Australia's Centro Hit by Credit Crunch, Shares Dive

Australia's Centro Properties Group, which manages U.S. malls with tenants from TJ Maxx to Wal-Mart, warned it is having trouble refinancing A$1.3 billion (US$1.1 billion) in debt and may have to restructure because of fallout from the U.S. subprime crisis.

Its shares tumbled more than 70 percent.

Centro, the fifth-largest retail property owner and manager in the United States, cut its forecast 2008 distribution per unit by 14 percent, just two months after reaffirming a previous forecast, as the global credit crunch triggered by the U.S. subprime mortgage crisis saw bank lending dry up.

Analysts believe Centro's crisis stems from its inability to refinance a bridging loan for its $3.4 billion acquisition of New Plan Excel Realty Trust made earlier this year, when it accelerated its push into the United States.

"There'll be a total restructure. They either have to sell assets or raise equity, or both," said BT Funds Management portfolio manager Peter Davidson.

Centro is the second major Australian victim of the subprime crisis after non-bank lender RAMS Home Loans Group failed to refinance its loans in August.

The subprime crisis has pushed up the cost of lending as lenders turn wary, and has almost shut down markets for some credit products, often those used by companies like Centro to refinance debt.

"The property sector is potentially one of the more heavily exposed because some companies are relatively heavily geared and have shorter-term debt maturities," said Michael Bush, head of fixed income credit research at National Australia Bank.

Centro has almost 700 shopping centers under management in the United States valued at over A$17 billion. Tenants include TJ Maxx and Wal-Mart Stores.

The group, which has A$26.6 billion under management in retail property funds in Australia, the United States and New Zealand, said it would begin a complete review of its structure.

It also suspended withdrawals from two of its funds, Centro Direct Property Fund and Centro Direct Property Fund International.
     
Shares Dive

Centro shares dived as much as 72.9 percent to a record low of A$1.54. It was the most active stock on the exchange and helped push the benchmark S&P/ASX 200 Index down almost 2.4 percent.

"This is the eye of the storm right now, the market is now looking at them on an asset valuation basis only, not on earnings," said BT's Davidson.

Among other property groups, Westfield Group, the world's largest property group by market value, fell 4.4 percent, Goodman Group skidded 13.3 percent and DB RREEF Trust dropped 5.5 percent.

"It appears to be a short-term refinancing issue so, potentially, if other entities have any short-term refinancing issues there may be some more problems out there," said Richard Morris, investment manager with Constellation Capital Management.

UBS analyst Stephen Rich said in a research note the vast majority of Centro's debt is off-balance sheet, with opaque disclosure. He estimated the company's debt to total tangible assets ratio at close to 70 percent, compared with its last stated book gearing of 42.8 percent.

Merrill Lynch analysts estimated Centro's gearing level at 63 percent, and said they were concerned leverage may be approaching undisclosed threshold levels linked to its debt covenants.

Centro said underlying earnings of its property and services business were robust, and added it would not pay a distribution for the six months to end-December.

"We never expected the sources of funding that historically have been available to us and many other companies would shut for business," Chairman Brian Healey said in a statement, citing the U.S. CMBS (commercial mortgage-backed securities) market.

Centro said it needed to reduce its gearing significantly to secure longer-term financing in the current illiquid credit market, and was looking at a number of options, including asset sales, joint ventures and equity injections.

It was continuing to negotiate a refinancing deal and had obtained an interim extension until Feb. 15.

Centro Properties said capital expenditure restrictions under the terms of the financing extension would restrict it from pursuing some of its growth plans in the United States.