THE DISTILLERY: Three fates

The Reserve Bank's March board meeting today seems to have avoided our jotters this morning, as did China's quaint way of revealing its new annual growth target for the next five years (via a fireside chat by Premier Wen Jiabao on the state run part of the internet. Bet you that wasn't blocked). Iron ore prices were reset for the June quarter yesterday and comments on the prospects for a 20 per cent rise were  absent. Instead of these usual suspects (including fourth quarter GDP data tomorrow) we had a slightly quizzical approach to the results from QBE and Goodman Fielder, some frowning over the surprise shutdown of the ASX yesterday and signs of life in the corporate mess known as Centro. Is it possible life could still be possible in that swamp?
 
The AFR reports that: "The deal to sell Centro's $US9.4 billion US portfolio that was inked in Melbourne yesterday closes a chapter on a large part of the Centro empire. Already though, the sound of soft knocking on institutional doors can be heard." The property trust from The Black Lagoon is back...
 
John Durie wrote in The Australian this morning that: "As Centro edges closer to survival, the Australian banks who sold their debt for as little as 50 cents in the dollar may be wondering what might have been. The decision to accept Blackstone's $US9.4 billion ($9.2 billion) bid is an important first step freeing another $US1 billion to pay down Australian debt. It is easy to be wise in hindsight, and ironically, the fact Australian banks sold out has arguably opened the way for a deal to be struck. Those who sold out earlier, like CBA, got the lowest price – around 50 cents in the dollar."
 
And Nabila Ahmed in The Australian got straight to the point of how will the Centro mess be finally sorted: "The key question now is how Centro Properties Group (CNP) and Centro Retail Group (CER) syndicates and wholesale funds will be brought together under the one umbrella. It will be a fight between the Moelis-advised CNP and the UBS-advised CER, with JPMorgan as the major lender – and an adviser – watching with interest. The next step is to work out how the assets will be restructured. There is no suggestion a decision is close, but one proposal, focused on CER, is to merge the remaining Centro companies and their stakes in the 112 Australian and New Zealand centres without having to raise fresh equity. The other involves CNP lenders agreeing to a debt-for-equity swap – and perhaps raising some fresh equity – to bring the assets under the CNP umbrella. This is the more ambitious – and controversial – scenario because it will mean CNP securityholders will end up getting some sort of return despite the fact the head stock is carrying negative equity value." Follow the hedge funds and watch which stock they are buying.
 
The ASX closed early yesterday, much to everybody's surprise. The Australian's Bryan Frith wasn't impressed: "For the Australian Securities Exchange (ASX) to be forced to completely shut down trading is serious enough, but for it to happen while the exchange is under a $US7.9 billion takeover offer from the Singapore Stock Exchange (SGX) is doubly embarrassing. Trading was shut down in all ASX markets, including CFDs (contracts for difference) at 2.48pm yesterday. The ASX said it was experiencing "technical difficulties" regarding trade dissemination on "partition three" securities. The problem was that confirmation messages, which are sent to confirm trades as they are booked, were not being received for many stocks. That created uncertainty as to whether booked trades had been recorded. Only one-fifth of the stocks listed on the ASX were affected, but trading couldn't be allowed to continue where uncertainty existed about many of the trades. The only solution for the ASX was to shut trading entirely."
 
Fairfax's Adele Ferguson wonders about the outlook for QBE – the country's biggest insurer – and its veteran CEO: "After 13 years at the helm of QBE Insurance, and with his 65th birthday just around the corner, the big question is whether chief executive Frank O'Halloran will stick to his guns and stay "for the foreseeable future" or consider the big "r" as the insurance game gets tougher. Following record profits, double-digit growth and fat insurance margins, the past two years have been a struggle for the company and investors, who have watched QBE's margins, overall profit and share price fall. In the past 12 months, QBE's shares have fallen 15 per cent compared with a 5 per cent rise in the overall market, and a smaller fall in its rivals, IAG and Suncorp. The problem with QBE is that it has gone from a company that used to pleasantly surprise with higher and higher insurance margins, to one with lower and lower margins and results that require more and more explanation."
 
The Australian's Richard Gluyas was much kinder to QBE and its CEO: "The QBE's chief's grim outlook for some parts of the local industry, delivered as he unveiled a well-flagged 17 per cent cut in annual profit to $US1.28 billion, echoes last week's commentary from Suncorp boss Patrick Snowball, who predicted a 10 per cent jump in premiums as a result of surging reinsurance costs. But Mr O'Halloran hosed down speculation that QBE could again have the nation's biggest general insurer, IAG, in its sights. "IAG has not been discussed at board level or internally for a while," he told The Australian. "At the right price, Australia is a good place to invest, but we can buy offshore much cheaper."
 
The Herald Sun finds a reason why the Commonwealth Bank has suddenly starting tasking on the NAB and its rivals in home lending: "New data reveals that the mortgage book of Australia's biggest home lender grew by 0.17 per cent in January – less than half the pace of all the other major banks. The data, released yesterday by the banking regulator, lays bare the reason for the CBA's combative reaction to National Australia Bank's campaign to poach mortgage customers. It shows that NAB's mortgage book grew almost 1 per cent in January – more than fivefold the growth rate chalked up by the CBA. Including figures from the CBA's cut-price subsidiary Bankwest, the group still only fattened its mortgage book by 0.25 per cent in January, to $291.6 billion."
 
