RBF: A hard road ahead

All super funds have made bad investments.

RBF is certainly no exception.

The Hobart Airport investment via Tasmanian Gateway Consortium (TGC) was a classic example, predicated on the assumption that the good times would last forever as per Macquarie Bank’s crystal ball.

Macquarie came to town as part of Operation Stealing Candy from a Baby HERE  and sweet talked RBF into parting with $100 million for a non controlling minority interest in an airport at nearly twice the going rate at 27 times earnings, which necessitated a high degree of leverage to achieve the required return, which in turn led to the fixing of interest rates, ostensibly to placate nervous financiers but realistically designed to lock in returns for lenders, which together with a management fee which approximated 15% of earnings for a bit of paper shuffling and a couple of long lunches with bankers, ended up removing all the investors’ gains.

RBF should have been extracting steady rents from the deal. It was in a good position as a cashed up fund with implicit State Government backing.

Instead it became the perfect partner for the financiers and deal makers as the latter locked in their returns ahead of RBF who ended up with an empty promise of blue sky.

Had RBF been unwilling, it would have been daylight robbery.

But there was worse.

Hobart Airport in trouble?

The Hobart airport owner/operator, the Tasmanian Gateway consortium (TGC) half owned by RBF, the Tasmanian government superannuation fund, is in serious trouble.

Going concern issues were raised in the latest financial statements lodged with ASIC in October 2012.

RBF’s Annual Report tabled in Parliament late in October gave no hint of trouble but the Auditor General let the cat out of bag with his report to Parliament tabled late in November.

MIS Barking up the wrong tree

It was the disappearance of almost the entire farming community of Preolenna, just a few kms away from home as the crow flies that first sounded the alarm.

In just a few short years at the turn of the century all the working dairy and potato farms were replaced with a carpet of hardwood plantations.

In earlier times planting the odd block to trees by landowners simply as another crop. was accepted as part of the fabric of farming in North West Tasmania.

Suddenly the landscape changed. Who were the invaders? Where did they get their money?

It would be brave to say no

Of small comfort in the crazy world of Tasmanian forest politics is that Lewis Carroll would have felt right at home.

“But I don’t want to go among mad people,” Alice remarked. “Oh, you can’t help that,” said the Cat, “we’re all mad here. I’m mad. You’re mad.” “How do you know I’m mad?” said Alice. “You must be,” said the Cat, “or you wouldn’t have come here.”

Finally we have a Tasmanian forest peace deal and a bill to go before state Parliament next week. The treaty of Versailles didn’t take 30 months, unlike this forests agreement. So what’s in it—and what will it mean for the flailing industry?

FT's wilful deception

It’s rare to find oneself in agreement with Minister Bryan Green as occurred the other day when referring to FT he said “the unprecedented challenges facing Forestry Tasmania have been underlined by its financial result….. further substantial losses had been predicted for Forestry Tasmania….. the reality is that in these circumstances Forestry Tasmania is not financially sustainable in its current form…”

That’s a pretty unequivocal statement, little room for doubt there, although a little understated as you’d expect from the responsible Minister.

FT is completely and utterly insolvent and only trading with assurances of Government support, without which Directors would have been unable sign the solvency declaration that it could pay debts as and when they fall due.

It’s been an awe inspiring gold medal winning performance.

FT is fortunate euthanasia is yet to be legalised.

The commentary accompanying FT Annual Report didn’t exactly assist with understanding how FT works from a financial perspective. Nor have any of the numerous combatative media releases over the years assisted readers in any way to understand FT’s business.

Trying to make sense of what has happened rather than accepting silence, inaction and apologia from Government and the gobbledegook from FT is the first challenge.

Let’s start from the beginning.

Gunns the morning after

It will probably be 6 months before Gunns’ Voluntary Administrator (VA) presents his full report to creditors (the Second Report) which will reveal once and for all the mess that has been created. At that time there will be a recommendation to ...

• Hand the company back to Directors (unlikely),or

• Enter into a DOCA (Deed of Company Arrangement) where stakeholders agree to haircuts to keep the Group going. This is unlikely due to the complexity of the Group, or

• Liquidate the Group (most likely)

Electricity.... a perspective

 

Restructuring electricity companies

The discussion about power prices and the restructure of the State’s electricity sector often neglects the crucial role of the sector as a fiscal contributor to the overall State sector.

