centro mediation process scrapped, page-2

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THE minutes from Centro Properties Group's audit committee board meeting on September 5, 2007, are an unintentional masterpiece in understatement.

Those present listened as Centro finance accounting manager Paul Belcher told his masters there had been some "minor changes" to the financial statements that had been circulated among directors.

Full copies of the latest draft financial statements were now ready for review, he told directors including chief executive Andrew Scott.

Non-executive Sam Kavourakis appeared cautious.

According to the minutes, revealed this week in court documents, he reckoned the audit committee should get another couple of days to review the new statements.

But Scott voiced the "practical consequences" of delay, as the final accounts needed to be approved that day to be included in the Centro annual report.

In any case, Stephen Cougle, a partner with auditor PricewaterhouseCoopers, gave "comfort" that his firm had signed off the full accounts.

Reassured, the committee recommended the statements to the board, which duly signed off the final 2006-07 accounts.

But what we now know is that those "minor" changes involved the definition of more than $1billion in debt and, within months, would help bring to its knees one of Australia's fastest growing blue-chip companies.

More than two years later, the changes are also at the centre of the biggest civil case launched by the Australian Securities and Investments Commission as it probes the causes and casualties of the global financial crisis.

The outcome will determine whether eight former and current Centro directors and executives are banned as directors and face heavy fines, as ASIC would like. Centro and those named are defending the action.

It will provide clarity on exactly how much directors, particularly non-executives, can rely on information they receive from executives, and their duty of care to companies and their shareholders.

Even as the subprime crisis was beginning to rattle through financial markets in September 2007, Centro remained what many investors considered a rock-solid blue-chip.

Its market capitalisation had recently peaked above $8bn, it had 800 shopping centres around the world after a two-year debt-funded buying spree, and its pedigreed board had attracted leaders of the retail and business world.

At the head of the table during the crucial boardroom meeting that year would have been chairman Brian Healey, who had been a director of listed companies such as Orica, Foster's, Biota and Incitec Pivot.

Next to him would have been the Centro mastermind, Scott, a former chartered accountant and Coles Myer exclusive who pocketed $3.6m in annual pay that year.

Also among them was director Peter Wilkinson, who was the former chief executive of David Jones and Just Jeans, and Kavourakis, a Harvard graduate and the former managing director of National Mutual Funds Management.

Jim Hall, who is still on the board, was a director of ConnectEast, Alesco and the former chief financial officer of Orica. Paul Cooper, who is now chairman, is a former solicitor who had been a director of Axa Asia Pacific. Graham Goldie was a former Target and Myer senior executive.

All seven -- along with former chief financial officer Romano Nenna -- are now in ASIC's sights over alleged "material misstatements" in the 2006-07 accounts of Centro and its associate Centro Retail Trust.

At the heart of ASIC's claim is that about $2.1bn worth of debt on the two groups' balance sheets was incorrectly identified as "non-current" -- or not repayable for more than 12 months -- when, in fact, it was due in the coming year.

ASIC's statement of claim, lodged this week, reveals the company had been paying attention to its $4bn-plus in debt, and particularly the maturity of its debt portfolio, for months leading up to the September meetings.

It alleges the board was repeatedly given documents showing the maturity of its debt.

In fact, just days before the 2006-07 accounts were signed the directors were told that $2.14bn of Centro's debts were classified as "immediate short term" -- a maturity of less than six months.

ASIC's claim says that in May, directors were given a document conceding that Centro's "rapid growth through significant acquisitions during the 2007 financial year had been substantially debt-funded and had created some short-term challenges in terms of maintaining (Centro's) liquidity reserve".

Centro had spent $US8.7bn since April 2005 to become the fifth-biggest owner of US shopping centres.

It had more than 800 centres globally -- 124 across Australia and New Zealand and 682 in the US. Under the Centro model, the two listed components of the company bought shopping centres and then sold them down to syndicates, predominantly comprising 20,000 "mum and dad" retail investors.

Unfortunately for the debt-laden Centro, the value of its centres was tumbling as US property prices fell and, concurrently, the cost of US bank debt soared on the back of the fallout from the subprime lending crisis. With the assets falling in value, banks would have told Centro to sell down the properties or else they would need to refinance.

