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Centro Hit by Credit Crunch

The big news out of Australia this morning is that Centro Properties Group, which is one of the largest owners of neighborhood and community centers in the U.S., revealed that it is having problems refinancing a $1.1 billion bridge loan from earlier this year it took out when it acquired New Plan for $6.2 billion. It has until Feb. 15 to line up financing or figure out some other way to raise cash to pay down what it owes. Centro says it would consider selling New Plan.

The company said it may have to restructure the company and its shares tumbled by more than 70 percent. That plunge dragged the entire Australian stock market with it. The Australian stock exchanged finished today down 3.5 percent to finish at a three-month low. Centro also suspended withdrawals from two of its funds, Centro Direct Property Fund and Centro Direct Property Fund International. Investors in Centro lost A$3.4 billion and, in overall the fall in the Australian stock market--the worst single day fall since Sept. 11, 2001--wiped out A$56 billion. "Only 34 of the country's 485 listed companies managed to rise."

"There'll be a total restructure. They either have to sell assets or raise equity, or both," said BT Funds Management portfolio manager Peter Davidson.

Centro is the second major Australian victim of the subprime crisis after non-bank lender RAMS Home Loans Group failed to refinance its loans in August.

The subprime crisis has pushed up the cost of lending as lenders turn wary, and has almost shut down markets for some credit products, often those used by companies like Centro to refinance debt.

"The property sector is potentially one of the more heavily exposed because some companies are relatively heavily geared and have shorter-term debt maturities," said Michael Bush, head of fixed income credit research at National Australia Bank.

The firm has a lot of information on its web site right now in three PDFs include a press release about an interim extension of one line of credit, a lengthly presentation detailing its problems and a press release that sums up its situation.

It should be noted that Centro is stressing that its property fundamentals remain sound. It seems it's a major victim of timing. It took out the bridge loan under one set of capital market conditions, before the sub-prime mortgage mess caused massive shifts in the CMBS market. Now it's faced with a challenge of refinancing where debt is considerably more expensive.

"We never expected the sources of funding that historically have been available to us and many other companies would shut for business," Chairman Brian Healey said in a statement, citing the U.S. CMBS (commercial mortgage-backed securities) market.

That creates an interesting set of circumstances. If this is a financing issue--and not about the soundness of Centro's properties--that could create a good buying opportunity for someone else. Of course, any big buyer might have similar difficulties in lining up financing. But it does sound like Centro's going to have to make some big changes one way or the other to get through this mess.

We ran an interview with Centro CEO Andrew Scott in our November issue.

The Australian media is all over this story. Here's a sample of some of what's being written.

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