The affairs of the parent company, aka the General Government (GG), are usually discussed separately to the affairs of its subsidiaries, the wholly owned GBEs and State Owned Companies (SOCs) which together comprise the Total State sector.

The survival of any entity is inextricably linked to its net operating cash flow, in other words the cash revenue less the cash operating cash outlays.

The GG’s net operating cash flow for this year 2012/13 is expected to be $154 million. If one disregards capital grants the net operating cash flow for GG is only $45 million.

Included in GG’s operating cash is $233 million of dividends and income tax equivalents from the GBE/SOCs and also $34 million in guarantee fees, also paid as a consequence of the competitive neutrality requirements of national competition policy. Almost all these payments are from the three electricity companies for they are the only profitable ones (apart from MAIB) and their borrowings comprise 89% of all GBE/SOC borrowings upon which guarantee fees are based.

Without these payments from GBE/SOCs the GG’s net operating cash flow would be a negative $222 million. This is after payments for unfunded super liabilities but before capital and infrastructure payments, the latter this year budgeted to be $524 million, of which some, but certainly not all, will come from capital grants of $109 million, asset sales of $40 million and unspent capital grants from prior years.

GBE/SOC contributions are pretty important for GG.

The second coming is more likely

Is Gunns likely to be a takeover target?

Highly unlikely. A takeover implies assuming all the contingent liabilities as well, the ATO debts, class actions liabilities etc. A buyer would need to be extremely desperate or badly advised to venture into that spider’s web.
 

If desperate buying assets and leaving the liabilities behind may be preferable.

Joining the dots

‘Twas the announcement by Gunns on 1st July that further write-downs of its forestry assets were needed in the current environment that has shed a little more light on the problems confronting the Tasmanian forest industry.

The announcement gives a little more context to the going concern deliberations currently occupying the minds of both Gunns’ and FT’s Directors.

Tasmania's decisions

Matthew Denholm’s short opinion piece in the latest Weekend Australian on Tasmania titled ‘Governance, the economy and culture need a total overhaul’, was a welcome addition to the discussion about our future.

It was a short piece so it would be unfair to criticise the lack of supporting arguments but there were three points which warrant a comment.

Plagiarism and the grand hoax

 

I can’t recall such a high reading.

Mr Hodgman’s Fiscal Strategy for the Future appended to his Roadmap to Recovery and Growth when subjected to a plagiarism check almost resulted in system failure, worse than Geiger counters at Fukushima.

Mr Hodgman’s colleague Mr Groom lavished praise on his leader, saying it ”has been described as the most comprehensive response to the budget in Tasmanian history”.

The most comprehensive cut and paste in Tasmanian history perhaps?

Where to tasmania?

Two months ago the problems facing the State Government were outlined with a detailed examination of cash inflows and outflows in the General Government Sector over a 9 year period including the then Forward Estimates: State of the State: What your mother didn’t tell you, graph by graph.

This note proposes to update the information as a result of last week’s Budget, to see what effects if any may ensue.

Wilful blindness and the new forest industry

Just what is happening with Gunns?

On 15^th May 2012 it requested ASX extend its listing suspension pending recapitalisation which it anticipated might take an indefinite period.

Gunns advised that

·        The Victorian Heyfield timber mill sale agreement was finally executed. The enterprise value was reported at $28 million.

·        The sale will end native forest operations for Gunns in Victoria following similar moves in WA and announced intentions in Tasmania.

·        The sale of Green Triangle assets was proceeding (as it has for the last 12 months)

·        Indicative offers had been received for the mainland plantation assets (in other words the Great Southern MIS management rights) and the Portland woodchip facility and a structured sale process had commenced.

·        Mr L’Estrange had his term extended until 31^st December 2012.

Feathering nests or furthering tassie....?

Not everyone it seems is fully aware of the scale of funds flowing into Federal Hotel’s coffers each year from gambling. It’s all publicly available information, from the Tasmanian Gaming Commission Reports and ASIC returns lodged by Federal Hotels’ parent company Mulawa Holdings Pty Limited.

