America’s subprime mortgage mess and credit freeze has thus far only brushed Australia, catching hedge funds and other investors with dud investments and handing out billions in losses.

Takeovers, floats and other deals have been pulled. Monday saw well over $11 billion worth dropped or put in the too-hard folder. Even the blue-chip investors like Perpetual have been caught with realised and unrealised losses of at least $18 million in poor investments in its enhanced cash fund. Perpetual told big investors these losses could rise if conditions in financial markets worsened.

But later today or Monday, we will get the biggest victim so far. Australia’s second largest shopping centre owner, Centro Properties and its associated Centro Retail Trust are on the verge of revealing sharp downgrades in earnings because of the higher cost of refinancing loans that could exceed $US2 billion.

The two companies asked for their shares to be suspended Thursday, hinted at the higher interest cost and its possible impact on earnings, but left it at that.

Centro Properties has $26 billion of funds under management and a complicated web of part-ownership in some property funds to cement management rights. Many of the owners of those funds under management are going to be disappointed at the news when it comes from both groups.

Centro Properties and Centro retail had a combined market cap of just over $8 billion at Wednesday night’s close of trade before they two companies requested trading halts. That’s down from $10.1 billion earlier this year.

Centro Properties share price is down 34% this year; Centro Retail’s units have fallen around 18.5%.

The poor communication and inadequate disclosure is appropriate for a company which has grown aggressively, especially in the US in recent years and ridden the good times, but gone quiet as the prices of its securities have fallen this year, along with those in other companies with investments in the US.

They will likely explain the problems, but highlight the Australian strength. But the just merged CER (which consists of US and Australian shopping centres and property) is unbalanced: around 72% of assets are in the Us and exposed to sluggish retail trade, slumping values and the impact of the higher Australian dollar. The other 27% or so is in Australia.

Investment bank and broker, Merrill Lynch this morning downgraded Centro.

“We are downgrading Centro to Sell from Neutral, as we have lost confidence in the company’s ability to execute its business model after a series of market events (US consumer, credit and REIT markets) and company-specific issues (e.g. CSF-CER merger, high gearing, poor disclosure).  CNP and Centro Retail (CER) have gone into a trading halt due to a revision of earnings guidance, just two months after CNP reiterated its 18.1% DPS growth guidance for 2008.

“We believe the interest margins at risk are related to US$2bn in a short-term loan facility CNP and CER utilised when it acquired New Plan Excel (NXL) earlier this year, which we understood from a company presentation had already been re-financed and fully hedged.

“Additionally, most of the assets and liabilities of NXL are held in a JV, Centro Super LLC, that is not consolidated on either CNP’s or CER’s accounts. CNP’s accounting makes it more difficult for us to understand its risks.

“While we recognize Centro’s funds have had a track record of success, we can see a downside scenario in which it may have to sell assets to lower its gearing (currently 63% debt/EV), and/or fund outflows occur, as rising cap rates hurt fund performance and yields contract. Asset sales to repay debt in this environment would likely be dilutive, as cap rates for secondary US retail is likely 7.5%+.

“Compounding our US market concerns (credit market volatility, REIT market performance, and a stretched US consumer) are concerns we have specific to Centro: it has a highly geared balance sheet (63% debt to EV), low-quality “product” that it is trying to sell to third parties, and poor accounting disclosure that makes it difficult to fully understand the company’s risks.

“The downgrade to Sell represents a substantial change in our opinion from Buy just three months ago, with the declining US credit and REIT markets moving dramatically since then. However, the turning point for us was the company’s poorly executed and conceived merger of CER and CSF (another of its listed vehicles) which we believe has made CER into a less conceivable funding partner. Additionally, US market concerns have become reality, and we do not see more potential negative catalysts given CNP’s asset quality and stretched balance sheet.”

It was just last Friday that both companies issued four page September quarter updates that made no mention of the slide in the share and unit prices, or any problems with loans. This is the one issued by Centro Retail.( The company was still saying “Projected 14.1% increase in 2008 distributions compared with 2007.”

It will be nothing of the sort and to issue that on December 7, six days before the trading halt was announced, is pretty miserable. Didn’t the management have any idea of the problems in the US, especially with rising interest rates, sluggish retail sales and falling commercial property values? If they didn’t they are pretty incompetent.

Holders of these securities will not be happy, but I would image among the more miserable will be UBS Nominees which lobbied in a 108-page substantial shareholding notice for Centro Properties yesterday with an initial stake of 5.09%, all bought above Wednesday’s close of $5.70. The securities will go lower when the update arrives.

Other big buyers in the past month to six weeks have been Barclays, Commonwealth Funds and Macquarie Bank.