Last Friday and Monday we saw two floats and two takeover deals abandoned as the impact of the subprime crisis and credit freeze took their toll on investor appetite for financial IPOs and big deals.
The two most notable deals were the ending of the purchase of $8.3 billion worth of assets by SP AusNet, the electricity distributor (see story below) from its Singapore parent, and the abandonment (for the time being perhaps) of the $3.1 billion offer for rural chemicals group, Nufarm by a consortium of a Chinese chemical company and two US private equity groups.
Yesterday the impact was seen in a very different way: one of the biggest Australian investors in US retail property in the past year is in negotiations with its banks seeking to re-work its loans. The cost will be heavy in lower profits and probably distributions for investors.
By late Monday investors in Centro Properties and Centro Retail, Australia's second largest shopping centre owners should know the bad news about the extent of the cost to their company and the value of their holdings from the credit freeze and subprime mess.
Centro Properties shares fell sharply Wednesday, down 4.5% to $5.70 before a trading halt was called yesterday morning. The related Centro Retail Trust units were off 1.5c on Wednesday to $1.425.
The CNP shares are down over 30% this year as investors took a set against companies with US investments and US dollar income, like Centro and its bigger competitor, Westfield. CER shares are off 18.5% for the same reason, especially worries about the health of US retailing.
(Following CER's April 2007 $US6 billion "New Plan" portfolio acquisition and creation in a merger, 72.3% of the portfolio is in the diverse US retail property portfolio, 27.7% is in Australia).
That merger was a mistake: it brought together its US shopping centre trust and merged it into the Australian business and boasted about its strength through diversification in a third quarter circular to shareholders (http://imagesignal.comsec.com.au/asxdata/20071207/pdf/00793191.pdf).
In the same circular, issued last Friday there was no mention at all of any problems in the US, or any suggestion of funding pressures. Its business is unbalanced, with the sliding US retail market accounting for 72% of assets and stronger Australia, 27%.
But in the CER circular it was all rosy in the Centro garden, and the headline in the circular said it all:"$10.1bn Portfolio with $3.8bn Market Cap:
"The merger of Centro Retail Trust (CER) and Centro Shopping America Trust (CSF) was overwhelmingly approved by investors and became effective on 22 October. With a market capitalisation of $3.8 billion, CER is now one of Australia's top LPTs, offering enhanced liquidity and growth opportunities.
"CER's results will be driven by income growth in its high quality portfolio resulting in 3%+ targeted DPS growth per annum from June 2008. The Trust remains well placed to pursue appropriate growth opportunities in Australasia, the US and potentially Europe with its expanded capital base, market capitalisation and significant assets under management. CER now has exposure to over 450 shopping centres across Australia, New Zealand and the US providing substantial geographic diversification benefits."
CER's circular said "Projected 14.1% increase in 2008 distributions compared with 2007." That is now in doubt after the statement yesterday, six days after the circular was issued to the ASX:
"CER intends to make an announcement regarding revised earnings guidance as a result of likely increased interest margins on some loan facilities the terms of which are currently under negotiation. CER requests that the trading halt be put in place for up to two days until announcement of revised earnings guidance expected before the commencement of trade on Monday, 17 December 2007," the statement to the ASX said."
The same statement was issued by CNP yesterday, which last Friday also issued a four page September quarter update which talked confidently of a 4.4% growth in US retail sales and then updated holders on the creation of CER. Not a mention of any problems in the US. And yet six days later, the statement to the ASX about new earnings guidance, as for CER.
Shareholders in both companies will be entitled to be very upset at that lack of disclosure.
While the market was signalling concerns, the company has been silent.
Indeed the $3.8 billion market value in the circular for CER had fallen to around $3.258 billion at the close of business Wednesday.
The claim to have a "$10.1 billion portfolio' is now in considerable doubt as the higher interest cost will change the way the properties are valued.
It's very possible the company will be under pressure to cut that valuation because of the higher interest charges and the weakness in US retailing and in US commercial property.
Borrowing costs for the two Centro companies have jumped as the subprime mortgage mess has deepened and banks have stopped lending and people have cut back on spending.
It's quite possible that the two Centro companies might also find it difficult to refinance much of its property in the US and will have to do it here in Australia. Banks in the US, Europe and elsewhere have cut back or stopped lending, even to each other.
The move by some of the world's major central banks to coordinate the injection of up to $US100 billion in liquidity into money markets over the next six weeks is a sign of how tight conditions have become.
Centro Properties has more than $5 billion in outstanding debt, more than half of which is due in the next three years.
The Centro companies have spent around $14 billion of assets in the US in the past year or so. The question now is that figure still viable