For the year 2010/11, player losses for table gambling, keno and poker machines (EGMs), the 3 leisure pursuits covered by FH’s monopoly license started to flatten out a wee bit, $256.9 million compared with $253.2 million in the previous year. Pubs and clubs (excluding those owned by FH) ended up with $16.3 million (6%) from commissions net of EGM machine hire and promotion fees, the Government $59.5 million (23%) in taxes and license fees whilst the balance of $181.1 million (70%) landed in FH’s lap.

Forestry Tasmania's shrinking estate

Forestry Tasmania is not as bad as Geoff Law suggests in a recent posting Forestry Tasmania: A compelling case for reform: HERE.

It’s far worse.

The sale of Taswood Growers’ 46,000 hectare softwood plantation estate of which FT was a 50% joint venture (JV) partner was just another indecent hasty grab for cash, much like the TOTE sale.

Whilst we still own the land we will get no rental return for the next 57 years.

Dream on...

Just when you thought the croupier had gone home, Morningstar analyst Peter Warnes was reported in yesterday’s press as saying ... “This is the last throw of the dice.”

He was referring to Gunns’ plan to raise another $400 million from shareholders. Business Spectator said “the funds would be used to help the company cope with the planned sale of non-core assets”. What does that mean? Are the non-core assets being sold? Or will Gunns be required to pay ‘purchasers’ to take the assets off its hands?

The sale of assets has proved to be tortuously difficult for Gunns.

The sale of Green Triangle land has been awaiting settlement for ages. The latest announcement re the Green Triangle land was only about shuffling the asset into another entity, not reaping any cash from a third party.

State of the state

 

Tasmania — A Cash Flow Analysis Based on a Working Paper commissioned by Ruth Forrest MLC and a presentation to the Economics Society, Hobart, 22nd March 2012.

The aim of this paper is an assessment of Tasmania’s past, current and forecast financial position, over a 9 year period, from 2006/07 to 2014/15. In particular this will include a close look at the General Government Sector’s (GGS) Cash Flow Statements to

• Reclassify inflows and outflows into more appropriate categories of ‘operating’, ‘investing’ and ‘financing’ as will allow an easier interpretation of Government financial statements.

• Examine the components of each category of inflow and outflow.

• Examine the source of inflows as Federal vs State sourced revenue.

• Provide a basis for understanding and measuring sustainability.

Nobody's buying

Nobody’s buying.

At least not Gunns’ assets.

A few are still buying CEO Greg L’Estrange’s story as described in the latest half yearly report and presentation of possibly the worst garage sale ever.

A year ago Gunns owed secured creditors $631 million. Now it’s $587 million.

The staggering State

 

Following the Bartlett tsunami the Premier has managed to point the State in roughly the right direction from a budgetary aspect although she is still being sparing with her analysis of our predicament if the media release (here) which accompanied the release of the State’s Mid Year Financial Report MYFR is any guide.

The Premier is struggling to send a positive message when she reverts to the old line that “the Report showed the Government remained on track to avoid going into net debt”.

Most readers would draw the fairly obvious conclusion that we are net debt free.

But nothing could be further from the truth.

In a week when forest protesters were severely chastised for their lack of truth one may have expected the Premier to choose her words more carefully.

Ta Ann as saviour

Malaysian owned Ta Ann was lured to Tasmania with grants and assistance ostensibly to add more value to native hardwood timber than the woodchipping option.

 

The company now finds itself at the centre of heated public discussion about the possible over cutting of native forests. Environmental groups have take action to disrupt market to bring pressure to bear upon Ta Ann.

 

Your correspondent Wishy asks: “what evidence do the MLC’s or any other Ta Ann supporters have that NGO information campaigns are actually what has impacted Ta Ann’s profitability and led to the shut down of capacity? Has anyone looked at Ta Ann’s financials in this regard? Are they available for scrutiny?”

Last roll of the dice

The capital raising proposal soon to be presented to shareholders represents Plan X for Gunns Limited.

If the previous plans including closures, layoffs, looting IGA funds and asset sales had worked there would have been no need for Plan X.

But they didn’t.

Trouble ahead for Gunns' MIS

What happens to MIS Growers’ plantations once the Responsible Entity supposedly looking after the tree crops runs into financial difficulties? What has felled others may also befall Gunns.