Desperate times

When Gunns first entered voluntary administration 15 months ago it seemed as if the secured creditors (the banks) would get most of what they were owed. It didn’t much matter if the pulp mill permit was worthless; there was enough value in Gunns’ other assets to ensure the banks were repaid.

Creditors and shareholders wouldn’t get anything. KordaMentha the receivers in control of most of Gunns’s assets acted for the banks and didn’t care about others: growers, creditors, the people of Tasmania. Their mission was to ensure there was enough in the pool to cover their fees and to pay the banks.

But with every passing day throughout the insolvency administration period the banks’ shortfall has been increasing.

·        Bank liabilities have grown with the addition of interest,

·        insolvency practitioners don’t work to a quote, it’s a do and charge job which has been very complex involving well remunerated lawyers and consultants who are always paid first from any pool of funds,

·        asset prices kept falling

·        the complexity of the windup has meant that the most valuable assets , land and trees, have to be sold in large parcels and that limits the number of buyers.

The price achieved by selling the ex Great  Southern MIS trees to New Forests’ Forestry Investment Trust has meant that the anticipated prices for Gunns’ land and trees and Gunns’ land with MIS trees is much less than originally expected and the bank’s shortfall is much greater.

The only hope to achieve a higher price is if one buyer can be found for both the permit and Gunns’ land, some of which has Gunns’ trees, some with MIS trees.

That is where the sale process is at right now.

The voluntary administrator turned liquidator PPB Advisory has limited control over Gunns’ assets as KordaMentha control all secured assets on behalf of the banks. But PPB do control the MIS assets, the growers trees.

PPB tried securing a replacement entity to take over Gunns’ MIS schemes, but there was limited interest and then only for two of the nine MIS schemes. Growers agreed to appoint a Macquarie Bank associated entity to take over two schemes but this was blocked by the courts as it was found the proponents had misled growers.

PPB then tried selling all MIS trees to a single buyer. Of 70 interested parties identified, eight completed a due diligence process, four indicative non-binding offers were subsequently received but none ended up making an offer.

Quite an attrition rate.

The same happened with Gunns’ softwood sawmills. At least five bidders we were told including Chinese. The Bell Bay and Tarpeena sawmills were eventually sold to New Forests for $21 million plus stock, a fraction of book value.

PPB is now trying to sell MIS trees in a joint sale process with Gunns’ other assets controlled by KordaMentha.

Land and trees will be sold as one with the proceeds then split with growers in the case of MIS trees.

This leaves trees grown on land leased from third parties, whether Gunns’ outright, Gunns’ joint venture or Gunns’ MIS trees. These trees are likely to revert to the landowners, and given the rental arrears due to the landowners, the price they will offer is estimated to be somewhere between half and three-quarters of bugger all.

FEA’s asset disposal is following a similar pattern to Gunns. The recent Ferguson report identified 39,000 hectares of MIS and 10,000 hectares of joint venture trees growing on land leased from third parties in Tasmania. If ownership of all these trees reverts to the landowner there is a real risk the land will be lost to plantation forestry after the first rotation. Once bitten?

The dissipation of ownership makes it even harder for a pulp mill proponent needing resource security.

Ms Giddings as shareholder minister of FT will have received an offer from PPB to buy the MIS trees growing on 14,000 hectares of State forest and possibly also the 7,000 hectares of joint venture crops also on crown land. So she should be aware of the market value of those trees.

The indicative prices from New Forests from the sale of the ex-Great Southern MIS trees are such that once the sale price is divided between KordaMentha, PPB and growers there won’t be much for the banks.

All up Gunns’ asset disposal process has proved to be a disaster for banks.

What to do?

No-one has shown interest in the pulp mill permit because of the impending TCT court challenge.

Ms Giddings announcements to seek a legislative remedy to the pulp mill permit flaws confirms what was widely believed, that Ms Giddings failed to conduct due diligence before handing Gunns the first $23 million of IGA money in August 2011.

She comprehensively failed to satisfy herself that substantial commencement could still be achieved by getting a few bulldozers on site before the end of August.

Not only that that but Ms Giddings helped Gunns keep trading when almost certainly they were insolvent .

Ms Giddings gave Gunns more time to continue to exploit creditors which has now left many hugely out of pocket.

Labor values Ms Giddings?

The creditors’ misfortune is now spreading to the banks.

The banks found themselves in an unusual situation, for them, of being screwed, as the remainder of the assets were falling in value and proving hard to sell. The receivers urgently need a few more purported buyers to try to gee up the price.

Along comes Ms Giddings to the rescue to cater for the remote possibility that a buyer can be found for both the permit and land and trees at a premium price.

It won’t work but it’s the only chance the banks have.

It has to be a premium price. If the growers get less then courts will move to prevent the sale, opting instead for a sale where MIS grower returns are maximised. They’ve suffered enough.

A premium price is now what the banks need to get their money back.

Alas it’s all too late.

There are no longer enough trees to feed the pulp mill.

KordaMentha would have been remiss not to have written to the government to request assistance to help flog Gunns’ assets, in particular to remove doubts about the permit.

But before agreeing Ms Giddings should have at least conducted some due diligence to ascertain whether the pain was going to be worth it.

Purely from a resource security viewpoint there is no way a pulp mill proponent will consider a pulp mill because of the chronic lack of feedstock, the ownership of which is being dissipated in all directions.

What was apparent when Gunns’ first went into administration was that its plantation estate was anything but a monolithic monoculture that could simply be transferred en bloc to a purchaser, preferably a pulp mill proponent.

The only surprising things are how asset values have fallen further ,Ms Giddings’ willingness to assist banks and her eleventh hour act of desperation to appeal to the firebreak of neanderthals currently obscuring her view of reality.

Ms Giddings is living in a world of illusion. Her demise is now certain. Regardless of the election outcome she will lose her leadership.