Monday, 17 November 2008

Collapse of MIS

LEONIE WOOD has written another revealing episode in The Age ( HERE ) concerning the collapse of Environinvest a MIS company which traded principally in Victoria. It’s interesting to read about the cast of characters involved in the real life drama.

1.      The company Environinvest, which owns land which it leases to investors to grow trees which it manages for those investors. Environinvest owes money to the CBA in respect of the land ($46 m) and also to other creditors etc , all up about $100m. MIS companies rely on funds from new investors to help expansion to buy more land and to pay expenses on existing managed plantations, rates, interest, plantation maintenance expenses etc. That’s how a Ponzi scheme works. When new MIS sales dry up, so does cash flow. Insolvency gradually follows. The Company is then unable to look after the investors’ Woodlots. Insolvency did ensue in the case of Environinvest and CBA appointed a Receiver to help recover its $46m.

2.     The Receiver acting for the Bank is not particularly concerned about the investors’ Woodlots. It won’t lend any more money to look after the Woodlots and hence they’ll become unviable and need to be wound up, or so the Bank says.

3.     A temporary Receiver to check to see whether the investors’ MIS Woodlots are viable or not.

4.     A liquidator appointed to wind up a subsidiary of Environinvest, which lent money to investors so they could participate in the MIS schemes. These loans were bundled up and transferred to Adelaide Bank.

5.     Adelaide Bank owed $33m by MIS investors doesn’t want to see the MIS schemes wound up because they will then struggle to get their money back from investors.

6.     The MIS investors, seduced by the company to invest in the first place, trying to salvage some value from their investment as the CBA and the Receiver try to shake them off, so they can sell the land free of the Woodlot leases.

Oh what a tangled web we weave.

It’s interesting to see how the plot is unfolding. A similar scenario might well confront Great Southern Ltd (GSL) and possibly other forestry companies.

GSL during the first 9 months of its 2008 year (it ended on 30th September 2008) suffered a large drop in profit, but more significantly, a large cash flow deficit. Also $38m of loans to MIS investors which hadn’t been transferred to other lenders were written off. Not a good sign. In fact, 2 of the preconditions that led to Environinvest’s downfall appear to confront GSL. And MIS sales will only fall further, adding to its woes.

Who’s going to lend GSL more money. The banks would be concerned about lending where land is leased to MIS investors and rental return is only 2.5% of the disappointing final yield. Look at the problems faced by Environinvest’s bankers.

Shareholders are unlikely to put in more equity as the share price has been as low as 30c in recent weeks. Remember the lack of enthusiasm for Gunns’ offer to existing retail shareholders. Also GSL doesn’t have a large institutional shareholder base as does Gunns Ltd.

There was only one solution . Transfer the trees back into GSL and issue GSL share as consideration. The 1998 and 1999 crops will be harvested soon and if 100% of the proceeds go to GSL instead of 5.5% ( 2.5% rent plus 3% admin fee), then GSL will be able to remain solvent and continue to pay rates, interest and plantation management expenses.

GSL has in fact proposed to purchase trees from 6 Projects, from 1998 to 2003.These trees cover 55,000 planted hectares. The following table summarises the areas from the 4 growing regions (GSL didn’t start planting in Tasmania until the 2004 Project).

Green Triangle
Planting area ha's
Av yield at 10yrs GM tonnes per ha

The above information is summarised from information contained in the ASX Explanatory Memoranda in particular the Concise Independent Expert Reports prepared by KPMG which valued each Woodlot Project with a view to determining how many GSL shares to issue as consideration.

Apart from the couple of paddocks planted at Bunbury, the yields have only averaged 160 tonnes per ha, 40% below estimates given to investors. Given that harvest, cartage and chipping costs are $55 to $65 per Green Metric (GM) tonne and it takes approximately 2 GM tonnes to make 1 tonne of exportable woodchips, then final net yields will only be $8,000 per ha. Under current arrangements GSL’s share of net proceeds at 5.5% will not be enough to cover payment of interest, rates and other plantation costs not to mention the other overheads of the company. Insolvency beckons unless investors agree to sell their trees and receive GSL trees as consideration.

The Independent Expert gave a strong hint of possible impending insolvency when he stated in his Report “(i)n the event that the Company were to fail there is significant uncertainty whether in the current climate and having regard to the financial obligations of the project manager and the Responsible Entity, the Project(s) would be able to continue in (their) current form without some form of additional financial contribution by Growers to the future maintenance of Project(s)” (my emphasis).That certainly reads like a warning about storm clouds on the horizon. Exactly the same as has happened to Environinvest.

But will insolvency affect Tasmania. GSL have planted part of their 2004, 2005 and 2006 Projects in Tasmania (planted in 2006,2007 and 2008). A total of 35 properties with a net planted area of 7,400 ha (total property size 14,400 ha) have succumbed to the MIS virus at this stage. If the Responsible Entity is insolvent then the condition of many of the plantations requiring maintenance will deteriorate.

GSL’s property at Temma was one of the first to be planted in 2006. Possibly because of the recent publicity given the property, the Independent Forester has just recently admitted “extensive areas of this plantation have failed and the majority of the failed areas are yet to be replanted” ( obtained via Yet he still describes the condition of the plantation as ‘patchy’. The same epithet is used to describe another 6 plantations (Barcoo, Bryar Wah, Hamilton, Musselroe, Togari, and Vinegar Hill). A further 3 plantations are described as ‘variable plantation(s) with insufficient survival’ and 8 as ‘variable plantation(s) with height limited’. Given his predisposition to making understatements, what is the true picture?

The tax subsidies that have been ‘paid’ to GSL in respect of the 7,400 ha planted from 2006 to 2008 probably only amount to $26m. But was it worth it? Did we as a community get our moneys worth? What about the 55,000 ha planted elsewhere in Australia from 1998 to 2003? They attracted tax subsidies of $220m. The yields are hopeless and GSL is trying to ward off insolvency.

Yet what are our policy makers doing?

The Forests and Forest Industry Council are looking into it with the assistance of Evan Rolley. These are the guys that helped formulate the existing policy, then didn’t see the train wreck coming, yet nevertheless are being asked to help with rehabilitation. Unbelievable.

When confronted with the problems of MISs the supporters take refuge in the claim that the most problems are cause by mismanagement. But the model is obsolete.

Where are the young Turks in the parliamentary parties (Messrs Hodgman, Rockcliff and Bartlett) who are going to lead us into the post Bacon /Lennon era? Have they too spent too much time in the forests without a hard hat?

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