wednesday update

Morning all.

Firstly, having slept on the deal, I wanted to reinforce again that the outcome shareholders have got from this is OK considering the situation we found ourselves in. The future of the company for the coming years is assured and this will give time for the directors and management to perform an orderly sell-down, reduce complexity and position the company for growth when the cycle inevitably turns back up.

The US seems to be throwing everything possible at ensuring recover for their economy and whilst there is some pain locally, we seem at this stage to be escaping the worst of the crisis.

I am disappointed that Centro chose to hold a late evening press briefing without shareholders. As yet, we haven't seen a transcript or audio from the briefing but hopefully this will be forthcoming at some stage today.

Anyway, down to business.

The exact details of the hybrid still need to be thrashed out, but as we now know, around $1bn or so of existing CNP debt will be swapped into a new convertible security. At a balance sheet level, this will reduce CNP debt by ~$1bn, increase equity by $1bn but of course there are now significantly more shares who have claim on the revised CNP amounts.

At this stage it's unclear whether the hybrids will have voting rights but there is a good chance they will not. This leads to a subtle point, which has so far been missed: even with the 14.9% new issue, existing holders retain voting control in CNP until the earlier of a) 7 years time b) when existing holders agree to the hybrids being converted. We need to see more details on this before working out what this means.

As I said last night, the stabilisation of CNP and SuperLLC will have huge knock-on benefits to all of the Centro-managed funds, especially CER. Whilst CNP remained 'on the brink' there were big question marks over whether CNP would be able to fulfil its obligations under hedging agreements with CER et al. This is know as counterparty risk. In addition, while SuperLLC was in doubt, it looked like CER would have to take the fall for the $700m 'ring-fenced' exposure it had.

With CNP staying afloat, the counterparty risk and rind-fenced exposure issues for CER have all but gone away. CER shareholders will get a $300m write-back of the impairment they took last half. Over time, as CER becomes separated from CNP, the hedge book will be moved away to other external counterparties.

Again, another subtle point is that the stabilisation of CNP (and by association CER) will result in their credit ratings being reviewed upwards. This is probably going to be a slow process, but I would expect some news in the coming weeks. This is a large part of the 'healing process' for both companies. For CER especially, an upward review in the credit rating will permit a number of instos, who were previously prohibited by internal policy, to return to the stock.

As for what the market will do today - I gave up a long while ago trying to predict the market. However:

1. CNP, almost ironically, is today still worth more post-dilution NTA than the closing price on Friday. There are still some revals to come in following halves but in time, the post-dilution NTA will increase significantly as the cycle swings upwards again. As I have said many times, the debt killed the stock on the way down but will accelerate the recovery on the way up. The best time to be highly, highly leveraged on property is the moment the sector starts to recover.

In my opinion, CNP is now a long-term NTA play. Once the beast has risen from the ashes in a few years, someone will take-over or merge what remains. The banks won't want to retain ownership for any longer than necessary.

2. CER is the real winner in all this and my genuine hope is that long term, everyone will make up some of the CNP loss on the CER gains. I have no idea of the time frames involved, but over time CER is going to start trading a lot, lot higher than it is today. The board and management team have done well protecting CER from the savages of the bankers and this is now firmly where value lies for shareholders. I have seen nothing which puts any burdensome conditions on CER and thus we will see the company start to become even more independent from CNP, pay distributions from the trust and grow. CER is still faced with a high LVR but this can now be reduced through orderly asset sales in the coming years. CER will have to take some further asset revaluations this half but this will in part be offset by the reversal of the impairment charge.

We should see an announcement from CER before the end of the week as to whether they will pay a divvy this half - maybe they will, maybe not. One thing is almost for sure, CER holders will get a divvy before the end of year. Before you ask, I have no idea how much. The trust has to pay out profits or else they are burdened with a huge tax bill. CNP will also benefit from the CER income on its 51% look-through holding.

CER now needs to work on severing the ties from the CNP mothership by announcing new directors, new hedging arrangements and in my opinion an urgent change of name to something 'non-Centro'.


It would be easy to take a profit on CNP or CER in the coming days, especially given the emotional exhaustion many are feeling. I have no intention of selling our holding in CER full stop. We are looking at the prospect of some significant divvy and growth returns in the coming years and I want to remain part of this. Luck Orbis holding 300m of the shares eh? I want to wait and see how CNP plays out over the coming weeks before making a decision - all is not lost with the stock just yet and great companies (of which CNP was one) have a habit of returning to greatness over time once they are stabilised.

On a final note, the real problem facing myself and other holders is where on earth we are going to spend time writing volumes of HC commentary from here-on now the Centro saga is drawing to a close. That's probably the least of our worries for the time being.