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centro was warned about expanding...

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    Centro was warned about expanding
    Matthew Stevens | November 08, 2008

    ON December 17 last year Centro Properties founding guru Andrew Scott announced to increasingly unnerved investors that only "Harry Hindsight" would have spotted the funding crisis that was consuming his business and trashing his reputation.

    That was not quite true.

    One of Scott's most important bankers, Commonwealth, warned Centro's chief executive a good 12 months earlier that plans for rapid international expansion would imperil his business.

    In rejecting Scott's invitation to join a banking syndicate being assembled to underwrite Centro's $5 billion plunge into US shopping centres, Commonwealth Bank told Scott the deal undermined the sustainability of his already complicated business model.

    Worse, Commonwealth management went on to tell Centro that if the deal proceeded it would review its relationship with the property business.

    It would also be unlikely to roll over existing loans when they came up for extension. Scott, of course, has been consigned to Centro history.

    He "resigned" just 29 days after closing that December briefing, without being able to reassure investors of Centro's future solvency.

    On that Scott was quite right. The shattered twin towers of Australian supermarkets, Centro Properties and Centro Retail, owe banks upwards of $15 billion and both currently survive at the whim of 13 Australian and US banks and 14 US insurance companies.

    We reported on Thursday that Centro's major Australian banker was playing a very hard hand in negotiations over Centro's future. Which bank? Well, yes, the Commonwealth.

    The most secured lender to Centro's Australian business, Commonwealth Bank is owed an estimated $1.2 billion by the property group.

    Of that, about $1 billion is secured, with $650 million being tied to assets at the core of the Centro imbroglio.

    There is speculation the Commonwealth is now the biggest obstacle between Centro and a successful conclusion to months of negotiation over the refinancing of $3 billion owed to eight Australian banks, $US1.3 billion owed to five US banks and $US450 million owed to 12 US insurance companies.

    And there is, I understand, some bitter pedigree to Commonwealth's intransigence.

    Commonwealth's confidence in Centro was severely shaken when Scott failed to heed its warnings over his US ambitions.

    The bank management's resentment was fanned in 2007 by what the bank believes was Centro's failure to maintain an adequately information flow on the progress of vital US refinancing programs.

    It is a brutal irony so typical of business life that Centro's rescue mission is being skippered by Scott's replacement, Brooklyn's own Glenn Rufrano.

    It was, you see, Rufrano who introduced Scott to his dismal fate. Rufrano convinced Scott to pay $5 billion for the New York-based New Plan Excel Realty Trust, which owned 467 shopping centre across 38 states of the US.

    Rufrano was running New Plan at the time of the sale and it was he who assembled the New Plan asset base. Rufrano subsequently joined Centro to run the New Plan assets through the ownership handover period, but somehow he ended up working in Melbourne trying to keep his new owner above water.

    Rufrano has until December 15 to convince his 24 major financiers Centro has a sustainable future.

    Late last month in New York Rufrano hosted what he hoped would be a landmark meeting of all 27 of his key financiers. All but one of them attended that meeting. Which bank was missing? You guessed it?

    Commonwealth's failure to attend the meeting has triggered justifiable conjecture that the bank's chief executive, Ralph Norris, is prepared to put Centro through.

    The bank has apparently defended its non-attendance on the grounds that it was not involved in the US funding and therefore had no place there. That represents either a dreadful misunderstanding of Rufrano's intentions or mere spin.

    Certainly Norris has a very tough decision before him. He represents the largest and most secured individual lender to Centro.

    Yet the Commonwealth is being asked to endorse, and presumably contribute to, a plan that would convert upwards of $2 billion of debt into various kinds of hybrid equity.

    As we said on Thursday, these sorts of negotiations are rather like old fashioned unionism. It is a one-out, all-out deal. If Commonwealth walks, Centro is dead.

    Commonwealth's reluctance to sign off on a debt-for-equity deal may reflect a belief in the quality of the assets that secured its lending in the first place.

    Why would Norris surrender his position as the most senior lender when, at the end of the day, there is a belief it is the US side of the Centro mess that faces the most intractable debt problems?

    Deeply aware that he is stuck in a deathly debt trap, Rufrano has told his bank he is not seeking to extend his current funding beyond the December 15 deadline for a deal with both his US and Australian syndicates.

    Rufrano wants recapitalisation of Centro or death. He will hand back the keys rather than continue to effectively work for the banks.

    For the Australian commercial property market, the ramifications should Rufrano fail to corral his banks into agreement are potentially dire.

    Already through 2008 the listed property trust industry has lost more than half its market capitalisation. The sector was worth $120 billion a year ago. Now it is at $54 billion and still falling.

    On Wednesday Mirvac warned it might breach some of its loan convenants if planned sales were not achieved or if real property valuations fell further.

    Now there is nothing more certain on God's green planet than that if Centro is dispatched to administration and receivership, asset values in the Australian property market will fall -- hard.

    Many in both the listed and unlisted property trust spaces have been able to struggle through value burn triggered by GFC without having to revalue their portfolios by marking to market.

    That is because there has been no market. The credit freeze has suspended the deal flow and that has meant the property business has been able to rely on its own valuations, some of which have been externally sourced.

    A forced liquidation of Centro's massive asset portfolio might well force a change to that situation. A rash of discount deals could trigger a round of revaluations that would strip value from balance sheets and result in Mirvac and many more facing serious issues with their banks.

    For all the consequences, though, no one should doubt that Norris may be preparing to pull the rug from Rufrano.

    It was, after all, Commonwealth that pursued Allco Finance into voluntary administration on Tuesday.

    It is understood Norris and Co were particularly concerned over a collection of already out-of-the-money hedges in Allco Finance.

    The bank, believing the other lenders to Allco has misunderstood the potential risk of the hedge book, then insisted on some sort of overarching guarantee from directors on the management and closure of Allco's hedge book. Understandably, the directors were unable of offer any further security commitments beyond the regular solvency sign-off.

    The rest, as they say, is history.

    Yesterday we started seeing the rippling impact of Allco's surrender, with Allco's Rubicon Holdings being passed into the hands of its senior lender, National Australia Bank. That, in turn, resulted in the suspension of trading in the suite of property trusts it managed. That is the predictable result of the failure of a head stock such as Allco Finance.

    The collapse of Centro would have far more serious and unpredictable implications for our property market and the wider Australian economy.

    The clock is ticking.


    Cheers, Pie :)
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