How your taxes bailed out an insolvent Gunns

The federal election scheduled for September means it's a double header over the next 12 months for Tasmanian voters, with a state election due in March 2014. That means lots of Canberra visitors, lots of promises and at least a few presents, and this might be one: according to The Weekend Australian, Julia Gillard is yet to rule out assistance to get the Tamar Valley pulp mill off the ground.

Coincidentally, Gunns' voluntary administrator also recently circulated his detailed report to creditors (Gunns planned to build the original pulp mill).

The pattern of behaviour of the Gunns Group over its last 12 months suggests it was insolvent for a while. Maybe it was insolvent as far back as August 2011, when Gillard and Premier Lara Giddings signed the inter-government agreement on forestry, promising $276 million in funding -- some of which was used to save Gunns.

Unsurprisingly, the administrator has recommended liquidating the Gunns Group. A further period of administration won’t revive the patient. Even before the administrator was appointed, Gunns had disclosed that liabilities exceeded assets. But it gets worse.

Employees' benefits of $10 million will be paid, but secured creditors won’t be paid the full $636 million they are owed -- including $446 million owed to the banks. Unsecured creditors, collectively owed $135 million, will remain penniless.

Once liquidation is the chosen path, voluntary administrators often produce a perfunctory report to discharge their statutory obligation. The task of pursuing miscreant directors is one for the liquidator. In this instance the administrator has shone the torch in a few dark corners requiring closer inspection by a liquidator.

Gunns, true to form for any company trying to scrape up enough to keep the wolves at bay, managed to mix up its own funds with funds belonging to others, possibly as much as $50 million.

As responsible entity for 18 managed investment schemes, the Gunns Group receives growers’ harvest proceeds and also insurance amounts from growers that need to be remitted to the relevant insurer. The Gunns Group used these amounts as working capital.

But more significant was the use by Gunns of funds from the sale of Green Triangle land and trees. Some of the trees belonged to others and were secured by a covenant. Covenant holders have already obtained a preliminary court judgment that certain amounts belong to them and shouldn’t form part of Gunns’ kitty to be split between creditors. At this stage the list of unsecured creditors contains an amount of $39 million owing to Australian Executor Trustees, the trustees for the covenant holders.

The voluntary administrator also identified a number of voidable transactions, or payments by Gunns that might be reversible depending on the crucial date of insolvency.

Clearly Gunns was insolvent when it approached the banks in September 2012 on bended knees and asked to be able to retain a little more from asset sales and also "that a debt compromise of a material portion of their debt was required to remain viable", to quote the administrator.

Gunns was probably insolvent when it received a significant downward revaluation of plantation assets early in July 2012, making asset sales pointless and raising capital almost impossible. And it might have been insolvent in March 2012 when white knight Richard Chandler Corporation exited the data lock-up after half an hour and headed back to Singapore.

But Gunns might have been insolvent as early as September 2011, when it received $23 million of inter-government agreement cash. There was $23 million earmarked in the agreement to compensate Gunns, even though it had previously relinquished its contracts, a decision it quickly reversed when a bucket of money loomed as a possibility. The original plan was to pay Gunns $23 million provided the company agreed to pay half to state-owned Forestry Tasmania for amounts owing, as Forestry Tasmania was also insolvent.

Gunns dug its heels in, knowing it was in a good bargaining position as the IGA might fall over, and demanded the full $23 million. Funds for Forestry Tasmania had to be found from elsewhere.

Gunns needed the money pronto to make a $10 million loan repayment to banks and to start pulp mill earthworks, or else the mill permit would become null and void. It couldn't borrow or raise more equity, asset sales were slow with prices continually falling and bank loans of $340 million were repayable in a few months.

If Tom Waterhouse was running a book on the date of insolvency, August 2011 would be well in the market.

Gillard and Giddings bailed out an insolvent company. Industry policy is indeed quite accommodating. It proved to be a postponement of the inevitable.

The postponement has meant a delay in the restructure of the forest industry and a continuation of mutual mistrust, as inevitably many see the inter-government agreement as simply a front for getting the pulp mill started.

Even now the state's upper house is still deciding whether to pass the Tasmanian Forests Agreement Bill, 18 months after the first tranche of cash disappeared into a sinkhole.

The cavalier way Tasmania begs for federal funds then absolutely wastes so much without the slightest concern for due diligence is an embarrassment. Hinting that pie-in-the-sky projects are still possible when the Tasmanian forest industry has just suffered balance sheet losses in excess of $2.5 billion -- and 150,000 hectares of plantations are looking for new owners after existing owners have lost 90% -- is mischievous stupidity.

 

(Published in Crikey 5th March 2013)