There are many lessons for entrepreneurs from the Centro debacle, not least of which is related to just what motivates your financial institution.
Risky money
Your correspondent is hard-pressed to select exactly which summer entertainment is most diverting.
Treasurer Swan’s exhortations against interest rate rises have a King Canute-like quality, even if they lack the irony of the original. Apparently it’s quite alright for his bank to increase interest rates, but no-one else may.
The occasional glimpses of an Alice-in-Wonderland world – in which the Australian cricket team are the sad victims of sledging, and China leads Australia on an environmental issue – are fascinating.
And your correspondent is unable to tear his eyes away from the near-death spirals of the Centro Properties Group.
Centro’s expansion into the US market was funded by a syndicate of US lenders. So far, so good; not only are US rates lower than in Australia, Centro is holding US assets and receiving US income, so it has created a “natural hedge” against exchange rate movements.
Late last year the largest US lender, JP Morgan, asked Centro for its money back. Your correspondent has no inside information whatsoever, but he guesses that this is credit-crunch related.
Overseas banks, far more than Australian banks, are under huge balance sheet pressure and they desperately need to turn loans into cash. From the view-point of a US lender, Centro would be a prime candidate for early exit. It is a small fish in a big pond, so it doesn’t matter if Centro gets upset. Second, it is more highly geared (albeit not wildly so) and exposed to retail, which will feel the pain of any US recession, so undoubtedly it is a little further out on the risk scale.
(Lesson for entrepreneurs; sometimes it is better to do business with suppliers to whom you are important, rather than chase the lowest price.)
Banks come and go from syndicates all the time. Why was Centro unable to find someone to step in?
There appear to be several factors at play.
First, Centro had a significant proportion of its borrowings on a short-term basis, so the amount for refinance was relatively large – large enough that the others banks had to think carefully.
Second, bankers are very cautious post the credit-crunch, and every other bank would have wondered; why does JP Morgan want out – do they know something that we don’t?
Third, there is a whisper that Centro left it very late to tell their other banks that JP Morgan wanted out. Banks hate being surprised – the only thing worse than a surprised banker is a scared banker, and some would say there is no difference between the two.
So, if all this supposition is correct, a moderately riskier customer asked its scared bankers for a relatively large amount of cash at relatively short notice – recipe for disaster anyone?
(Lessons 2, 3, 4; don’t surprise your banker, have a mix of maturity in your lending, and most importantly – albeit by analogy – understand that if you borrow as much as you can from the only lender who will lend it to you, you may find your options are very limited if things get sticky.)
Where to from here? There is so much money at risk that your correspondent would be surprised if Centro is unable to eventually negotiate a refinance. But it will be at higher cost, with very tight controls, and Centro will probably have to sell some properties earlier than it would like.
If a re-finance can’t be arranged then Centro shares are probably worthless, but if it succeeds then they are a bargain. Are Centro shares worth a punt?
If you are a cashed-up former entrepreneur with a specific allocation of mad-money, go ahead.
If you are a current entrepreneur – don’t be stupid. You don’t solve cash-flow problems by punting on the sharemarket.
If you are a current entrepreneur who doesn’t have cash-flow problems – well… are you sure that you are really an entrepreneur?
Ruth Nimbalker writes: Australian bankers, especially the four pillars of our society, will use every excuse or partner with corporate criminals in the franchising world to hurt the people of this nation. Mr Rudd and Mr Swan stop them; their CEs and partners don’t need to earn millions in bonuses on the blood and sweat of the people of this nation. Mr Rudd we need you to keep your promise to protect the people of this land, so stop the bankers and the franchising world from destroying your people.
Mr Banker replies: Your comments suggest that you have had a very difficult personal experience, and for that you have my sympathy – but not my agreement.
I work with many bankers who are dim or lazy or greedy, but I don’t know any that I would regard as dishonest – although I am sure that they exist in the same proportion that they do in general society.
I have always thought of the franchising model as a highly effective employee management system. McDonald’s appears to be a notable exception; I am sure there are others, but for the life of me I can’t understand why someone would pay money to buy a job.
I think it is disgraceful that the Government has not provided an effective framework to protect punters from unscrupulous operators, but I can’t see why you would criticise banks for lending money to people to buy a job. It may not be the smartest thing to do with money, but there are certainly worse alternatives.
We allow people to borrow to buy big screen TVs they don’t need and planet-destroying 4WDs. We don’t stop them tipping money into poker machines. At least the franchise buyers are doing something with their money that might generate some kind of return.