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
12 months?]
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
currency risks?]

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 pr

operty trusts.