Debt and Corporate Control

Robert Gottliebson has an interesting article over at Business Spectator about Centro. For those of you who haven't been following it, Centro is a high profile Australian casualty of the US credit crisis. Centro Properties (ASX:CNP) manages retail properties in Australia and the US. The properties themselves are owned by various trusts, the largest of which is Centro Retail Trust (ASX:CER). In December it became clear that Centro was going to have trouble re-financing a large portion of its debt, and the price plummeted. Clearly the underlying assets (management contracts for CNP and real estate for CER) have not dropped nearly as much in value as the share prices have. Gottliebson points out that the way the debt is structured (unsecured loans to CNP) makes it difficult for the banks to foreclose because CNP's management contracts are written to require shareholder approval in the event of a change in control. The banks will collect much more if they work with Centro to re-finance the debt rather than force Centro into administration.

For my students, this is a good illustration of the effects of debt on corporate control, and how clever structuring can change the usual dynamics between debtholders and shareholders.

(Disclosure: the author has a small financial interest in CER)