Centro’s walls are crumbling
Monday, December 17, 2007/
Make no mistake – Centro is in trouble and needs friends. Centro was created for the Australian superannuation funds to reflect the way they liked to invest – so the fund managers must accept a big slice of the blame.
Australian superannuation funds are the major investors in the approximate $13 billion in equity in the various arms of the complex group. In all there is something like $13 billion worth of borrowing, the vast majority maturing in about four or five years. These are not exact figures, because parts of the group are geared to 60 per cent, but it gives an indication of the magnitude of the group.
The Australian superannuation market has not seen anything like this since the early 1990s. If the funds walk away, their unit holders will have every reason to be unhappy with their managers. As I’ll detail below, CBA’s Colonial and the AMP may be in the front line.
Centro can be helped because, unlike most difficult corporate situations, the actual property behind its debt appears to be generating strong income. If no-one is prepared to help Centro, then the superannuation property investment sector could experience a nasty shock and there will be a number of very angry superannuation unit holders – particularly those with ‘conservative’ superannuation options who were given very ‘unconservative’ investments. I obviously do not know the key players, but the Commonwealth Bank’s Colonial Group earlier this year revealed it had a holding of more than 10 per cent in Centro Properties. Colonial property units have not been performing well.
AMP announced it had a 5 per cent stake in Centro Properties, much of it held on behalf of other superannuation funds it was managing. Both CBA and AMP have the funds to help Centro – on commercial terms, naturally – perhaps by buying properties directly, but not at forced sale prices.
When Centro found it had $2.5 billion in short-term borrowings just as the US commercial mortgage market virtually closed, it was very hopeful that its strong relationships with a number of banks would enable it to raise the money and trade on, albeit with higher interest costs. But those ‘friendly’ banks did not come to the party. I don’t know the identity of the ‘friendly’ banks, but given CBA’s equity in Centro Properties, it would surely have been on the list.
The American commercial mortgage market was an easy source of funds for a vast array of property. It will not be closed forever, but when it re-opens interest margins will be higher, which will lower the value of properties.
However, if US interest rates stay low, the long-term effect might be marginal. But if Centro is forced to sell its US properties on the open market when the debt deadline hits on February 15, and if there is effectively no US mortgage market operating, then there will be a substantial fall in the sale prices. Many Australian superannuation property unit holders will be savaged.
Centro was a pyramid with a holding company Centro Properties at the top. Centro Properties held 50 per cent of the units in two unlisted property trusts – a local one and an international one. Units in these trust were popular among superannuation funds because they could be redeemed with notice. But now redemptions have been cancelled.
These two funds invested in three avenues: stock in the listed Centro Retail, various property syndicates that owned a selection of US and Australian shopping centres and various wholesale trusts.
Once a group of that complexity freezes, everyone starts looking after their own interests and each part of the group has different rights.
My family superannuation fund has a small interest in two long-term syndicates with Australian shopping centres– so I suddenly realise I should disclose this.
The two Australian property syndicates have been in operation for many years and should be straightforward, but Centro has to manage its cash so that it can service debts. The first step is to stop distributions wherever possible and use the cash to cover debts, but problems arise when the cash emerges in one part of the group when the need to cover short term debt is in another.
I think the ‘friendly’ banks that did not help Centro with loans actually did the right thing. The game has completely changed and the whole Centro structure needs to be looked at. That’s now going to happen.