Wrong pace, wrong time for expansion

The 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. But some of the banks that have provided bridging finance are taking a gamble themselves, and demanding that Centro pay the
money back - somehow, some way. By holding out, they are threatening to force Centro into a fire-sale of properties, and putting weight on others with exposure to the group, including many of Australia's biggest superannuation funds, to come to the party, perhaps by joint-venturing properties.
Centro warned yesterday it believed it would need to "reduce its gearing significantly" to attract long-term funds. Gearing in Centro itself is about 48 per cent, but gearing on the group's entire $26.6-billion asset portfolio is about 60 per cent.
Centro has been caught by the squeeze in a different way to the RAMS home lending operation, which until yesterday was the most visible local casualty of the global squeeze.
RAMS ran into trouble as soon as the liquidity debt crisis flared in August, because it had been raising its funds for home lending in the securitised debt market, where demand had slowed to a trickle, and the interest rate required to get issues away had become prohibitively high.

Centro, on the other hand, is trying to refinance almost $4 billion of bank debt, and has been unable to either take its usual course of issuing long-term (10-year) mortgage-backed securities, or arrange new longer-term bank finance.
However, the debt crisis is at the heart of both problems, and the result for Centro is similar: the group needs to replace short-term debt, and cannot. It has stabilised its position, but only temporarily. Andrew Scott and the board have until mid-February to locate $2.7 billion for the lead Centro company and $1.2 billion for its listed retail affiliate, Centro Retail, from lenders, the joint-venturing of properties with new partners, or outright property sales.
They should be able to raise the money, with sales from the three-tiered Centro group's $26.6 billion property portfolio looming as the last resort. The Centro chief said yesterday that the group had already received approaches about property joint ventures that would be preferable to outright sales as a way to free funds.
The New Plan takeover was to be a defining deal for Centro. New Plan owned, partly owned and managed 467 neighbourhood shopping centres in the US, and the deal raised Centro's assets under management by 48 per cent to $23.1 billion. They reached $26.6 billion in June, before the liquidity crisis hit, having more than doubled from $11.5 billion in just 12 months. But Centro expanded too fast, and at the wrong time. Australian investment funds and other investors are caught, and there will be an investor rethink about the entire listed property sector.
Big institutional investors including Colonial and AMP own Centro shares and were caught by yesterday's savage market slide, which ripped 64 per cent, or $5.6 billion, from the combined market value of Centro and its affiliate, Centro Retail.
Many are also investors, alongside Centro, in local and international unlisted funds (which have suspended redemptions for the time being), and some are in syndicates that own Centro properties, along with the two main Centro funds.
The structure has allowed Centro to buy properties using debt and equity, and then on-sell them, clearing its balance sheet for more acquisitions, and the property portfolio itself still appears fairly solid.
However, the big risk now is that the group will be forced into a fire sale of assets to raise funds to cover the short-term debt. If so, the structure that enabled Centro to shift its properties into partly owned vehicles could complicate the process.