Loans squeeze wipes $3.5b off Centro

CENTRO Properties Group, the country's second-largest owner of shopping centres, has become the latest Australian victim of the global credit crisis after investors wiped about $3.5 billion from its market value.
Centro's management effectively has lost control of the company's destiny.
Yesterday morning it revealed it had encountered serious problems refinancing up to $4.6 billion worth of debt, some of it due to be repaid by the end of this month.
Its bankers have given it an eight-week extension to come up with the cash.
The funding crisis forced the company to cancel this half's dividend and reduce its full-year dividend as Centro suspended applications and withdrawals from its Direct Property Funds. That sent Centro's stock plummeting.
The securities, which had been suspended from trading since Thursday, went into free-fall after the announcement and finished the day 76 per cent lower at $1.44 after bottoming at $1.29.
More than 118 million shares changed hands as investors stampeded for the exit. Before the suspension on Wednesday, they last traded at $6.05 after peaking in May at $10.02.
The company has expanded heavily in the US in the past 18 months, most of the expansion financed with debt that it now is having trouble refinancing.
In July 2006, it bought Heritage Property Investment Management for $US1.8 billion ($2.1 billion). The deal came with an additional $US1.4 billion of debt.
Then in February this year, Centro and one of its listed funds, Centro Retail Trust, shelled out $US5 billion to buy an American shopping centre trust, New Plan Excel Realty Trust Inc. That deal included an extra $1.3 billion in debt.
Centro's group managing director and founder, Andrew Scott, said the June 30 dividends were expected to be cut to 40.6 cents, from previous forecasts of 47c.
Mr Scott said it was not until last Wednesday evening that it became apparent the debt refinancing was in trouble.
"We believed we had achieved the bank refinancing - worth as much as $4.6 billion for the combined parent group and the Centro Retail Trust - but when we were of the view that it was not going to happen, we stopped trading in the securities," he said.
The banks, said to be a Bank of America syndicate, have given the company eight weeks to formulate a plan.
"There is a platform of three choices: to sell assets; to sell down interests in our funds, and to issue equity. We are examining all three as part of our strategic review," Mr Scott said.

Broking analysts estimate Centro's gearing now sits at about 70 per cent, giving it little leeway to negotiate terms with its lenders. They say the company may need to sell assets in a hurry to reduce gearing to about 45 per cent. But predators, such as Westfield, GPT, Mirvac or Stockland, would be more likely to let Centro sweat and wait for a fire sale of assets.
All listed property trusts were heavily sold down yesterday as fears spread about how much exposure the overall sector has to the US credit crunch.
Despite its debt problems, Centro maintained it was solvent. It was given an extension until February to repay the initial $1.3 billion in debt, which was due at the end of this month.
In response, Goldman Sachs JBWere said: "For how long, if asset values decline?"

Wrong pace, wrong time for expansionTHE Centro crisis dramatically drives home the pervasiveness of the global liquidity squeeze, and how imperative it was when it emerged that groups with exposure took insurance quickly.
After a US invasion that more than doubled the group's assets in a year, Centro did not take enough insurance. As the global debt crisis erupted in August and debt funds became scarcer and more expensive, Centro's chief executive, Andrew Scott, and the group's board held off on rolling billions of dollars of loans due to mature in December, most of them raised for the $6.3 billion takeover last April of New Plan, a big US shopping mall owner and manager.
They believed that the crisis would ease and pull interest rates lower by December, when the nine-month money was due to be repaid, and after talks with their banks believed they would be able to tap the mortgage-backed debt market for 10-year money at that time.
But they were wrong. The liquidity squeeze ebbed in October, but returned in November, pushing interest rates in the debt market Centro was aiming at even higher than they were in August.
For banks that would normally readily lend to a group such as Centro, the renewed squeeze was worse than the August one, because it came as many of them were approaching a December year-end balance date and book-squaring exercise that threatened to be brutal. The US bank that arranged Centro's funding, JPMorgan, is believed to still be supportive.

Shopping giant falls as US crisis hits home

Australia's second-biggest shopping centre owner has joined the RAMS home loans provider as a casualty of the global liquidity crisis.
Centro Property Group, with Woolworths and Coles among its main clients, yesterday revealed that the cost of borrowing at least $2 billion from US credit markets to fund its expansion in North America had soared so high that its future was now in doubt.
On a day that $54 billion was wiped from the value of Australian shares, Centro's stock plunged 76 per cent, down $4.34 to $1.36. That lopped $3.5 billion off its market value and Centro is now worth just $1.15 billion - compared with $10 billion in May.
The company admitted it was having big trouble repaying the debt and slashed its planned annual payment to shareholders.
Investors across Australia were hit as Centro's difficulties exacerbated concerns about a looming recession in the US. In the biggest one-day fall since August, the benchmark ASX200 index fell 228.2 points to 6263.5 while the broader All Ordinaries dropped 224.3 to 6331.8.
Market strategists said the sell-off illustrated that Australia was not immune to the global credit crunch nor the subprime mortgage crisis in the US, which prompted the freezing of funding markets that has hit companies such as Centro and RAMS.
"The subprime situation is a bit like Voldemort - you never know when he is dead," Nomura Australia's market strategist, Eric Betts, said yesterday. "People are worried about the fragility of the financial system. The era of cheap debt is over - and that was really brought home with a thud."
Last week central banks in Europe and North America tried to avoid US recession with a commitment to pump $100 billion in liquidity into the financial system.
Market strategists expect the severe volatility on the Australian market to continue for at least the next two months as investors search for safe havens in companies without high debt or exposure to the US economy.