Macquarie vs Centro - a study in debt management contrast
February 2, 2010
Dear 26 Mayne Report subscribers (no extras),
The implosion of the $26.6 billion Centro shopping centre empire today has caused enormous shock waves, but at the end of the day it comes down to a simple question of debt management. You simply cannot afford to borrow short in this global environment of dysfunctional credit markets and rising interest rates.
Centro was in many ways trying to emulate Macquarie Bank by tapping into Australian superannuation savings to go on a global shopping spree. It was also the poor man's Westfield.
As subscribers I'm going to try and give you the inside run wherever possible. To understand the success of Macquarie, check out this background briefing document it sent around when it was being attacked by short sellers and some international journalists in June this year.
Not only has Macquarie consistently bought well, it had the following fixed interest or hedged debt maturity on the $95 billion borrowed against the assets in its various funds:
0-2 years: 91% or $86.45 billion
2-4 years: 81% or $77 billion
4-7 years: 70% or $66.5 billion.
7 years plus: 45% or $42.75 billion.
The genius of Macquarie is riding the credit boom to borrow $66 billion at fixed rates for more than 4 years. Now, contrast that with Centro which has a similar 60% gearing to the Macquarie funds but has just been destroyed by not locking in long term cheap debt.
Go to page 19 of this presentation from Centro today and you'll see the following debt maturity profile:
two months: $3.9 billion
12 months: $3.4 billion
more than 12 months: $10.5 billion.
The US commercial mortage backed securities (CMBS) market has collapsed just like the sub-prime housing market. The table on page 4 of the presentation shows monthly CMBS issuance averaging about $US100 billion since the beginning of 2002, but then falling to about $US30 billion a month for the past three months.
Silly old Centro got caught through the purchase of two big US shopping centre companies, Heritage and New Plan, over the past two years, which lifted assets under management from $10 billion to $26.6 billion. They simply paid too much for ordinary assets and didn't lock in long term funding, whilst also taking on substantial currency risk as the US dollar tumbled.
Finally, there's a very interesting family connection here. Centro CEO Andrew Scott used to run the Coles Myer property empire. His brother is Peter Scott, the former Coles Myer supermarkets boss who was fired for taking backhanders from meat suppliers. Not a good look.
I'll be chatting to Libby Gore on 774 ABC Melbourne about all this at 4.05pm this afternoon and below are my two stories in Crikey today:
The Melbourne suburb of Glen Waverley, home of Centro Properties and The Glen shopping centre, has today assumed a prominent role in the global credit crunch when a series of shock announcements caused the destruction of $5 billion in largely Australian savings in one morning.
Forget about RAMS and the loss of a piddling $600 million, in terms of value destruction we've never before seen the level of damage inflicted by the following four stock exchange announcements from the Centro group, Australia's second biggest shopping centre owner with $26.6 billion under management:
In one morning, the Centro Group has revealed that it has been unable to roll over $3.9 billion in short term loans that expire on February 15, 2008. There's an additional $3.4 billion that falls due within 12 months and the remaining $10.6 billion expires some time after that.
So, what's the solution? A complete review of everything, fire sale of assets, suspension of redemptions and abandonment of distributions. Heaven forbid. No wonder shares in Centro Properties Group collapsed today. The stock last traded before Thursday's suspension at $5.70, capitalising the group at $4.817 billion.
Today they hit a low of $1.545 – a fall of 73% - and by midday they had only recovered to $1.95, still a fall of 65.8% which has seen $3.2 billion in value destroyed.
But it gets far worse. Units in the flagship Centro Retail Trust finished on Thursday at $1.42, valuing it at $3.26 billion. Today they hit a low of 58.5c and by midday were at 60.5c – a fall of 57.4% which reduced its market capitalisation by $1.87 billion.
All up, that is a cool $5 billion of equity destroyed in one morning. And who are the major shareholders involved? Millions of Australian through our major funds which are controlled by different divisions of the same big banks which are refusing to roll over Centro's loans.
The largest shareholders in Centro Properties Group are: ING 8%, CBA 6.42%, Deutsche Bank 5.8%, Barclays 5.14%.
The largest shareholders in Centro Retail Trust are: CBA 12.95%, Barclays 9.32%, Macquarie Group 5.76%, UBS Nominees 5.09%, AMP 5.03%.
They have all taken a huge hair cut. There is no way Centro can recover from the crisis of confidence that will flow from borrowing too much money to become the fifth biggest shopping centre owner in the US.
Centro will be bought by someone like Westfield or Macquarie Bank because the credibility of managing director Andrew Scott, the former property boss at Coles Myer, is now shot. His own $30 million shareholding amassed over the past decade has also been decimated.
