Down Under Feels the Subprime Crisis, Too

Centro Properties, Australia's second-largest shopping center manager and owner, has been plagued by debt problems due to U.S. financial woes—and the contagion is spreading

by Brad Howarth

Investors in Centro Properties, the fifth-largest owner and manager of U.S. shopping malls, could hardly have imagined a worse end to 2007. In mid-December, Centro, Australia's second-largest shopping center manager and owner, emerged from a four-day trading halt with news it was struggling to refinance its debts—$1.14 billion in long-term debt and $1 billion in joint-venture debt—after traditional finance options dried up because of the U.S. subprime crisis. The stock plunged 80%, losing $3.5 billion in value and making it the worst performer of the 200 largest companies in Australia.

The news keeps on getting worse. In an after-market announcement on Jan. 4, Centro revealed it would not be able to maintain interest-rate hedging, which could reduce earnings. This sent the stock tumbling a further 15% when it opened. Trading in the shares were again halted on Jan. 11 pending a further announcement about the futuer of the company, which is facing the possibility of multimillion-dollar lawsuits over its alleged failure to disclose more than $880 million in debt. Centro had allegedly reclassified the debt as non-current liabilities in its 12-month accounts to June 30, 2007, masking a $396 million funding hole in accounts.

When contacted, a Centro spokesperson declined to comment. The company is reported to have been questioned by Australian regulators about its debt accounting, and may face further action. Over the weekend, company executives were locked in meetings with financiers to discuss ways out of the crisis.

A Dramatic Collapse

Whatever they decide, they need to work fast. Centro, which has around 700 U.S. properties—the largest being Independence Mall in Wilmington, N.C., Cortlandt Towne Center in Mohegan Lake, N.Y., and Pointe Orlando in Orlando, Fla.—has until Feb. 15 to refinance $2.4 billion in debt relating to its U.S. shopping center business or come up with an alternative plan that satisfies its lenders. It must also refinance $1.1 billion in its affiliated Australian Centro Retail fund by the same date.

The Centro collapse has been dramatic. Based in the Melbourne suburb of Glen Waverly, the company owns 124 shopping centers in Australia and had been on a $9 billion U.S. spending spree in the past two years. That included the acquisition of mall owners and managers New Plan Excel for $5.9 billion and Heritage Property Investment Management for $2.1 billion. These acquisitions helped Centro's funds under management rise from $8.7 billion to around $23.4 billion in just two years. But they also added debt of $1.5 and $1.4 billion, respectively, to a company whose total debt is now estimated at $15.8 billion. Of the 700 Centro-owned shopping centers in North America, 470 were acquired as part of the New Plan Excel purchase ast April.

Those malls, in 40 states such as Pennsylvania, Connecticut, and Texas, are now weighing down Centro because of the high levels of debt the organization took on to acquire them and the higher cost of new debt due to the subprime crisis. In a presentation to analysts on Dec. 17, Centro Chief Executive Andrew Scott said it has been the company's policy to manage debt and interest rate risk by utilizing short- and long-term debt maturities, and sourcing debt from international markets, including those in the U.S.

Death of a Brand

Over the past five years ending in June, U.S. commercial mortgage-backed securities issuance has been more than $80 billion a month, but that flow has now dried up due to the subprime crisis. "We never expected, nor, we believe, could have reasonably anticipated, that the sources of funding available to us and many similar companies would [be] shut for business," Scott said at the analysts' briefing.