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    Hope for Centro Retail shareholders
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    In Centro Retail Trust’s results presentation there is a slide that ought to provide its security-holders with some comfort that there is something salvageable for them in the wreckage of the wider Centro Properties group.

    At the heart of the liquidity issues that have overwhelmed the Centro group was its decision to expand significantly in the US last year with acquisition of the New Plan group and the subsequent merger of Centro Retail with Centro Shopping America.

    For Centro Retail, the effect was truly dramatic. Its portfolio grew from $2.4 billion to $9.6 billion, with the US component of the portfolio going from $US1.1 billion to $US6.6 billion. The Centro group was made vulnerable by the short-term funding taken on to finance that expansion and its unwillingness to pay the price – said to be an additional 50 basis points – offered by its bankers to convert that funding to long-term debt.

    For Centro Retail, the US exposure flows through an entity that Centro calls Super LLC, essentially a financing vehicle for Centro Properties, Centro Retail and a property syndicate, Centro MCS 40. In Super LLC are 538 individual assets, valued at $US6.2 billion and $US5 billion of debt, $US3 billion of it unsecured. The joint venture partners have direct, rather than collective, interests in the underlying properties.

    The $US2 billion of secured debt is associated with first mortgages over the individual properties, while the joint venture’s obligations to the unsecured lenders are confined to the value of the properties within Super LLC.

    While the structure is complex, Centro Retail’s exposure to it is straightforward. It has an interest in 161 of the 538 properties, valued at $US3.1 billion, and its share of the debt totals $US1.9 billion, with $US1 billion of it secured. Thus its equity exposure to the Super LLC is $US1.2 billion.

    Centro Retail is liable, if there is a default by one of its partners, for the unsecured debt within the Super LLC – but only to the extent of its equity investment.

    As Centro’s new chief executive, Glenn Rufrano, said yesterday, the bottom line to Centro Retail’s position (as opposed to Centro Properties) is that if the Super LLC "falls over" Centro Retail’s exposure is definitively capped at $US1.2 billion.

    "There is no other exposure. This is ring-fenced," Rufrano said.

    Centro Retail, after a $A198 million write-down in the value of its US portfolio, has net tangible assets of $1.65 per share. If the Super LLC fails and the capital Centro Retail has tied up in it is completely wiped out, it would lose 57 cents a share – it would still have $1.08 a share of asset backing. Its share price ahead of the results announcement was about 30 cents.

    The underlying performance of the US portfolio was respectable, although the outlook in the US is softening. The performance of the high-quality $2.1 billion Australian portfolio was very strong.

    Centro Retail does have some indirect exposures to Centro Properties, which has been responsible for some of its interest rate and foreign exchange hedging. If Centro Properties isn’t able to deliver on those commitments, Centro Retail would face some re-pricing of rates and risk.

    The key message Rufrano appeared to be trying to convey to Centro Retail security-holders, however, was that their part of the Centro group has some form of future regardless of what happens to its US assets. If the Super LLC can be recapitalised, there could be upside for Centro Retail shareholders.

    Centro Retail has appointed its own advisers, independently of the Centro Properties team, to alleviate investor concern that the management and boards of the two entities are identical. Rothschilds, Gadens and Pitcher Partners are there to ensure the interests of Centro Retail aren’t confused with the interests of Centro Properties. Rufrano said that the Centro Retail board was also considering the appointment of independent directors.

    From the presentation, it would appear Centro Retail does have an independent future but remains entangled with the reeling Centro Properties within the Super LLC. In light of that, the appointment of independent directors should occur
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