As the ripples spread through the heavily indebted property trust market courtesy of the global sub-prime storm, yet again we have to marvel at the brilliance of Macquarie Bank in navigating a safe path through.
Today's victim is Australia's second biggest shopping centre company, Centro, which, just like Northern Rock in the UK, will never be able to recover from the crisis of confidence and brand damage.
Unlike Northern Rock, investors in the various Centro wholesale funds, notably its two flagship WRAP products, are being told they can't have their money back. Oh dear.
Macquarie Bank shares are only down $2.65 to $77.43 today, yet other heavily geared property players such as Goodman Group have been clobbered, falling 76c to a two year low of $4.80 in morning trade.
Macquarie Bank sold its 7.7% stake in the old Macquarie Goodman for $773 million last year, fetching $5.90 a share and booking a profit of $130 million. Talk about great timing.
Centro today revealed it has changed all its assumptions. Future Australian debt is now expected to cost 1.2 percentage points more, whilst US debt is up by 1 percentage point. Macquarie houses well over $100 billion of debt across its empire but almost half of this was hedged at fixed rates for seven years. Brilliant! Why didn't Centro think of that?
Centro is about to become a household name in Australia even though many Australians have heard of it through major shopping centres such as The Glen in Melbourne. Check out the full list of its Australian centres here. Most are second division behind the mega Westfield centres and they are all for sale now.
The Centro boards are strong and should have known better. Centro Retail Trust and Centro Properties Group are both chaired by the respected Brian Healey and other directors include former National Mutual funds management boss Sam Kavourakis, former Myer managing director Peter Wilkinson, Axa director and former Freehills partner Paul Cooper and former BHP executive Jim Hall, who currently has his hands full as a Symbion Health director.
These blokes can't hide because they signed up to CEO Andrew Scott's unique model of using short term debt to plough aggressively into the US. Check out the $US5 billion New Plan takeover announcement from April this year as this transaction more than any other is what killed it.
Centro will now join the likes of Alan Bond, Westpac and National Australia Bank in coming a cropper in the US after promising the world.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.
The implosion of the $26.6 billion Centro shopping centre empire today has caused enormous shock waves, but at the end of the day it comes down to a simple question of debt management. You simply cannot afford to borrow short in this global environment of dysfunctional credit markets and rising interest rates.
Centro was in many ways trying to emulate Macquarie Bank by tapping into Australian superannuation savings to go on a global shopping spree. It was also the poor man's Westfield.
As subscribers I'm going to try and give you the inside run wherever possible. To understand the success of Macquarie, check out this background briefing document it sent around when it was being attacked by short sellers and some international journalists in June this year.
Not only has Macquarie consistently bought well, it had the following fixed interest or hedged debt maturity on the $95 billion borrowed against the assets in its various funds:
0-2 years: 91% or $86.45 billion
2-4 years: 81% or $77 billion
4-7 years: 70% or $66.5 billion.
7 years plus: 45% or $42.75 billion.
The genius of Macquarie is riding the credit boom to borrow $66 billion at fixed rates for more than 4 years. Now, contrast that with Centro which has a similar 60% gearing to the Macquarie funds but has just been destroyed by not locking in long term cheap debt.
Go to page 19 of this presentation from Centro today and you'll see the following debt maturity profile:
two months: $3.9 billion
12 months: $3.4 billion
more than 12 months: $10.5 billion.
The US commercial mortage backed securities (CMBS) market has collapsed just like the sub-prime housing market. The table on page 4 of the presentation shows monthly CMBS issuance averaging about $US100 billion since the beginning of 2002, but then falling to about $US30 billion a month for the past three months.
Silly old Centro got caught through the purchase of two big US shopping centre companies, Heritage and New Plan, over the past two years, which lifted assets under management from $10 billion to $26.6 billion. They simply paid too much for ordinary assets and didn't lock in long term funding, whilst also taking on substantial currency risk as the US dollar tumbled.
Finally, there's a very interesting family connection here. Centro CEO Andrew Scott used to run the Coles Myer property empire. His brother is Peter Scott, the former Coles Myer supermarkets boss who was fired for taking backhanders from meat suppliers. Not a good look.
I'll be chatting to Libby Gore on 774 ABC Melbourne about all this at 4.05pm this afternoon and below are my two stories in Crikey today:
1. Centro calamity: $5 billion in equity destroyed today
By Stephen Mayne, who has dropped $700 in Centro this morningThe Melbourne suburb of Glen Waverley, home of Centro Properties and The Glen shopping centre, has today assumed a prominent role in the global credit crunch when a series of shock announcements caused the destruction of $5 billion in largely Australian savings in one morning.