At the August board meeting, Nenna ran through a PowerPoint presentation on "emerging disturbances in international capital markets and their effect on the Centro group". The presentation noted that "short-term liquidity" was the group's "greatest challenge". But management was confident its relationship with its banks was strong enough to ensure existing debt facilities could be extended until markets recovered. In early August, Centro and Centro Retail lodged their preliminary financial accounts with the securities exchange. Centro said it had no current debt -- due within 12 months. ASIC argues it should have been $2.6bn. Centro Retail also said it carried no current debt. ASIC argues it should have been $598m.

But sometime between August 9 and August 31, according to ASIC, Belcher identified a $1.1bn loan from JPMorgan to Centro that should have been classified as current. It was, after all, due for repayment on January 4, 2008. This was the "minor change" introduced into the final accounts when they were presented to the audit committee and board in early September.

ASIC claims that number still vastly underestimated the current debt within Centro. Indeed, in mid-February the group reported that the December half accounts would be restated to classify a further $1.5bn of the total debt as current liabilities. From no current debt in August, its short-term liabilities had blown out to $2.6bn, or 72 per cent of the total debt of $3.6bn.

Centro's rumoured debt problems quickly leaked into the public domain in the closing months of 2007. On December 17, two listed arms of the shopping centre giant emerged from four-day trading halts to announce they had been unable to secure debt funding of $3.9bn.

Centro's relationships with banks, unnerved by the gathering credit crisis, had not been strong enough. "We never expected nor could we reasonably anticipate that the source of funding that had been historically available to us and many similar companies would shut for business," Scott said in the days that followed.

The prices of both shares went into freefall following the news, with Centro plummeting 76 per cent from $5.70 at resumption of trade to close at $1.36, and Centro Retail crashing 40 per cent to close at 85c. At the depths of its woes last year, Centro shares fetched just 4c -- a loss of more than 99 per cent from their peak.

Just over $5bn was wiped from both companies on the first day alone, with the reverberations being felt through all listed property companies. Another $5bn was stripped from Macquarie DDR Trust, Macquarie Office Trust, GPT Group, Westfield Group and Goodman Group.

Justin Blaess, director of real estate for ING, says that in late 2007 debt maturities were not at the top of people's minds and the global financial crisis had not started in earnest. "There were some cracks on the side -- some hedge funds had started to go broke -- but it really wasn't seen as an issue," he says.

In the weeks after Centro's meltdown, Scott left with a $3m golden handshake. He was followed by Healey about six months later.

Centro is now fending off two major shareholder class actions over the events of 2007. Those cases, one of which was in mediation and both of which could also target PwC, have received a boost with ASIC's intervention.

ASIC claims that the current and former Centro directors and executives breached their duties to ensure that information contained in financial reports and disclosed to the market was accurate, complied with relevant accounting standards and was not misleading. The regulator claims that the directors -- who have yet to file their defences -- knew that Centro and its related companies had "very significant" short-term interest-bearing liabilities and should have known they were incorrectly classified.

The watchdog will begin its civil proceedings on November 20 in the Federal Court in what will be the first case brought under laws that require a listed company's CEO and CFO to sign off on company accounts. It will also be the first major case targeting corporate Australia since the start of the global financial crisis (GFC), although ASIC is still looking into other fallen companies, such as Eddy Groves' ABC Learning Centres.

Ian Ramsay, the director of the Centre of Corporate Law and Securities Regulation at Melbourne University, says the latest case shows ASIC is "being very active" in pursuing directors over alleged breaches of duty. "It is likely to be the case that in the wash-up of the GFC the regulator will focus on accounts and financial reporting and directors' duties," he says.

Centro, despite its near-death experience, limps on. Scott was replaced by New Yorker Glenn Rufrano in January last year. Under Rufrano, the company managed to strike a debt-for-equity deal with its 23 financiers that saw them agree to extend $4bn worth of debt, after a string of short-term extensions were granted through the year. In exchange, however, the banks would own 90 per cent of the company.

Rufrano has also announced he will not renew his contract when it expires next year, sending the company on a hunt for a replacement.

It is on these grounds chairman Cooper and Hall maintain it is in the best interest to stay on the board of Centro. Both say they will vigorously defend the claims against them. "A sustainable future for Centro requires stability and certainty," they say.

http://www.theaustralian.news.com.au/business/story/0,28124,26251679-643,00.html