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I was going to do a full update on this issue, but I can do little or no better than Stephen Mayne. Go over there – it makes for interesting reading. If what he is saying is true, it should make the management, board and auditors of Centro very worried indeed.
Every once in a while I solicit (a banker soliciting?) comments from my readers – and this is one of those times. If you would like to let me know what you find useful / interesting or make (hopefully) constructive suggestions, go right ahead.
Otherwise; have a Merry Christmas for those who celebrate Christmas or, to my Muslim readers Eid Mubarak for Eid al Adha, or for the rest of you just enjoy the Summer break – unless you are in the wintry North, in which case it is a Winter break.1
I may post if there is anything particularly interesting over the holidays, otherwise, see you in the new year.
Lets all hope 2008 starts better than 2007 looks like it may finish.
1. Trying to get all this right is a bit tricky.
Interesting publication from the Markets Committee of the BIS yesterday. It does a pretty full comparison of the practices of 16 of the major world central banks, covering what their targets are, how they carry out any prudential functions they have and lots of information on how they carry out their other duties.
The 16 covered are the members of the committee: Reserve Bank of Australia, Central Bank of Brazil, Bank of Canada, People’s Bank of China, Eurosystem (European Central Bank plus the national central banks of Belgium, France, Germany, Italy, the Netherlands and Spain), Hong Kong Monetary Authority, Reserve Bank of India, Bank of Japan, Bank of Korea, Bank of Mexico, Monetary Authority of Singapore, Sveriges Riksbank, Swiss National Bank, Bank of England and Federal Reserve Bank of New York.
It is a very useful start for anyone researching the operations of the central banks and for general information on them.
(Updated – link changed so you do not have to go hunting through the site from the press release. Thanks Sadashiv)
This whole Centro thing is looking interesting. The core problem is simply stated – they have a lot of debt that is maturing now and, given current conditions, they have not yet been able to refinance on anything like reasonable (for them) terms. The firm has also been highly geared, so refinancing in this market means that they will need to raise more funding through equity.
Listed property trusts are notorious for their complex structure, with individual shopping centres frequently having differing investors with the overall management (and an equity stake) being held by the listed entity (or entities) as at Centro. This makes sorting things out when they have problems very difficult.
The problem, as simply put above, raises a few questions – not least of which is “How did they let this happen?” There are likely to be more than one investigation of this over the coming months – and a lot more if they do fail as a company (which does not look likely at the moment), so any views here must be treated as uniformed conjecture.
At the moment, it looks like an old fashioned liquidity issue – the company has simply let too much of its debt mature at once and that maturity is happening at a bad time. I have said this before and I will say it again – it is bad policy to bet the house on being able to roll any debt facility at any time. A good treasury policy (like the one on CPA Australia’s website) will cover this risk like this:
The XYZs funding requirements and funding strategy, will be reviewed annually and set out in the Treasury
Funding and Risk Management strategy paper. The funding strategy detailed in the Treasury strategy
paper will be developed consistent with the following parameters.
1. [Determine the debt maturity profile. For example provide a information on how much debt will
mature over 1, 3 and 5 years. What is the maximum level of debt that is permitted to mature in next
2. [Does there need to a policy on whom debt can be borrowed from; does debt raising need
diversified in terms of counterparties, types, maturity and geography and do limits need to be set?]
3. [What is policy in terms of raising debt in foreign currency and management of the associated
This is not just a few things to fill in, but things to think carefully about. Getting all your funding in large blocks may be tempting, but it can be horrifically expensive – ask Centro.
Quite often, though, a liquidity issue is masking a deeper solvency issue. Banks will normally lend (if on occasionally difficult conditions) if they are satisfied they will get their capital back and interest in the interim. It looks like Centro has not been able to convince them this is a strong possibility – which is why they cannot roll the facilities.
If they have over-paid for the shopping centres in the US – a possibility since the economy there looks like it is slowing.
Another interesting point is the disclosures in the last full year report. They disclose only just less that $1.1 bn in total current liabilities (look at page 34). This figure is meant to include all debts maturing during the next 12 months – all of them, including any short term accounts, ordinary trade debts, etc. etc. as well as all major debt facilities. They are now trying to refinance $1.3bn in total facilities – so what are they doing refinancing in one hit $200m more than the total current debts of all types they had at 30 June? Something looks odd here. As I said, these entities have a convoluted structure, so it may be OK, but it does look odd.
My guess is that the audit team is currently being pulled off any other work they were on and are now starting to go back over the files. It should be an interesting period to the the auditors of Centro – and, possibly, a few other listed property trusts.
Just a quick clarification on my earlier piece on APRA’s announcement process. APRA have apparently, and informally, let it be known that the answer to the question on how much capital BankWest and NAB will have to carry next year is that it will be the Basel I number until they get Advanced credit risk clearance.
Now – how long before they formally tell the banks concerned? So far, as far as I have heard, they have not yet been told. You would have thought it would be polite to tell them.
Malcolm Knight, General Manager of the Bank of International Settlements, gave a speech last Thursday to the 2nd Islamic Financial Services Board Forum, outlining how the IFSB, the BIS and the BCBS are working together on developing the institutional framework for the globalisation of Islamic Finance. He emphasises the areas the conventional and Islamic finance have in common – the needs for sound risk management, corporate governance and capital adequacy.
