interesting article...kimco good example

Was Colorado's corporate life support switched off too soon? March 31, 2011
Article from Business Day.

COLORADO Group's descent into receivership yesterday and the recapitalisation plan for the Centro group that is under attack from some of its investors both underline a developing trend for distressed debt trades to influence the shape of corporate recovery plans.

Colorado's board was backing a recovery plan devised by KPMG. It is believed to have included a partial debt-for-equity swap, and it aimed to keep the retail group afloat a while longer. It wouldn't have propelled Colorado completely clear of its problems, but it may have got the group through the present retail trading recession and into an environment where asset sales were more productive.

But the lenders that yesterday rejected that plan in favour of tipping Colorado into receivership are a different bunch to the ones that originally extended credit to Colorado. More than half the retail group's original seven-bank lending syndicate is gone, having sold out for as little as 40? in the dollar to distressed debt specialists, including big investment banks and hedge funds.

Advertisement: Story continues below A similar debt shuffle occurred at Centro as it searched for a recapitalisation plan. And as debt traders move in on distressed companies, the odds on short-term asset sales arguably shorten. A sale that generates, say, a return of 50? in the dollar is obviously not out of bounds to a trader that has just bought in at 40? in the dollar.

This is a relatively new development in the corporate intensive care ward.

The distressed debt market is basically a byproduct of the corporate carnage created by the global financial crisis. And it's not clear yet whether it is working to more efficiently clear away financial crisis flotsam, or freezing out longer-term recovery plans that offer higher returns.

Colorado's board certainly believes that the group's lenders have rejected an alternative that would have taken longer, but delivered better returns. And Centro Properties security holders unhappy about that group's $9.4 billion US shopping centre sale to private equity group Blackstone think the same.

Centro's US sale is pitched at a 1.3 per cent cent discount to the book value, and after the payment of tied debt will generate $1.38 billion to be carved up between Centro Properties, its listed affiliate, Centro Retail, and unlisted Centro syndicates.

That in turn will underpin a debt-for-equity swap that clears the master company of its suffocating debt load and sets up an amalgamation of Centro, Centro Retail and the syndicates into a new vehicle that the lenders will effectively own.

Centro says $100 million will be set aside for distribution to other stakeholders, but the queue for this is lengthy. Payments of around 6? in the dollar to the holders of hybrid securities, and around 3? in the dollar to convertible bonds holders, would absorb most of the $100 million set aside and if, as expected, the $100 million kitty is also tapped to fund a settlement of the class action being brought against Centro, there will be next to nothing left for ordinary security holders.

The US property sale that Centro Properties shareholder Smartec is now testing with a court action aimed at getting information about the deal is the linchpin, because it injects almost $1.4 billion back into Centro and its stablemates after debt raised against the US shopping centres is repaid. And, as with Colorado, one question is whether the asset sale cuts off an alternative rescue that would take longer, but potentially yield more.

In a growing pile of letters flowing from Smartec's law firm, Atanaskovic Hartnell, and Centro's law firm, Freehills, Smartec argues that the sale of the US properties Centro has decided will not be put to a security holder vote is not necessary, and value-destroying. Centro argues the opposite: that the deal is the best and perhaps the only route to a recapitalisation of the group that works.

But the argument that lenders should have given Centro more time to create value, and, perhaps, boost the return to stakeholders not in the lender group, is also being advanced by some fund managers with exposure to Centro convertible bonds and hybrid securities - and there is at least some anecdotal evidence to support them.

Another US retail property owner, Kimco, was, for example, trading around $12.50 a share in the middle of last year, and is now trading at just under $18.

According to one Centro noteholder, that rise follows analyst revaluations of Kimco's portfolio of strip malls to reflect a partial recovery in US retail property values from the lows of the global financial crisis - a recovery that is not yet reflected in Kimco's stated asset valuations.

They ask why Centro has sold its assets at a slight discount to last year's published asset value when a real estate group with a similar portfolio is already already being rerated on-market.

There's no reason to doubt that the lenders, boards and advisers working on problem companies like Centro and Colorado are doing their utmost to come up with the best recovery plan. But debt trades are introducing a stronger incentive for fast asset sales, and history tells us that is not always the best course to take.

Australian-listed OZ Minerals, for example, sold off the bulk of its mining assets to China Minmetals in June 2009 for $1.38 billion, after its banks baulked at refinancing just $1.2 billion of debt. The assets that OZ was forced to cover the debts it could not roll earned about $1 billion before interest, tax and deprecation in 2010, valuing them at $5 billion-plus.

OZ Minerals kept one asset, the Prominent Hill copper mine in South Australia. It is now separately valued by the market at $5 billion.