Tax Realty Consultant

The risk of Australian property trusts defaulting on their debt rose to a record after Centro Properties Group, the owner of 700 U.S. shopping malls, said it has difficulty refinancing debt.

Credit-default swaps on Westfield Trust reached 108 basis points at 4:28 p.m. in Sydney, according to BNP Paribas SA. Contracts on Sydney-based Lend Lease Corp., which has stakes in malls in the U.S. and the U.K., rose to 128 basis points. The contracts have climbed by about 25 basis points since yesterday, which means it costs an additional $25,000 a year to protect $10 million of the companies’ bonds from default for five years.

“I expect negative headlines for the markets throughout the rest of the year or even early next year,” said Bob Sahota, who helps manage A$3 billion ($2.6 billion) of debt at Challenger Financial Services Group in Sydney, including Centro’s commercial mortgage-backed bonds. “Banks will be under more pressure.”

Australian property trusts, including Westfield and the one managed by Centro, have been stepping up expansion overseas in the past few years as more than 75 percent of investment-grade property in the country is already owned by the companies.

Melbourne-based Centro, which lost 86 percent of its market value this week, won’t rush asset sales as it struggles to renegotiate debt, Chief Executive Officer Andrew Scott said today.

Scott led the Australian company’s $9 billion expansion into the U.S., where the largest shopping center owners led by Simon Property Group are cutting profit forecasts as the economy slows. He needs to refinance A$3.9 billion of debt for Centro and the listed trust it manages by Feb. 15.

Restrict Spending

Refinancing and restructuring of the debt will likely cost Centro A$40 million. New debt refinancing will restrict plans to spend more on the U.S. malls, which were expected to generate higher earnings, Centro said.

Credit-default swaps linked to GPT Group, Australia’s fourth- largest real estate investment trust, rose 10 basis points to 115 basis points, according to Citigroup Inc. The Sydney-based company borrowed 2 billion euros ($2.9 billion) in October. The loans mature between 2008 and 2012, data compiled by Bloomberg show.

“I wouldn’t be surprised to see other small property trusts having problems refinancing their debt as well in the next couple of months, but the big names like Westfield and GPT are suffering mainly from contagion, rather than fundamental problems in their debt profile,” said Michael Bush, head of fixed-income research at National Australia Bank Ltd. “These two companies refinanced their debt earlier this year.”

Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a borrower’s ability to repay debt. Higher prices suggest that investor confidence is deteriorating.

iTraxx Index Rises

The Markit iTraxx Australia Series 8 Index rose half a basis point to 68 basis points. The index contains credit-default swaps tied to 25 borrowers including Westfield and Australia’s biggest banks. A basis point is 0.01 percentage point.

Investors demand a record risk premium of 156 basis points to hold GPT’s A$325 million notes due in 2009 rather than Australian government debt, 17 basis points higher than yesterday, according to BNP Paribas.

“We’re seeing panic selling across the sector,” said Challenger’s Sahota.

Westfield Trust is a unit of Sydney-based Westfield Group, the world’s biggest shopping center owner. At the end of June, Westfield Group’s net debt was 36 percent of its assets. Its earnings before interest, tax, depreciation and amortization was 2.6 times its interest expense, according to the company’s earnings report. Westfield is paying an average 5.25 percent interest on its debt.

Westfield Bond

The extra yield, or spread, on Westfield Group’s 5.4 percent bonds maturing in 2012 has widened to a record 218 basis points more than U.S. Treasuries, according to BNP Paribas prices. The spread has increased by 36 basis points since Dec. 14.

Westfield Group got $4.7 billion of loans in June, extending the maturities of the borrowings it took in 2004 by three years to 2011 and 2013, Bloomberg data show.

“We are advising investors to stay away from the sector altogether for the moment given how jumpy the market is, but they should watch out for any opportunity for bargain hunting on the big names in the next few months,” said Melbourne-based Bush.

Two-Day Slump

Centro extended its two-day slump on the Australian Stock Exchange, falling 41 percent to 80.5 Australian cents at the close of Sydney trading. This values the Melbourne-based company at A$680 million, compared with A$4.8 billion before the rout. Centro Retail tumbled 23 percent to 65 Australian cents, slashing its market value to A$1.5 billion from A$3.3 billion last week.

U.S. malls helped Centro increase operating profit by 14 percent to a record A$335.3 million in the 12 months ended June 30, as rents rose in the world’s biggest economy.

Since then, concern has increased that the slump in U.S. housing will curb retail sales and the construction of commercial property, hurting U.S. shopping mall owners.

http://www.bloomberg.com/apps/news?pid=20601080&sid=a3UFENDASqUs&refer=asia

Realty Property Tax Consultant

Metro Services Bid Wpg

www.realtytaxconsultant.com