Yesterday, in Crikey, Martin Dougherty explained the losses suffered by investors in Centro and the tale of a large number of Chinese shareholders who now face a near complete destruction of their stake in the collapsed group. The only problem is, Dougherty left out a fairly important point — that is, almost all of the aggrieved Chinese shareholders acquired their stake in Centro after the company all but collapsed in 2007, not before. So while the shareholders may have received a raw deal when Centro agreed to sell its US assets to private equity giant Blackstone, that is what happens when one speculates (it certainly wasn’t “investing”) in a company that is worth far less than nothing.
The Centro story is a classic tale of corporate greed and stupidity. Led by former Coles Myer executive Andrew Scott and overseen by a weak board, headed by former chairman Brian Healy, Centro used an enormous amount of leverage to create a commercial property empire that spanned several continents.
It is often forgotten that the assets owned by Centro were actually fairly “safe” — usually commercial shopping centres anchored by a large, long-term tenant such as a supermarket. However, even the safest investment can become risky when large amounts of leverage and complexity are involved. Centro had a couple of funds from which it raised money, which in turn owned a retail trust (which held the properties) which then had stakes in various property investment syndicates. However, the equity raised from shareholders and syndicates was dwarfed by the huge levels of debt taken on at the various levels of the business.
When the market was rising, the use of leverage fuelled supercharged growth — in 2007, after acquiring US property company New Plan Excel Realty, Centro (combined with its separated listed Centro Retail Trust) would control more than $26 billion worth of assets. The problem was, the business also had tens of billions of dollars of debt.
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While there were serious issues about Centro’s disclosure of its debt to shareholders (which are now the subject of several legal actions), ultimately Centro made the all-too-familiar mistake of paying far too much for assets, especially New Plan in the US, using too much debt. In December 2007 the company collapsed, and control was effectively handed to its bankers (which could have chosen to appoint receivers, but instead, felt they could receive a better return from maintaining the business as a “going concern”.)
In 2007-08, Centro announced a $2 billion loss, mainly due to write-downs. The following year, a further $3.5 billion was lost — these astronomical losses represented how much management overpaid for assets.
Since December 2007 Centro has remained a listed company on the ASX but has been the financial equivalent of a mortally wounded deer — unable to survive but not quite dead. Centro would almost certainly never again be a viable entity with its net tangible assets amounting to negative $1.6 billion in June 2009. That means the company was worth $1.6 billion less than nothing. Because Centro was still listed on the ASX, shareholders were still able to purchase Centro Properties securities (Centro Retail, the separately listed entity continues to trade at a slightly higher level). Centro Properties securities bounced around from 30 cents in March 2008 to a low of only four cents in November 2008.
Purchasing Centro securities during that period was little different to putting a few dollars on the craps table. In its 2009 annual report, Centro informed shareholders that the company was actually worth negative $2.23 per share (which has since worsened to negative $2.43), so any return which would have been made would have only been due to some sort of miracle. Shareholders rank last in any wind-up, so Centro’s bankers would have taken the proceeds of all asset sales to repay the debt owing to them first. In virtually all corporate collapses, ordinary and preferred equity holders receive nothing.
There is a good reason for this. Despite some attempts by the High Court to change priorities in the event of a misrepresentation, equity holders receive all the upside from their investment so they also should face the highest risk of loss. When Centro’s security price increased from 75 cents in January 2003 to $10.06 in May 2007 — equity holders would have seen their stake multiply in value exponentially. At that time lenders to Centro would have to settle for a regular interest payment on their debts. In exchange for the lower returns, lenders are given priority in any wind-up.
This brings us back to the Chinese speculators.
Almost all of the speculators’ stake in Centro was purchased after the company collapsed in December 2007. Insiders suggest that the Chinese investors were unsophisticated did not understand that Centro was worth billions less than zero. At one stage in September 2009, Centro Properties shares climbed to 52 cents, valuing the company at about $500 million, a completely irrational figure given its debts far exceeded its assets.
While the Centro board, and its current chair Paul Cooper are certainly at fault for the massive destruction of wealth at the company through the New Plan acquisition (and the allegedly misleading disclosures to shareholders), they cannot be blamed for the predicament of foolish speculators.
Dougherty claimed that:
The Centro debacle is a dribbling black beast in the heart of the Chinese investment community — from Melbourne to Hong Kong to Beijing. And the beast is dribbling bile on Australia’s perceived lack of protection for overseas Chinese corporate investors here. The Australian government can only hope that the Chinese commodity buyers choose not to revenge themselves on our prosperous mining community.
This is not quite accurate. The protections offered to investors in Australia are substantially better than those offered in many parts of the world, including China. The Chinese speculators (and others who bought shares in Centro after its 2007 collapsed) lost most of their stake because they lacked sufficient knowledge of Australia’s insolvency laws and lacked a fundamental understanding of Centro’s intrinsic value.
Almost every investor who ever loses money looks to blame someone else. The company, regulators, stock brokers. Rarely, do they realise that the real culprit is themselves.
*Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.