Centro fallout sees market meltdown of $56 billion
Article from: Herald Sun
Stephen McMahon and Ben Butler
December 18, 2007 12:00am
INVESTORS lost $56 billion yesterday as giant Australian shopping
centre owner Centro admitted it was teetering on the edge of disaster.
The shock news triggered a huge investor sell-off that engulfed the
stock market in the biggest one-day meltdown since the height of the US
debt crisis in August.
In the second worst day's trading since the September 11 terror attacks
six years ago, only 34 of the country's 485 listed companies managed
to rise.
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a.. Terry McCrann: There'll be some contagion
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Centro owns 118 shopping centres in Australia, including The Glen in
Glen Waverley and half of Victoria Gardens in Richmond.
Yesterday it become the biggest local victim of the global credit
squeeze.
The property company has reported it may be forced to sell some of its
properties to pay its debts of $18 billion.
Centro is also the fifth-biggest shopping centre operator in the US,
where it has almost 700 centres.
Investors in Centro -- including a sizeable proportion of mum-and-dad
investors -- lost $3.6 billion in one day as the share price tumbled 75
per cent.
The debt crisis is expected to trigger a major fire sale of its assets.
After weeks of speculation that the American economy may go into
recession, already-nervous investors were spooked when Centro said it had
been unable to get new loans to cover its short-term debts. It has eight
weeks to organise a rescue plan.
HSBC chief economist John Edwards said the turmoil in the credit
markets was likely to cause continued volatility on global stock markets
until the New Year.
Yesterday the All Ordinaries dropped 224 points to 6331. The property
trust sector, big miners, and banks led the fall.
In the past week, the share market has dropped 6 per cent and the
Australian dollar has slipped back after its recent gains.
In the past month, the Aussie dollar has fallen from a peak of US94c to
just above US86c.
Despite concerns the debt market shutdown will continue until early
2008, Centro chief executive Andrew Scott said he was confident the
company could refinance its debt.
"We believe that there is a strong, viable underlying business," he
said.
But late last week, the major banks also refused to provide funding.
Despite the see-sawing on the stock markets since the sub-prime crisis
in the US mortgage sector emerged in August, the stock market has grown
12 per cent since the start of this year.
Billions lost in credit crunch
By Turi Condon December 18, 2007 01:00am
- Centro shares drop by 76 per cent
- Banks forced to write off billions
- Aussie investors caught off guard
THE global credit crunch broke out of the banking sector yesterday for the first time, sending Australia's second-biggest shopping centre owner into crisis and wiping more than $50 billion off the stock market.
Shares in Centro Properties Group (cnp.ASX:Quote,News) collapsed by 76 per cent after the company admitted it had been unable to refinance $3.9billion worth of maturing debt in the risk-averse credit markets.
Investors carved $5 billion off the value of Centro's two stock market-listed company arms as the group said it could guarantee its solvency only until February, when an extension to refinance the debt expires.
The S&P/ASX200 property trusts index dived 261.7 points by 4pm AEDT to 2030, or 11.4 per cent, with losses amongst even the biggest property trusts.
Centro (cnp.ASX:Quote,News), which ranks second to Westfield (wdc.ASX:Quote,News) in the Australian shopping mall market with 124 centres containing 7000 individual stores, said it had suspended withdrawals from its unlisted property trusts, freezing almost $2 billion worth of investors' funds.
Debt troubles
Centro, whose debt levels rose to 70 per cent as chief executive Andrew Scott pursued an aggressive expansion strategy, is expected to be forced to sell assets, including its recently acquired US mall business.
The company is talking with potential white knights, such as other property trusts that might be interested in injecting funds or buying some of its shopping centres.
Centro's problems represent the first time the global credit crunch, which was caused by the crisis in sub-prime mortgages in the US in July, has affected an Australian company outside the banking sector.
Global credit crisis hits home
International investment banks such as Citigroup and JP Morgan have been forced to write off billions of dollars worth of poorer-quality loans as financial markets have closed to riskier debt.
In August, shares in the newly listed RAMS Home Loan Group collapsed when it could no longer refinance its loan book. The company was forced to sell its brand and distribution channels.
Other Australian institutions have lifted their lending rates to recoup some of the extra costs of raising funds on the international debt markets.
Property trusts deep in the red
But the scale of Centro's problems caught investors off-guard yesterday, despite the company's shares having been suspended since Thursday.
Centro Property Group shares slumped by $4.34 to $1.36, with its flagship Centro Retail Group shares falling 57.5c to 85c. Other property trusts, usually considered blue-chip investments, were also hit, with Goodman Group down 25 per cent to $4.13.
The key S&P/ASX 200 index plunged 228.2 points - or 3.5 per cent - to 6263.5 in its biggest fall in four months.
The value of Mr Scott's personal shareholding in the Centro company crashed by $27 million.
Centro chairman Brian Healey said yesterday the company "never expected nor could reasonably anticipate that the sources of funding that have historically been available to us and many other companies would shut for business".
But big investors yesterday damned Centro's management and called for resignations, including that of Mr Scott, who came to Centro from Coles Myer.
"This is shocking. A 73 per cent drop is shocking. It's as bad as it gets," said ING director of listed property and infrastructure Justin Blaess. "The architects of this should be held accountable."
Centro, which controls $26.6billion worth of shopping centres in Australia and the US, went on a spending spree when debt was cheap, culminating in a top-of-the-market $US3.7 billion acquisition of US shopping centre owner New Plan Excel in February. Centro has ploughed $US8.72 billion into US shopping centre acquisitions since April 2005, some bought from Frank Lowy's Westfield Group.Less than five months after Centro's New Plan Excel deal, the US sub-prime mortgage rippled through the financial system, prompting massive write-downs on bundled portfolios of US housing loans and raising the cost of debt worldwide.
Centro, through its web of funds and syndicates, owns about 600 mostly neighbourhood shopping centres in the US. In Australia, it owns the Glen at Glen Waverly in Melbourne, Galleria in Perth, Toombul shopping centre in Brisbane and Bankstown Square and Roselands in Sydney.
Mr Scott said yesterday the company had suspended its distribution for the December half year and downgraded its full-year distribution guidance by 14 per cent from 47c to 40.6c a share. The retail owner also froze withdrawals from two of its managed funds - Centro Direct Property Fund and Centro Direct Property Fund International - affecting small investors and do-it-yourself superannuation funds with investments of $1.84 billion.
Centro's unlisted property funds and syndicates have about 20,000 investors.
A complete review of its complicated and interwoven structure would also be undertaken, Mr Scott said. The refinancing and restructure will cost the group $40 million.
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