Centro's dollar bounce
The ill fortune that has plagued Centro Retail ever since they became entangled with Centro Properties’ excruciatingly poorly-timed $US6.2 billion plunge into the US market in 2007, just ahead of the start of the financial crisis, may be receding. While the rapid strengthening of the value of the Australian dollar is bad news for some, for Centro Retail it has produced a tidy little windfall.
When the initial phase of the crisis instantly overwhelmed the Centro group before it could refinance the ill-fated New Plan acquisition in 2007, Centro Retail’s affairs were inextricably meshed into those of the incestuous Centro group. It shared the same board and management and its financial management was directed and entangled with Centro Properties’.
Centro Properties acted as a central treasury and also provided the other entities in the group with their derivative requirements – the hedging of interest rates, currencies and their equity in property and funds. When the New Plan acquisition was finalised, Centro Retail's equity and debt exposures were hedged for about five years, on average.
After their near-death experience, with their executions staved off solely by their bankers’ eventual realisation of the implications of allowing the group to collapse – and Glenn Rufrano’s ability to convince them that the Centro management were the best team to manage the high-quality underlying portfolio of very badly-financed properties, there was an agreement to sever ties between Centro Retail and Centro Properties.
That has been reflected in the appointment of an independent board and an agreement that, when and where possible, the hedging arrangements would be terminated.
From Centro Retail’s perspective, Centro Properties wasn’t a good counterparty to have on the other side of billions of dollars of hedges. The various members of the Centro group have agreed that, where possible, they will close out their derivative positions with Centro Properties and look for cover from rated external counterparties.
When, last August, Centro Retail announced a loss of $2.7 billion for the year to June, an underlying profit of $185 million from the property portfolio was swamped by $2.1 billion of asset devaluations and $662 million of mark-to-market adjustments on its derivative positions.
Today, Centro Retail announced that it had closed out some of its equity hedges – largely the hedging of its equity exposure to the New Plan assets – because the recent appreciation in the value of the Australian dollar had resulted in a mark-to-market value for the hedges of zero. That has reduced Centro Retail’s net equity hedge exposure to zero.
Centro Retail does have a residual equity hedge exposure to Centro Properties of $2.2 billion, but with the dollar expected to continue to firm against the US dollar, the prospect of that exposure being further significantly reduced is strong. It’s certainly a lot better than when the Australian dollar appeared to be heading inexorably towards $US60 cents earlier this year. The average rate at which Centro Retail has hedged its equity exposures is just over $US0.85.
The currency windfall both reduces Centro Retail’s prospective liability when the hedges mature but, just as importantly, helps the process of distancing and disentangling it from the broader Centro group and reducing the complexity of its affairs.
Centro Retail’s security holders, who would have felt cursed during the group’s nadir when the banks were agreeing to their debt-for-equity swap and their security price fell below 2 cents, might not feel ecstatic about Centro Retail’s securities moving about the 20 cent level in the past week for the first time in over a year, but at least a few pieces of good fortune are finally falling their way.
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