It was not surprising Gunns’
Voluntary Administrator recommended all companies in the Gunns group be placed
in Liquidation.
The second alternative of passing
control back to a Board was never a possibility as Gunns had already disclosed
in August 2012 that liabilities exceeded assets and as everyone knows
liabilities are rarely understated whilst the reverse is invariably true of
assets.
The third alternative of a
Deed of Company Arrangement to allow for an extended period of administration
so that all parties could achieve a better result was never a possibility
because
·
the
unsecured creditors aren’t going to get anything in an orderly administration.
·
The
best chance unsecured creditors have of getting a return is if a Liquidator can
successfully establish that Directors allowed Gunns to trade whilst insolvent.
·
Grower/investors
need a new Responsible Entity (RE) for their MIS projects if they are to
continue until harvest and this can occur even if a Liquidator is appointed.
·
If a
replacement RE cannot be found for the MIS projects then the growers will vote
to liquidate the schemes at the same time as companies in the Gunns Group are
liquidated.
·
Grower/
investors hopes for a return may be boosted if breaches by Gunns Plantations of
its RE duties can be upheld.
·
The
banks’ returns are likely to diminish with every passing day so they just want
to get on with the liquidation. Gunns has well and truly tested their patience
and forbearance over a considerable period of time.
·
The
banks as secured creditors will claw back some amounts from MIS growers if and
when the schemes are liquidated for amounts owing to the RE.
·
The Gunns
Group structure has been made incredibly complicated with the overlaying of
49,000 MIS growers each with a leasehold interest in land owned in some cases
by Gunns and in other instances by third parties. Even if there was a will to
keep the structure under Administration there is not the money.
The Voluntary Administrator’s
(VA) report prepared for the second meeting of Gunns’ creditors contained little
new information on the financial health of the Group and the reasons for its
demise.
In that respect the report
was a little perfunctory, merely discharging the VA’s statutory responsibilities
to report to creditors.
There were however a few bits
of information that were new to Gunns’ watchers as the company bumbled its way
towards insolvency.
The VA is often fairly non
committal about possible breaches by Directors, first because he doesn’t always
have the funds to investigate, and second it’s the Liquidator’s job to do a
full examination and take the necessary action.
In this instance however the
VA was a little more forthcoming about the performances of Directors and
auditors.
Gunns were told as early as
2010 that potential pulp mill investors were concerned about
·
The
level of debt and liquidity of Gunns
·
Complex
and diverse structure
·
Various
litigation matters
Gunns recognised in June 2010
the significant cash flow drain caused by Gunns’ MIS schemes (NB this was only
6 months after it had burdened itself with nine Great Southern schemes as well,
so work that out?).
The VA report said “the costs
of operating the GPL Schemes were deemed high and the timing and magnitude of
tree crop sales was uncertain”.
That didn’t stop Gunns from
booking a $70 million profit from expected future harvest commissions when it
took over the Great Southern schemes.
The report went on to say “it
would be in stakeholders’ interest to wind up the GPL schemes.....the process
of buying out GPL Growers had significant execution risk as there was a high
probability of resistance by Growers especially given the significant decrease
in buyback value compared to the forecast values in the respective PDSs ........it
is uncertain whether the Gunns Group would have been successful in buying out
GPL Scheme Growers and relieving itself of GPL Schemes’ obligations.”
Fancy that.
Any donkey who followed Great
Southern’s botched attempt via Project Transform in 2008 knew the pitfalls to
buying back trees from Growers.
One can get away with
misleading investors in Product Disclosure Documents PDSs for a while but the
chickens come home to roost at some stage and these days are often accompanied
by a class action lawyer.
So how was the tree buyback
ever going to work?
The buyback was continually
extended until May 2012 when it was decided to sell the entire Tasmanian
plantation estate including trees on freehold and leasehold land, both Gunns’
trees and Growers’ trees.
Great idea fellas. If a
simple buyback of Growers’ trees was too hard how was the sale of all land and
trees going to work?
The valuer reported back on 3rd
July 2012 that values had just fallen through the floor. The sale proceeds
would not be enough to stay out of gaol. Gunns told the market on 6th
August that it would have to write down its assets, the pulp mill was no longer
a goer and the cooperation of its bankers was needed to survive.
After 2 years of stuffing
about Gunns failed to tidy up its Tasmanian plantation estate and the
associated MIS mess.
