The shopping spree that sunk Centro

IN October 2007, the champagne was flowing as two central figures in the Centro story took the podium at the annual staff conference.

IN October 2007, the champagne was flowing as two central figures in the Centro story took the podium at the annual staff conference at Torquay in Victoria.

Centro Properties Group chief executive Andrew Scott and Andrew Pridham, then the head of investment bank JP Morgan and a property market powerbroker, reassured Centro's 100 or so upper management people -- some flown in from the US -- that its $US3.7 billion top-of-the market purchase of US shopping centre company New Plan Excel was as safe as houses, the market was sound and that bigger and better things awaited.

Less than two months later Centro was on the brink of collapse, unable to refinance $3.9bn of maturing debt in risk-averse credit markets. Its shares, which had peaked at $10 the year before, plummeted, taking stocks across the market with them.

The credit crisis had hit, wiping $50 billion off the Australian market in a single day. Centro was its first big local casualty.

Winston Sammut, managing director of fund manager Maxim Asset Management, says that before the global financial crisis, property companies continued borrowing money to buy more properties, yet gearing levels were falling because property values continued to increase.

Was there a feeling of invincibility in the property sector before the GFC? "Very much so," says Sammut.

Three years on, in the Melbourne offices of law firm Freehills, more than 50 advisers, lawyers and a buyer began dredging through a deal to sell a big piece of the Centro carcass -- $US9.4bn of Centro's US shopping centres -- to US private equity giant Blackstone.

More than 40 levels above Melbourne's 101 Collins Street, Blackstone's A.J. Agarwal, who was leading Blackstone's high-stakes bid, 10 or more of its lawyers, another contingent of lawyers representing parts of Centro, and 10 or so advisers to the hedge-fund lenders sat down with contracts on Thursday, February 24, to hammer out the details. They emerged five days later with a deal.

"At least Freehills' in-house catering was good," said one of the advisers who ate most of his meals there.

It was a far cry from the optimism and largesse of the October 2007 staff party.

Though opinions vary on the extravagance of the conference -- from Halloween-themed nights, bands and even helicopter rides, not to mention the cost of flying the contingent of US executives from the newly purchased New Plan Excel -- these were costs borne largely by a listed company and its shareholders.

Many Centro executives, reassured by Scott's and Pridham's words at the staff conference despite the already sliding share price, geared up and bought even more Centro shares.

In May 2008, The Australian reported that staff losses were estimated to be about $265 million.

It represented a loss of just under $500,000 per employee for each of the 531 workers who were known to own Centro stock through an in-house scheme.

But in mid-2007, margin loans were all the rage and Scott promoted the benefits of the stock to employees for some time. One of Centro's bankers, the Commonwealth, wrote some of these margin loans as the stock rose to $10 highs in July that year.

On December 17, 2007, Centro Properties shares plunged 76 per cent after it told the ASX that $3.9bn was coming due but could not be paid. Up to eight of the company's senior executives were subsequently forced to sell investment properties to meet margin calls.

This week's deal could see a new $4bn Australian-only shopping centre owner with 40 properties rise from the Centro ashes. At the core of the deal is a massive debt for equity swap. The US hedge funds and other lenders that control about $3.1bn of the headstock's borrowings will cancel the senior debt in exchange for Centro Properties' stakes in the group's $7.3bn Australian shopping centre portfolio.

The Melbourne deal left a pot of $100m on the table for disenfranchised parties left out in the cold. Squabbling over that pot will be the lenders of the hybrid securities, owed roughly $1bn, the convertible bond holders ($500m face value), the CNP shareholders, whose shares now trade around 8 cents, and the shareholder class-action litigants.

While there is speculation that that $100m figure may rise, the biggest bites are likely to go the biggest players.

"If the litigants don't agree -- their claim ranks behind the secured lenders -- the secured lenders will put it (Centro Properties) into receivership and there would be nothing left," said one source this week.

Centro chief executive Robert Tsenin said when the deal was announced on Tuesday that while the restructure would not benefit Centro stapled securityholders, the potential amalgamation of the group's Australian property and management interests could be "a very attractive, stable and appropriately capitalised fund".

He cautioned that the structuring of the proposed transactions was not yet complete. "Until all conditions are met, there can be no assurance that any transaction will take place," he said.

Elsewhere in the listed property sector, companies have retreated from offshore markets with their tails between their legs.

ADDITIONAL REPORTING: BRIDGET CARTER