Forget about RAMS and the loss of a piddling $600 million, in terms of value destruction we've never before seen the level of damage inflicted by the following four stock exchange announcements from the Centro group, Australia's second biggest shopping centre owner with $26.6 billion under management:
- Two page summary from parent company, Centro Properties Group, outlining inability to roll over debt
- 21-page presentation laying out the full horror
- One page statement from listed Centro Retail Trust cancelling distributions
- One page statement from Centro Diversified Funds suspending withdrawals
In one morning, the Centro Group has revealed that it has been unable to roll over $3.9 billion in short term loans that expire on February 15, 2008. There's an additional $3.4 billion that falls due within 12 months and the remaining $10.6 billion expires some time after that.
So, what's the solution? A complete review of everything, fire sale of assets, suspension of redemptions and abandonment of distributions. Heaven forbid. No wonder shares in Centro Properties Group collapsed today. The stock last traded before Thursday's suspension at $5.70, capitalising the group at $4.817 billion.
Today they hit a low of $1.545 – a fall of 73% - and by midday they had only recovered to $1.95, still a fall of 65.8% which has seen $3.2 billion in value destroyed.
But it gets far worse. Units in the flagship Centro Retail Trust finished on Thursday at $1.42, valuing it at $3.26 billion. Today they hit a low of 58.5c and by midday were at 60.5c – a fall of 57.4% which reduced its market capitalisation by $1.87 billion.
All up, that is a cool $5 billion of equity destroyed in one morning. And who are the major shareholders involved? Millions of Australian through our major funds which are controlled by different divisions of the same big banks which are refusing to roll over Centro's loans.
The largest shareholders in Centro Properties Group are: ING 8%, CBA 6.42%, Deutsche Bank 5.8%, Barclays 5.14%.
The largest shareholders in Centro Retail Trust are: CBA 12.95%, Barclays 9.32%, Macquarie Group 5.76%, UBS Nominees 5.09%, AMP 5.03%.
They have all taken a huge hair cut. There is no way Centro can recover from the crisis of confidence that will flow from borrowing too much money to become the fifth biggest shopping centre owner in the US.
Centro will be bought by someone like Westfield or Macquarie Bank because the credibility of managing director Andrew Scott, the former property boss at Coles Myer, is now shot. His own $30 million shareholding amassed over the past decade has also been decimated.
2. Centro crunch re-affirms the genius of MacBank
Stephen Mayne writes:As the ripples spread through the heavily indebted property trust market courtesy of the global sub-prime storm, yet again we have to marvel at the brilliance of Macquarie Bank in navigating a safe path through.
Today's victim is Australia's second biggest shopping centre company, Centro, which, just like Northern Rock in the UK, will never be able to recover from the crisis of confidence and brand damage.
Unlike Northern Rock, investors in the various Centro wholesale funds, notably its two flagship WRAP products, are being told they can't have their money back. Oh dear.
Macquarie Bank shares are only down $2.65 to $77.43 today, yet other heavily geared property players such as Goodman Group have been clobbered, falling 76c to a two year low of $4.80 in morning trade.
Macquarie Bank sold its 7.7% stake in the old Macquarie Goodman for $773 million last year, fetching $5.90 a share and booking a profit of $130 million. Talk about great timing.
Centro today revealed it has changed all its assumptions. Future Australian debt is now expected to cost 1.2 percentage points more, whilst US debt is up by 1 percentage point. Macquarie houses well over $100 billion of debt across its empire but almost half of this was hedged at fixed rates for seven years. Brilliant! Why didn't Centro think of that?
Centro is about to become a household name in Australia even though many Australians have heard of it through major shopping centres such as The Glen in Melbourne. Check out the full list of its Australian centres here. Most are second division behind the mega Westfield centres and they are all for sale now.
The Centro boards are strong and should have known better. Centro Retail Trust and Centro Properties Group are both chaired by the respected Brian Healey and other directors include former National Mutual funds management boss Sam Kavourakis, former Myer managing director Peter Wilkinson, Axa director and former Freehills partner Paul Cooper and former BHP executive Jim Hall, who currently has his hands full as a Symbion Health director.
These blokes can't hide because they signed up to CEO Andrew Scott's unique model of using short term debt to plough aggressively into the US. Check out the $US5 billion New Plan takeover announcement from April this year as this transaction more than any other is what killed it.
Centro will now join the likes of Alan Bond, Westpac and National Australia Bank in coming a cropper in the US after promising the world.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.