Important Company Update - Centro Properties (CNP)

On Monday 17th December, CNP announced to the market it had encountered significant cost increases associated with the renegotiation of A$1.3 billion in maturing on-balance sheet debt facilities. There is also a further A$1.4b in joint venture debt that requires refinancing. Essentially the company has not been able to renegotiate its short term financing facilities and has indicated it will need to substantially reduce its gearing levels to secure a package. This is due to the global credit crisis which has made the sourcing of debt financing in some cases nonexistent. The company has indicated it has an interim extension until 15th February 2008, which they are currently trying to extend.

Under the terms of the bridging finance, there have been restrictions imposed on CNP’s capital expenditure program. CNP’s distributable profit has been reduced from 47 cps to 40.6 cps and payment of the ~19.9 cps half year distribution will not proceed.

The company has disclosed the following points:

1. At this stage CNP and its managed funds are not in breach of any covenants and no clause in the financing documentation triggers a default if the market capitalization of CNP or its entities falls below a certain level.
   
   
2. CNP management have the following options to reduce their debt: asset sales including its interests in managed funds and joint venture assets and/or an equity injection (ie. capital raising). The company is not obliged to undertake any specific course of action prior to the 15th February 2008.
   
   
3. Management will determine whether the December distribution which has been halted will be cancelled or deferred or alternatively whether a special distribution will be paid prior to the end of the financial year in lieu.

The market has reacted savagely to this news with the share price dropping to a low $0.42 and currently trading at $1.10. The twelve month high for the stock is $10.26 so there has been a total fall in value of around 92% since the drop in NPAT was announced for its full year to 30 June.

CNP management announced on Wednesday December 2 they had received a number of unsolicited offers for a number of properties, from both property specialists and diversified investment funds. This has prompted CNP to invite potential buyers in to deliver expressions of interest for CNP assets. There appears to be a wide availability of suitors from American corporate raiders Blackstone and Citadel, as well as local institutions AMP and Colonial First State. It is also possible a large cashed up sovereign pension fund could make a bid.

The interest of these astute investor’s highlights the problem is not in the assets CNP holds, but rather the environment in which they are seeking capital. This is the reason that so many analysts and market commentators (ourselves included) were recommending clients to buy CNP when the share price fell below $6. These interested parties who possess the capital and the patience could extract significant gains from such an acquisition. This could see some value extracted for current shareholders.

Further on Friday the company announced they were unable to extend maturing interest rate hedges as counterparties in the contracts were not willing to extend as a result of recent announcements. Interest rate hedges lock in an agreed interest rate for a period specified, this provides companies with certainty and stability in earnings as they remain unaffected by interest rate fluctuations. Centro’s interest rate hedges are now below historical levels. Without these hedges Centro will have increased exposure to interest rate fluctuations, and therefore increased volatility in earnings.

We recommend existing shareholders maintain their exposure. The share price has already lost 92% from their May high; in a well diversified portfolio this exposure will now be insignificant and further downside movement will have minimal effect on the total portfolio.

Therefore you can allow your exposure to take some risks with the view CNP’s management are able to engage in a successful restructure and provide upside gains on the share price. Shareholders taking this position will need to be prepared for share price volatility; however we believe there is enough upside potential to warrant holding onto CNP.

As a result of the changed outlook for the company, we have cancelled our buy recommendation on CNP and removed it from our long term recommended list. CNP is now considered a high risk investment proposition.

A update will be provided in the next issue of Investing Times.