Retaining MISs scared
investors and selling them was difficult.
It didn’t make much sense in
any event, seeing as the Tasmanian plantation estate was always listed as
Gunns’ equity contribution to any pulp mill project.
By the time the sale became
the preferred option the value had evaporated. It was poor strategic planning.
Listing an asset for sale is
one thing; whether there are reasonable grounds for believing it can ever be
sold for the price needed is a separate issue entirely.
Hence more capital from
shareholders was needed.
Richard Chandler came and
went in a month. That was going to raise $280 million.
Gunns then tried to raise
$450 million, enough to satisfy the banks, from its institutional investors and
were told.......... you’re dreaming.
Maybe a reduced raising of
$200 million?
Some support had been
received and Gunns was talking to the banks. In September Gunns suggested to
the banks “that a debt compromise of a material portion of their debt was
required to remain viable”. This presumably means the banks were requested to
take a haircut, at the time there was a report of a $200 million haircut
request.
The banks refused and the VA
was summoned.
For nine months the capital
raising attempts got nowhere. Asking someone for a contribution is one thing
but whether there were reasonable grounds for believing it was ever going to
eventuate is another matter entirely.
The disposal of non core
assets and consequent debt reduction was also painfully slow.
The Directors always
maintained that with asset sales, further capital and the cooperation of
bankers it was always reasonable to assume that Gunns could pay its debts as
and when they fell due.
The VA has now questioned
this belief.
Quite clearly Gunns was
insolvent when the banks refused its requests in September.
What about on 3rd July when the valuer told
Gunns the value of its Tasmanian plantation estate had largely disappeared,
meaning the likelihood of sufficient funds from asset sales had also
disappeared ?
Maybe when Richard Chandler
walked out early in March and Gunns soon discovered further capital raising
would be difficult?
What about in January 2012
had the Directors revalued all assets for the Mid years instead of its practice
of waiting for June to revalue. Had the values been lower the banks might not
have agreed to roll over loans at the end of January 2012?
Or had Ms Giddings failed to
give Gunns $23.5 million of IGA funds in August 2011 to enable the sham
commencement of earthworks at Longreach, insolvency may have occurred in
September 2011.
The VA has drawn attention to
Gunns’ practice of only fiddling with asset values for the Mid Year accounts,
with the approval of the auditor who reviewed the accounts as distinct from
auditing the figures.
Most of the major
revaluations for 2010, 2011 and 2012 occurred in the second half of the year. The
valuations always involved an element of subjectivity because the principal
assets were items like loans owing (some from disgruntled investors), future
harvest commissions, trees, plantation land,
and old assets in a declining industry with few willing buyers with any
money.
The VA said ”given the
quantum of these writedowns (particularly during FY12), if they had been
brought forward this may have impacted on the level of support the Lenders were
willing to provide to the Gunns Group and potentially resulted in earlier
solvency issues......... given the significant quantum of the impairment
charges and the high degree of variation between the writedowns/impairments
identified in the half year review accounts as compared to the charges
recognised in the end of year financial statements, we recommend that a
liquidator ( if appointed) investigate in more detail the figures and estimates
used to value Gunns’ Group assets as well as potential breaches by the auditor
of Australian Auditing Standards.”
Maybe some nervous times
ahead for the auditors?
The value of many of Gunns’
assets (viz its own trees, future harvest commissions from MIS crops and
plantation land) critically depend on tree growth rates, so it will be
interesting to see what these rates are (if the Liquidator ever says) which
will not only (possibly) affect the value of assets and indirectly the solvency
date but also the extent of damages against Gunns by Growers for losses
resulting from the over ambitious projections contained in offers to investors.
Secured creditors ($636
million including banks of $446 million) are unlikely to be paid in full,
employees should get their $10 million but the unsecured guys ($135 million)
are unlikely to get anything except:
·
There
is an unsecured amount of $39 million owing to Australian Executor Trustees.
Elsewhere in the report the VA stated that $34 million was owing to Australian
Executor Trustee Limited on behalf of certain covenant holders. This may relate
to trees owned by investors and grown on ex Auspine land in the Green Triangle.
Gunns disposed of land and trees and part of the proceeds belonged to the tree
owners (the covenant holders). Gunns used the money for working capital. The
Trustees have secured a preliminary Court determination that the moneys doesn’t
form part of Gunns’ property. Sounds a bit like theft by another name.
