process will be quite unusual, with Tsenin prepared to entertain bids for individual assets, groups of properties and entire portfolios, as well as the management of Centro�s syndicates. The preference will clearly be to deal with portfolios rather than individual assets. It might also lead to recapitalisation of some or all of the entities within the Centro structure.

In other words, Centro is open to all offers and ideas and will try to mix and match them to come up with the best outcome, with the twin objectives of maximising value and disentangling the group.

The basic strategy Tsenin outlined is to reduce leverage and recapitalise the group, or at least those parts of it capable of being recapitalised once the asset sales process has run its course.

With net assets approaching $800 million, Centro Retail is the entity with the best prospects of salvaging something material from the wreckage of the wider group, particularly if the US sales enable it to recover any of the $US480 million of capital that was trapped within the ill-fated Super LLC joint venture with Centro Properties and written off.