Australia's Centro dives again; contagion unlikely

MELBOURNE Tue Dec 18, 2007 2:59am EST

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MELBOURNE (Reuters) - Shares in Centro Properties Group, which owns and manages 700 shopping malls in the United States, slumped for a second day on Tuesday on fears its exposure to the subprime debt crisis could sink the company.

But analysts said there were specific issues and other Australian property firms were unlikely to face similar problems.

Centro, the fifth-largest mall owner in the U.S., has been expanding aggressively for a decade. It sold part of each shopping centre it owned into a complex network of managed funds and much of its debt is held off balance sheet. Analysts estimate its debts at up to 70 percent of its equity capital.

Centro shares fell as much as 69 percent to A$0.42, before closing at A$0.80. The stock has lost 85 percent of its value since Centro warned on Monday it was having trouble refinancing A$1.3 billion ($1.1 billion) in debt and may have to restructure.

Analysts said there were concerns that Centro may not survive and a fire sale of assets was likely.

"There are broker reports about liquidation as a possibility, and that has spooked the market," said Constellation Capital Management investment manager Richard Morris.

"Centro was right out there in terms of gearing. There are other similar vehicles, but they don't have the extreme levels of gearing and they have better quality portfolios."

Centro is the first Australian casualty of the subprime fallout outside the banking sector. The crisis has pushed up the cost of lending and has almost shut down markets for some credit products, often those used by companies like Centro to refinance debt.

The shopping centre manager and developer, whose stock peaked at above A$10 in May, has extended some debt facilities to a February 15, deadline and is expected to sell assets to raise cash and help reduce gearing levels to satisfy banks.

"Given refinancing risk and readily available sources of equity, we believe there's a very real scenario where Centro could cease to be a going concern," Merrill Lynch analysts wrote in a note, describing Centro as an "aberration" in the sector.

FIRE SALE

A fire sale of Centro's assets, more likely its Australian shopping centers than some of its U.S. malls, is now expected in order to meet the banks' lending requirements.

One third of the company's shares changed hands and it was the most active stock for the second day running.

Shares in affiliate Centro Retail Group, which is renegotiating an additional A$1.2 billion in financing, fell 23.5 percent to A$0.65.

"What you're seeing is a repricing of risk. What we saw in the credit markets is now in the real estate markets," said Justin Blaess, director of property securities at ING Investment Management.

"After a crash like we saw yesterday, the mood's going to be pretty dark for a while and there's going to be panic through the whole sector."

But Blaess added that while Centro was ultra-leveraged, other firms such as mall developer Westfield Group and Stockland Group have low gearing, strong management and were well capitalized. Both stocks ended higher.

Other analysts said Centro Properties' complex funds management structure and opaque accounting were not widespread across the property sector.

Merrill Lynch upgraded its rating on Goodman Group to buy from neutral, saying the recent sell-off was overdone considering its modest gearing. It had fallen 32 percent in three days, but rose 6.5 percent on Tuesday to A$4.40.

Markets, however, remained wary.

Debt-protection costs of Australian property trusts widened by 10-20 basis points to a record.

The cost to insure Westfield and GPT Group's debt with credit default swaps (CDS) widened to about 107 bps, or $107,000 per year for five years to insure $10 million in debt, from around 87 basis points, said National Australia Bank.

Companies moved to reassure investors, with Valad Property Group issuing a statement reaffirming its earnings.

Australia and New Zealand Banking Group Ltd said it expects the subprime crisis to affect mainly the United States and Europe.

GPT told Reuters it does not have short-term debt to refinance. Its first maturity is in June when A$300 million comes due.

"Centro just got caught, they rolled the dice one too many times, and too aggressively. The debt crisis came along and 'whammo' -- they're out on a limb," said ING's Blaess.

(Additional reporting by Ben Wilson and Cecile Lefort; editing by Jonathan Standing and Ian Geoghegan)

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