All I can do is encourage those interested in the area to read it.
Although there are differences between Islamic banking and “conventional” banking, there are some fundamental principles that apply equally to both. In particular, rigorous risk management and sound corporate governance help to ensure the safety and soundness of the international banking system. In the light of the growing importance of Islamic banks and Sharia-compliant financial innovation, the increasing integration of Islamic financial services into global financial markets serves to strengthen this point.
The Basel II framework improves the risk sensitivity and accuracy of the criteria for assessing banks’ capital adequacy. This framework is fundamentally about stronger and more effective risk management grounded in sound corporate governance and enhanced financial disclosure, the importance of which has been underscored by the recent problems that have arisen in the banking industry worldwide. The guidance provided by the Islamic Financial Services Board (IFSB) is a useful contribution to the realisation of these global goals. It will support the establishment of resilient financial market infrastructures and sound and robust core Islamic financial institutions operating according to safe and sound risk management practices.
Activity in the US sub-prime area continues to hot up, with UBS acting to strengthen their balance sheet at the same time as announcing that there is not likely to be a profit this year. The measures are:
- Issue an additional13bn (CHF) in fresh capital;
- Sell about 2bn in treasury shares they had figured on cancelling; and
- Pay this year’s dividend in stock.
This is all from revising “…key input parameters of the models that are used to estimate lifetime default and resulting losses for sub-prime mortgage pools.” In other words we got our mark-to-models wrong and we changed them.
I continue to maintain that the whole sub-prime problem is over-done, with the banking system in general able to absorb these losses with ease – but individual banks getting caught. From their press release, UBS would have been able to absorb these losses out of profits from other areas and some capital deterioration but decided not to – presumably because they wanted to reassure the markets on their capital base.
It may also be that they have adopted very conservative valuations, having been caught once. We will see over the next 6 to 18 months.
Look for heads to roll there over the next few months. Investors hate things like this.
As you can read from the post below, the approvals for various banks to use some of the advanced approaches for Basel II compliance have been released. An interesting point that arises from it is the approach to the announcement.
With about 20 days to go, the banks were simply told this morning whether they were going Advanced or not and what they were allowed to do. It included a couple of real surprises – not about which banks, but a whole approach.
APRA have been consistent from their first letter on Basel II (23/6/2003) that “…AMA will not be available to non-IRB banks.” Yet their announcement this morning gives AMA to two banks not going IRB – NAB and BankWest. Better yet, these ones are not even going Basel II Standardised yet – they are staying Basel I for credit risk.
Of course, that leaves a very big question for these two – what will our capital requirement be next year? Basel I implicitly included the capital for operational risk within the credit risk component. Basel II explicitly splits these – meaning the banks going Basel I plus AMA are having their operational risk capital double counted. APRA will need to clear this one up – and fast. For Australia’s biggest bank (never mind BankWest) this is only a slightly important question.
Macquarie’s announcement to the exchange this morning was very interesting, claiming to get the “advanced approaches”. Note the (presumably very careful) omission of the capital “A” on advanced. This is because they have gone “Foundation” not “Advanced” for credit risk. To me, this comes close to “misleading and deceptive conduct” – but probably not quite there.
Likely attitudes to the announcement:
- ANZ – happy and able to crow about excellence in the usual things that banks like to crow about;
- BankWest – wondering what APRA was thinking about to come up with this approach;
- CBA – happy and able to crow about excellence in the usual things that banks like to crow about;
- Macquarie – reasonably content (and quite smug on the wording of their press release);
- NAB – wondering about how to calculate their capital requirement for next year and how the market will digest this over the next few days (and how to phrase their press release – not out yet);
- St. George – feeling a bit sore but confident they can fix it; and
- Westpac – happy and able to crow about excellence in the usual things that banks like to crow about.
All in all, an eventful day.
With 21 days to go to the start date of Basel II in Australia,
APRA have announced those banks that will be able to use the Advanced
methodologies for compliance. They are:
Advanced Everything –
Foundation and AMA –
AMA only –
There is a lot of gossip in here. Just as a first cut, I went to the banks’ websites to have a read – at this point only CBA had their media release out. The rest still had their usual “we are wonderful” media releases.
Macquarie going Foundation is interesting. The difference between Foundation and Advanced is really only in the Retail area and, as Mac Bank does not have a huge exposure to retail lending (except through securitisations) this seems a sensible approach.
NAB not getting Advanced credit risk is really a smack in the eye.
They have (according to rumour) spent the most on their project of
everyone and have failed to do it. For Australia’s biggest bank this is
not good. They, and BankWest, can beexpected to catch up soon, though.
APRA originally said that no-one would be able to go AMA without an
Advanced credit risk approach, o this means they, and the Millionaires’
Factory can be expected to go Advanced credit risk soon.
The notable absence is St. George – who seem to have disappeared off the radar. Anyone with decent gossip on this?
[BTW – if you do leave gossip I maintain I will not hand out contact details or other information unless compelled to do so by a court of law. Keep it factual and there should be no problems.]