The chances are fading fast for the restructuring of the billions of dollars in debt and dodgy assets values in companies like Allco, Centro Properties, ABC Learning, Babcock and Brown and even some of the Macquarie Group satellites. This follows a statement by Centro Properties to the ASX today.

The credit crunch and reluctance of banks to lend money to refinance failing companies or any sort of deal, means the work out of Centro and others in its position will take years, not months. We will still be writing these stories in a year or two’s time.

From what Centro told the ASX today, it looks like shareholders in it will have to take a big haircut in any restructuring. Centro is proposing the creation of “hybrid” debt and equity securities to issue to its financiers in any restructuring. That will dilute or even eliminate existing shareholder equity.

Centro Properties’ statement today means that our big banks, and some in the US, will not quickly resolve their huge debts with Centro, and questions will now be raised whether they should start raising specific provisions against Centro debt. Only one bank, ANZ, has done that so far for a small amount of debt.

Centro’s problems and lack of clarity about its debt, its board and its CEO started a chain of similar problems for the likes of Allco Equity, MFS (Octaviar), City Pacific, Babcock and Brown and its various listed funds, Macquarie Bank and its funds, Challenger and a host of other financially engineered firms.

As Centro Properties (and its associated Centro Retail trust) were first cab off the failure rank, they have been more advanced in debt negotiations, rescheduling and the search for new management and equity and of course buyers for unwanted assets. Its success or otherwise would give us a clue as to how the likes of Allco and Babcock and Brown and their various funds would go in renegotiating their huge debts and selling assets to reduce debt.

Despite finding a solid new CEO and changing some of the board, and selling or moving to sell more than $US700 million in assets in the US, Centro Properties was forced to admit today that the restructuring and asset sale process was proving hard to do, given the collapse in credit markets and the lack of finance

The message was it’s tough and its going to get tougher.

Centro has around $A6.6 billion in debt it is trying to restructure and it revealed today that it won’t be able to meet the December deadlines for its restructuring and that it wants a longer, but unquantified period of time to do this.

The alternative to the Centro proposal for the company’s future is liquidation and a fire sale of assets at vastly reduced prices and larger loan losses for the banks. And that applies to all those other companies in the same position.

This is what “de-leveraging” is all about: it’s brutal, nasty, its involves brinkmanship, but in the end it will punish Centro and those other financial engineering companies that thought the cheap money, low risk party would go on forever.

Peter Fray

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