·
$22
million is also listed as being owed to ex Great Southern MIS schemes. Again
this sounds like moneys received in trust for MIS growers. The Report talks about
up to $11 million received that may belong to Growers. The discrepancy with the
$22 million figure is not explained.
·
Growers
also paid $1.2 million in tree insurance premiums to Gunns which it failed to
forward to the insurance company. Fraud is being alleged by Growers.
Other breaches of RE duties
including agreements and dealings between Gunns and the RE, Gunns Plantations,
will be investigated, as well as fending off the class action claims by Growers,
already in train, involving deceptive and misleading conduct, failure to comply
with disclosure obligations, in fact the whole book of torts and misdemeanours
by Directors.
In addition the class action
against Gunns for lack of market disclosure at the time John Gay offloaded a
swag of shares before the release of the disastrous Mid Year report in February
2010 is continuing, as is the ASIC action against Mr Gay for insider trading.
What is most surprising is
not that Gunns ended up round the S bend, or that the shortfall at the end was
greater than previously disclosed, or even that they did some dodgy stuff
towards the end just to survive.
It’s that Gunns lasted as
long as it did.
It’s not that Directors
didn’t see it coming. Mr Gay had an inkling and managed to get his own personal
house in order in December 2009.
But as for Gunns itself the
restructure plan was forever changing and poorly executed.
Assets were listed for sale
in one set of accounts. Next time they would reappear back on the balance
sheet. The strategy was forever changing.
The perception and the
reality of Gunns’ significant land assets being enmeshed in a complicated web
of legal interests via MIS which caused investors to shy away, was not
addressed. For 2 years Gunns stuffed about until the plummeting values meant a
restructure was pointless.
Plan B was capital raising which
it stuffed up as well. It was made more
difficult as it relied on favourable asset sales and tidying up the MIS mess,.
The whole charade was
unbelievable.
Operating cash flows were
boosted by a run down in inventory following the Auspine and ITC Timber
purchases and by the treatment of some MIS securitised loan receipts as
operating amounts.
For the last 3 years there
were underlying cash deficits from all operations.
Gunns didn’t exit native
forests for noble reasons, to search for a social license as is popularly
assumed by commentators and others writing a social history of Gunns, Tasmania
and other tipping points.
Gunns exited native forests
because it was unprofitable, the future looked grim and its crappy old assets
were in a bad state of disrepair.
The ostensible search for a
social license is Goebbels gobbledegook.
Gunns exited native forests purely
to survive, to rationalise assets and maintain a going concern and at the very
least avoid trading whilst insolvent.
How a company like Gunns’
expected to attract a partner to build and operate a large state of the art
international processing facility when one closely examines Directors’
performances over the last 3 or 4 years is indeed mind boggling?
Without a sale of native
forest and other non core non productive assets and Ms Giddings’ benevolent
gesture of a $23.5 million handout, Gunns’ lurch into insolvency would have
occurred sooner.
With hindsight it was only a
postponement of the inevitable.
And your odds on a successful prosecution of the guilty in the Tasmanian jurisdiction, John?
ReplyDeleteAh, but will it be in the Tasmanian jurisdiction? This criminality looks like it will cover ALL jurisdictions & even drag some politicians in to court. Oh to be a lwayer...
ReplyDeleteI think it was the CEO of Scandinavian Airlines who famously said, when shown a hanger filled with aeroplanes and told that these were SAS asssets, "These aren't assets...they're liabilities until we have customers who wish to pay to use them"
ReplyDeleteGunns plantations were never assets, they were costs (thinning, pruning, harvesting, making safe from fires etc) that couldn't be recouped unless Gunns also had access to a processing facility, and even that wouldn't make money unless a whole set of other conditions were true.
Mr Gay has been described as Australia's most inarticulate CEO. Just listening to him and his various 'directors', coupled with the senior management of the various Tasmanian forestry interests, would tell any competent analyst that they had no idea how to produce value in an industry.
It's time this tedious and unenlightening period was behind us.
Well done John.
Really nice post. Appreciated. Also have a look on http://www.atlantaliquidation.com
ReplyDeleteObviously it’s great that Gunns’ allow all companies to be placed in liquidation. We are thankful to Gunns and also thanks for John Lawrence for this post as I never knew all these information about Gunns before.
ReplyDeleteliquidation pallets
his article was awesome!! Thank you. It is absolutely necessary for a person to have sufficient amount of control over his financial condition.
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