The destruction of Centro

By Stephen Mayne
December 18, 2007

The following four stories about Centro were published in Crikey this week and you can also listen to Stephen Mayne's two ABC interviews about the debacle.

Centro calamity: $5 billion in equity destroyed today

Crikey, Monday, December 17, 2007

By Stephen Mayne, who has dropped $700 in Centro this morning

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:

Make no mistake about it, this is the biggest crisis to ever hit Australia's funds management and property industries. If our second biggest shopping centre company can't survive, is anyone safe?

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.

Centro crunch re-affirms the genius of MacBank


Crikey, Monday, December 17, 2007

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.

Centro fails on continuous disclosure and debt disclosure
Crikey, Tuesday, December 18, 2007

By Stephen Mayne, failed shareholder activist who never attended a Centro AGM

Shares in Centro Properties Group fell from $5.70 to $1.36 yesterday. This morning they hit a low of 42c before stabilising at 76c by midday as 130 million shares changed hands – meaning that the company worth $4.7 billion last Thursday is now worth just $630 million.

And while the broader Australian stock market followed Wall Street down another 2% in morning trade, the contagion effect has stabilised as shares in Valad and Goodman both recovered marginally, although Westfield tumbled another 59c to $18.98 as investors start to get nervous about the value of its huge portfolio of US malls.

The market clearly believes the Centro management company is stuffed and it will be the lenders owed $18 billion, plus the frozen wholesale co-investors in the shopping centres who will get first crack at Centro's 124 centres, 67 of which in the US are reportedly already on the market.

When a group is geared at 60% on inflated valuations, there isn't a lot of margin for error, so the game now becomes how much of the nominal $8 billion of equity can be salvaged.



Continuous disclosure laws are meant to avoid such unprecedented shocks and they have clearly failed Australian investors who have collectively dropped about $5 billion of their $1 trillion of super in Centro.

The big question is how Centro Properties Group could release this profit statement on 9 August. Go to page 11 and you'll see a table claiming it had no current interest-bearing liabilities and $3.6 billion of non-current debt.

This changed on September 18 when the annual report was released and page 34 disclosed $1.1 billion of current interest bearing liabilities and $2.5 billion of longer term debt.

Contrast that with page 19 of this presentation yesterday which revealed the following debt maturity profile for the parent company:

Two months: $2.7 billion

12 months: $1.2 billion

More than 12 months: $2.8 billion

There is a little asterisk with the note "includes shares of US JV debt", which might explain the extra $3.2 billion of total debt not disclosed at all in the earlier statements, let alone correctly as either current or non-current.

Then, of course, there is the separate $5.6 billion of debt in Centro Retail Trust, which is somewhat more than the $1.44 billion they disclosed in the annual report sent out a few weeks ago.

However, this was before the merger with Centro America Shopping Trust was approved by unit holders on 12 October and it was clearly debt laden after the two big US acquisitions, Heritage and New Deal, over the past 18 months.

All of this looks like a pretty clear cut case of inaccurate market disclosure of debt. Wasn't that at the heart of Enron's problems?

From Yannon, to meat deals – meet the Scott brothers

Crikey, Tuesday, December 18, 2007

Stephen Mayne writes:

Way back in the late 1980s, a fiery red-head called Andrew Scott was a loyal treasury minion of then Coles Myer finance director John Barner. Scott would later rise to become the retailing giant's property chief before leaving in 1997 for Centro Properties, whilst Barner was fired in disgrace in 1993.

Come the early 1990s, Coles Myer's then largest shareholder, Solomon Lew, got into strife during the last property crunch in Australia, courtesy of Paul Keating's 17% interest rates. Solly borrowed too much money in 1989 from ANZ to buy Westfield's stake in Coles Myer when Frank Lowy was struggling under the weight of huge losses at Channel Ten.

Solly needed a bail out, so along came the notorious Yannon transaction – an undisclosed deal that saw Coles Myer cop an $18 million loss by making good a liability Lew had to Rodney Adler's FAI Insurance, which underwrote a capital raising by his Premier Investments.

It was Barner who put the Yannon deal together, but Scott was a bit player, even scoring a mention in the much-maligned report done by Alan Goldberg QC, a barrister sometimes used by Solly who is now a Federal Court judge.

Fast forward a few years and it is amazing how the players remain the same. PwC was the auditor that missed Yannon and PwC is the current Centro auditor that, once again, seems to struggle with the disclosure of liabilities.

Solly Lew has finally sold out of Coles to confirm his billionaire status, but someone called Scott was causing controversy to the last – not Andrew Scott, but his brother Peter Scott, the disgraced former head of Coles supermarket who was fired in late 2006 for taking backhanders from a major meat suppliers.

And who are two of the leading figures who could mount an opportunistic raid on the teetering Centro? None other than Solly Lew and Frank Lowy.

There are myriad governance questions around Centro. Its long time adviser, JP Morgan's Andrew Pridham, has generated more investment banking fees out of property than anyone in Australia, but he's now copping it in the neck from the likes of Michael West in The Australian.

West had the best summary of the Centro governance issues, which will surely lead to formal investigations from the ASX and ASIC, along with a class action from investors against the directors and possibly auditor PwC.

The Rudd Government has picked funds management as an industry for special treatment, but it also believes in tougher corporate governance laws so expect quite a regulatory backlash from the Centro collapse.

For instance, it is completely inappropriate that Centro Retail Trust had the same board as Centro Properties. This is a criticism I used to make against Frank Lowy's old Westfield structure, but Frank did the right thing merging all his vehicles in 2004.

It's a shame the big shareholders and little activists like me all failed to pressure Centro into a more conventional structure. Sorry about that.

*Visit the Mayne Report to listen to Stephen Mayne two ABC radio interviews on the Centro debacle.


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