Centro/Challenger Challenged

Sydney, Aug 26, 2008 (ABN Newswire) - The chances are fading fast for the quick resolution for the restructuring of the billions of dollars in debt and dodgy assets values in companies like Allco, Centro Properties, ABC Learning, Babcock and Brown and even some of the Macquarie Group satellites.

This follows the statement by Centro Properties to the ASX yesterday that its talks with its lenders was taking longer than planned and that more time was needed to work out restructuring proposals.

It fact Centro is close to broke and engaged in a high stakes game of brinkmanship with its banks: ut wants more time and money, and is showing the banks that if this is not forthcoming, then it could mean huge write-downs for them.

The credit crunch and reluctance of banks to lend money to refinance failing companies or any sort of deal, means the work out of Centro and others in its position will take years, not months. 

Centro's statement means we are now getting to the crunch part of debt restructuring and asset sales with the first real Australian casualty of the credit crisis. Centro Properties, a big real estate and shopping mall operating fell over midway through last December when it couldn't refinance over billions dollars in debt.

From what Centro told the ASX, it now looks as though its shareholders will have to take a big haircut in any restructuring. Centro is proposing the creation of 'hybrid' debt and equity securities to issue to its financiers in any restructuring. That will dilute or even eliminate existing shareholder equity.

That is not going to be the last such suggestion from a struggling financial engineer.

Centro Properties' statement now means that our big banks, and some in the US will not quickly resolve their huge debts with Centro, and questions will now be raised whether they should start raising specific provisions against Centro debt. Only one bank, ANZ, has done that so far for a small amount of debt.

Centro is said to be still paying interest, but is it paying all the interest on the more than $A6 billion in debt?

As Centro Properties (and its associated Centro Retail trust) were first cab off the failure rank, they have been more advanced in debt negotiations, rescheduling and the search for new management and equity and of course buyers for unwanted assets.

It's success, or otherwise, would give us a clue as to how the likes of Allco and Babcock and Brown and their various funds would go in renegotiating their huge debts and selling assets to reduce debt.

Despite finding a solid new CEO and changing some of the board, and selling or moving to sell more than $US700 million in assets in the US, Centro Properties was forced to admit today that the restructuring and asset sale process was proving hard to do, given the collapse in credit markets and the lack of finance

The message was its tough and it's going to get tougher.

Centro has around $A6.6 billion in debt it is trying to restructure and it revealed today that it won't be able to meet the December deadlines for its restructuring and that it wants a longer, but unquantified period of time to do this.

Centro Properties told the ASX today that :"In the absence of a recapitalisation solution in the short term, the Group's objective therefore is to obtain longer term debt extensions from the lender groups beyond 15 December 2008 to provide a more stabilised environment for the recapitalisation process to be pursued over a longer time frame.

"The Group has commenced discussions with the lender groups on possible terms for longer term debt extension and stabilisation of the Group. It is likely that those terms would include a requirement for the conversion of a portion of debt into some form of hybrid security. This may impact the value of the Group's existing ordinary equity.

"While the asset sale program will provide the Group with liquidity and some level of debt reduction, the Group considers that asset sales alone will not provide a long term recapitalisation solution.

"The Group has also received and evaluated a number of proposals for new equity. The Group, in consultation with its lenders, has concluded that no proposal received to date provides an acceptable outcome which is in the best interests of all relevant stakeholders.

"The Group believes that, in particular given current difficult capital market conditions, an acceptable proposal capable of being implemented by 15 December 2008 is unlikely to be forthcoming."

"Discussions with the lenders on possible terms are at a preliminary stage and no specific proposal has been formulated. The Group can give no assurance that any further debt extensions will be achieved beyond the expiry of the current extensions on 30 September 2008."

The alternative to the Centro proposal for the company's future is liquidation and a fire sale of assets at vastly reduced prices and larger loan losses for the banks. And that applies to all those other companies in the same position.

This is what 'de-leveraging' is all about: it's a brutal, nasty business and there are no winners except for those buyers with enough cash and confidence to buy the assets being sold and to then hang on to them long enough to enjoy the upswing, whenever that happens.

Centro Properties securities closed down 2 cents at 20 cents and Centro Retail Trust securities were half a cent firmer at 32 cents.

Centro Properties was in the Federal Court in Melbourne yesterday, for a directions hearing involving two class actions.

It is the sixth extension the company has sought since last December 17, when it stunned investors with the news it was unable to repay its $4.5 billion debt. That sent the value of the securities down more than 60% in one day. They have lost more than 90% since.

The two groups report 2008 results on Friday, We will learn more, then.

Centro lost its CEO Andrew Scott early on with his departure a condition of the banks remaining 'nice'.

It has now become a trend with a growing stream of CEO's departing financial engineers which get into trouble.

CEO, Phil Green and chairman, Jim Babcock were ousted as executives of Babcock & Brown but still hanging around as non-executive directors, supposedly because they are large shareholders with great global relationships.

Michael King quit as CEO of MFS in January just two days after the shares were sold down heavily and then suspended.

David Coe resigned as executive chairman of Allco but remains on other boards within the group and is still working as an executive out of its London office.

Some argue that National Australia Bank CEO, John Stewart was another early departer after the bank's CDO mess in the US, but that's unfair.
Executives have departed from ABC Learning, as have board members, but the founder, Eddie Groves, remains in place.

And, yesterday Mike Tilley quit as CEO of Challenger Financial Services after 4 years.

Mr Tilley quit 10 months after re-signing a contract with Challenger that would have seen him remain there until 2011. It was not a well explained reason, only that it was 'a good time'.

Challenger chairman, Peter Poulson said the departure of Mr Tilley less than a year after his contract was extended was a "mutual decision" between Mr Tilley and the board.

The announcement came the same day as the James Packer 20% owned associate revealed surprise a loss after write-downs.

Were the two linked? Possibly. Tilley's departure came on the same day that Challenger revealed write-downs of $70 million on two strategic investments plus an after tax loss of $192 million on its investments. 

This dragged the bottom line down to a net loss of $44.2 million, compared with a net profit of $255 million in 2006-07.



But Challenger declared a 7.5c final dividend and the market liked the package of information released today and the share price jumped 16c to $2.41, still a long way from last October's high of $6.50.

It hit a low earlier in the year of $1.60 just as Chris Murphy's Opes Prime funded stake was being unwound.

Tilley is being replaced by deputy, Dominic Stevens.

Profit excluding investment write-downs rose 20% to $A218 million in the June 30 year.

 

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