More bad news for some listed health care companies like Primary. The Australian Financial Review reports that: "The Gillard government will make big cuts to pathology sector funding in the May budget with Health Minister Nicola Roxon set to outline favoured options to industry today." The AFR reports that the axe is also swinging at Macquarie Bank: "Investment bank Macquarie Group is primed to undertake a fresh wave of staff cuts from its Infrastructure Technology Services group as it battles to rein in growing costs."
 
News Ltd tabloider Terry McCrann still doesn't like the carbon tax, but he has made an interesting point on the timing: "The unexplained urgency of the rather interesting timing of Julia Gillard's carbon tax seems to have passed unremarked – in particular by the massed might of the Canberra Press Gallery. And it's the signal that we are going to have a so-called 'price on carbon' (forever) that's supposedly the really important thing, not the tax actually kicking off in any particular year, far less 2012-13. Now where have I heard that year before? Oh yes, it comes to me: it's the year that the prime minister has promised – really, really promised, to have the budget back in surplus. Surplus promise, new tax – surely there can't be a connection? It must be entirely 'coincidental'.''
 
Fairfax's Insider, Ian McIlwraith, wonders what's up with Clive Palmer: "There's no prospectus … no launch,'' said Clive Palmer when asked last night about reports from Hong Kong that his much-delayed $3 billion Resourcehouse float was back on. Palmer, who is in China but ''I am over here at the moment doing our coal project'', was less definitive when told that a Thomson Reuters report was saying that two weeks of pre-marketing to potential institutional investors begins today, with March 14 tentatively set as the start for roadshows. ''Normally pre-marketing starts after the launch,'' Palmer said. So does he have any dates pencilled in for March? ''No, I leave here tomorrow and will be back in Melbourne by the weekend to watch the football.'' Resourcehouse is registered in Hong Kong, and holds Palmer's China First coal project in Queensland."
 
John Durie wrote on The Australian's website yesterday that the prudential regulator, "has taken some gloss from recent bank results by taking a tough stance on liquidity rules this morning. The regulator's statement today put beyond any doubt that so called level-one assets under the new global liquidity standard were limited to cash, central bank reserves and high-quality sovereign reserves. This was not the language the banks were using in their recent profit round-ups. The new rules come into play in January 2015, and Australian banks have long expressed concerns that there were few bits of paper they could invest in within Australia to meet the rules without driving up prices. It seems they were buoyed by hopes of being able to invest in each other. But, come to think of it, if all the banks invested in each other's paper, that's a sure way of turning one bank failure into systemic failure, hence the logic in APRA's stance." Quite so, and it's amazing banking analysts haven't made that point more strongly.
 
Thumbs down yesterday from Adele Ferguson for troubled industrial Downer EDI: "Whichever way you cut it, Downer EDI's full-year outlook appears grim. Even if the massive $250 million provision for its Waratah Train is stripped out, the company expects underlying profit for the full year to be down 14 per cent and has not ruled out scrapping its final dividend. The negative outlook comes as the company seeks to raise $279 million from shareholders in a one-for-four renounceable equity issue at $3.25 a share, 25 per cent of issued capital, which is at a 17 per cent discount to the closing price on Friday."
 
Business Spectator's Bob Gottliebsen is counting the hours to the AXA Asia Pacific meeting tomorrow in Melbourne: "Wednesday March 2 is set to be one of the saddest days in Australian finance history. That will be the day of the AXA Asia Pacific extraordinary meeting where AXA shareholders are highly likely to agree to sell the Asian segment of their company to the French without having all the facts before them. As I understand it the board has the numbers because shareholders have backed directors recommendation. Although the deal is clearly not in the national interest I can't see Treasurer Wayne Swan rocking the boat given what's happening with the carbon tax. Yet if I was a director of AXA Asia Pacific, I would be nervous and in the next 48 hours I would seek personal legal advice because, in my view, the individual directors maybe taking a high personal risk." The AXA meeting will be the big story tomorrow and Thursday. Now where is the tick from Canberra?
 
The Australian's Tim Boreham had a bit of fun with the weak interim result from Goodman Fielder yesterday: "The investment sage who said you can't go wrong with everyday food stocks should be smothered in Meadow Lea marg, wrapped in Pampas pastry, basted in Crisco canola oil and then baked in a Wonder White industrial oven until crisp. Goodman Fielder – trans-Tasman custodian of such brands and the biggest suppliers of our daily bread – continues its habit of falling short on expectations. Having posted a 3 per cent interim profit rise to $90.3 million – 5.5 per cent if the Kiwi dollar had behaved itself – Goodman waved the white flag on its August 2010 guidance of mid high to single digit full-year growth. The company now concedes growth is likely to be flat on last year's normalised $183 million."
 
And John Durie took a swipe at the way Goodman Fielder is being governed in his column this morning: "The company is a textbook example of what happens with second-rate corporate governance. Its board is a classic old boys club from the old National Food days when Margin used to run the show and Foster's chair David Crawford was (albeit briefly) his chairman. Margin is due to step down at the end of April and as yet there is no replacement, but Max Ould figures he will be interviewing the short-list at the end of March. Ould will be familar (sic), as Margin's predecessor at National Foods was a Foster's board member and soon to be chair of its wine spin-off, Treasury Estate. The Foster's chair will be present boss Crawford. Also on the Goodman board is one Ian "Choco" Johnston, the board member turned CEO at Foster's. Now if Ould is short of a CEO, then maybe Choco can fill in for a while."