How the banks are squeezing retailers and undermining Rudd’s handout: Kohler

Banks need to remember that they were the first to be bailed out and that they are now operating as arms of Government.

Last week, in fact, they issued $6.3 billion worth of government guaranteed bonds, led by the Commonwealth Bank’s $2.2 billion raising.

Today the banks will decide whether to crunch one of the nation’s biggest shopping centre owners, Centro Properties Group.

Commonwealth Bank is apparently holding out – threatening to bring the whole thing down, which would devastate Australia’s retail sector and eventually lead to a big increase in unemployment.

So just a few days after raising $2.2 billion using the Government guarantee, CBA could completely negate the Government’s efforts to stimulate the economy.

That doesn’t mean banks should simply abandon the principles of credit and stop protecting shareholder capital from borrower defaults, but they should remember where their money is coming from.

Right now it looks like the banks are forgetting this. They are squeezing shopping centre owners, who are in turn squeezing retailers who are in turn either going out of business or cutting staff – completely offsetting the impact of the Government’s $10.4 billion stimulus package.

It looks like a few phone calls from Kevin Rudd and a few ministers might be in order. The banks might not have asked for the Government guarantee, but they are very happy to use it now.

Specifically banks need to be very careful about defaulting shopping centre owners, considering valuations have fallen below covenant requirements because of changes in capitalisation rates.

The Rudd Government’s $10.4 billion stimulus was primarily aimed at supporting Australia’s retailers – it’s certainly not to support the manufacturers because the stuff in the stores is mostly imported these days.

If the bailed-out banks undercut the retailer bailout by putting the squeeze on shopping centre landlords, who then have to transfer the squeeze to retailers by putting rents up, the money will be wasted, even if it is spent.

I have heard of some landlords trying to increase rents by 40% as they try to avoid the clutches of their bankers.

Last week, Harvey Norman’s Gerry Harvey told us that he’s in dispute with a landlord in one centre who wants to put his rent up.

In fact, the rent actually needs to be reduced because Gerry Harvey is going to close the store. Harvey Norman is the anchor tenant and brings traffic to the other retailers in the centre; they will all go bust if Harvey Norman closes those stores and rents go up at the same time. All of the staff in the centre will be out of work and unemployment will rise.

And today a very tangible crisis looms for the shopping centre owners’ it’s D-day for Centro Properties Group.

Centro owns 122 shopping malls in Australia and 650 in the United States, and has been a corporate vegetable on life support for a year.

During that time the company has scrambled through many deadlines with its bankers because it is worth more alive than dead; that is, chief executive Glenn Rufrano has been effectively acting as their liquidator trying to sell assets, so far without much success.

Today is another deadline. By the close of business, banks must agree on a new plan to swap debt for hybrid equity. If they don’t agree, Centro will likely go into receivership and then liquidation, and an insolvency accountant will dump the shopping centres on the market.

All the banks have reportedly agreed except Commonwealth Bank, which is owed the most – $1.2 billion. CBA is also reported as being the holdout bank responsible for causing the potential collapse of OZ Minerals.

The liquidation of Centro will reverberate through the shopping centre industry, retailing and the Australian economy because it will further push down mall valuations as the centres are dumped on the market by the liquidator.

Landlords across the country will be in breach of their debt covenants in early 2009.

Perhaps that’s what the hard men and women at CBA have in mind – they will have the power to determine life and death in the commercial property sector next year.

If that’s what they think, or what any other bankers think, then they are behaving like suicide bombers.

Australian retailing is now very delicately poised. With 10 shopping days to go till Christmas consumer confidence kicked up 7.5% this month thanks to lower interest rate and petrol prices, but the trend remains down; the Government stimulus package is now in people’s bank accounts and they are deciding whether to spend it or not.

And even if it is mostly spent and a half-decent Christmas does provide some cash relief, the retailers then have to negotiate the first half of 2009.

If rents go up because their landlords are trying to escape the banks, there will be devastation.

Today’s Centro decision is merely the largest and most high profile of thousands of such decisions that bank credit departments are making every day about shopping centres.

They need to think carefully about the effect their commercial property book will have on their residential mortgage book.

If unemployment in the retail sector rises, then home mortgage defaults will soon follow.

This article first appeared on Business Spectator