Tuesday, 5 May 2009

A triumph for absurdity

In December 2008 Tasmanian Times reported on the Race to the Bottom for MIS companies. “(They) are continuing their inexorable journeys towards a catastrophe. Not all will survive intact……..Great Southern Plantations (GSL) seems to be at the head of the peloton at this stage…….Joining GSL in the race to the bottom has been Timbercorp”.

Gunns too are selling assets to pay off debt.

What’s the current situation?

Timbercorp reached the bottom first, appointing voluntary administrators on 23rd April 2009.

Timbercorp was unable to refinance $20.5 million owing to banks. It’s still got plenty of assets, but it hasn’t been able to sell any at a price and within the time frame required to satisfy the banks. Gridlock. No alternative but to appoint a Voluntary Administrator.

Great Southern’s situation is similar to that of Timbercorp.

Great Southern has a bit of breathing space. The next lot of bank debt ($105 million) needs to be repaid in October 2009. It now owns cattle worth $200 million following recent restructuring so it should survive until then.

New MIS investments will surely only be attempted by the foolhardy. That only leaves tending the current lot of trees. And trying to collect loans owing by investors. Or selling parts of the loan book for others to collect. So desperate for cash are Great Southern that on 31st March 2009 they sold $24 million worth of loans for $9 million, 38 cents in the $.

Whilst not formally in voluntary administration Great Southern’s actions over the last 6 months have been similar, focusing on asset sales and cash flow management ahead of the next repayment demand from banks. Writing off investor loans and goodwill and reorganising the Company will lead to a loss in the first 6 months of between $120 million and $130 million. It’s a survival operation only at this stage.

One big problem with both Timbercorp and Great Southern lies with the MIS structures. Land, their most substantial operating asset, is leased to investors. The sale of land is too difficult with leases in place. This has been the experience with Environinvest, a Victorian MIS company currently in receivership where the CBA is trying to extinguish the leases so they can sell the land. The tree investors are resisting. They’re hanging on hoping for a return at harvest time.

It’s unlikely however investors will do an Oliver Twist and front up for a second helping. The MIS industry has developed an image problem that needs a little remedial action. In the short term new MIS investors may be hard to find.

The takeover of the MIS companies is equally difficult. Any takeover has the added problem that a purchaser will inherit a host of contingent liabilities in the form of class actions from aggrieved punters.

Appointing a new manager for tree plantations is not easy either. Tree investors will have to agree to a new Responsible Entity. It’s not a simple plebiscite. Every MIS project is bound by its own set of rules. Separate votes will be needed for each Project.

The big winners will be the lawyers as legal battles are bound to intensify. Shareholders will get very little. Tree investors if they are resolute may partially recoup some of their original outlay.

It’s been a tumultuous 10 years or so for the MIS industry with upwards of $1 billion pa being spent on trees from Temma to the Tiwi Islands, 30% to 40% from taxpayers and the balance from tree punters.

Set up costs including legal fees and bribes to accountants and planners accounted for 20%, tree establishment costs were 20% , ongoing maintenance costs over the tree rotation period a further 20%, ongoing fees to the paper shufflers a further 20% with the remaining 20% about to be grabbed by lawyers for winding up the mess.

A triumph for absurdity, greed and stupidity.

A notable omission from Mr McLean and Mr Kroon’s list of self evident truths (their press release dated 1st May 2009: HERE ) was the now unassailable fact that MIS schemes have not worked. Only a small proportion of MIS money, possibly only 20%, has gone towards growing trees for the benefit of timber workers, their families and communities. The rest has been wasted.

Both Mr McLean and Mr Kroon have been accessories in the development of this failed policy. The policy is a lynchpin of the mill project. When the mill is sourcing its requirements solely from plantations, the annual planting rate will be 15,000 hectares. That’s $100 million worth of MIS investments.

If Gunns has to fund these amounts internally, maybe that’s why overseas lending institutions are taking a long hard look at the project, quite apart from any social, economic or environmental doubts.

Not to mention nervousness about the management of Gunns in the past 2 to 3 years (see story on Gunns’ $50 million tax bill).

If Mr McLean and Mr Kroon are genuine in their search for truth, maybe they should start a little closer to home.


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