Wednesday, 11 January 2012

Trouble ahead for Gunns' MIS

What happens to MIS Growers’ plantations once the Responsible Entity supposedly looking after the tree crops runs into financial difficulties? What has felled others may also befall Gunns.

Growers’ trees are on leased land, some internally leased from entities associated with the MIS promoter, and in other cases externally leased from third parties.

In some instances rent has been prepaid, in others Growers are invoiced regularly for rent payments, and in a further category, rent is on a ‘deferred’ basis until harvest time.

The problem for Growers is to ensure that their leases are not in default, ‘cos if they are the landowner, or in the case of an MIS Company in the hands of the Receiver, the banks being the secured creditors, will simply advise the Grower he has defaulted and sorry, but your trees now belong to us and we’re going to sell them along with the land and we’re going to use the proceeds to pay out the MIS Company loan, plus interest and as many penalties as the fine print permits, plus the Receiver’s fees, so if we can get all that we’ll call it quits, and thanks for coming, but it’s not all that bad, remember you did get a tax deduction.

The matter of the interests of MIS Growers being steamrolled by Receivers acting for banks has become starkly apparent in the case of FEA. Fortunately BRIFerrier was appointed as Voluntary Administrator and now runs the Company pursuant to a Deed of Company Arrangement whilst the long term future is being assessed, either to restructure or liquidate.

Meanwhile the secured creditors, CBA and ANZ, appointed Deloittes to act as Receivers. Deloittes essentially look after the banks’ interests pursuant to the security given by FEA, basically the land in other words.

The Administrators have an obligation to look after the interests of FEA’s shareholders and creditors as well as the interests of the Growers. The Receivers act for the banks. A lot of time is being spent in Courts as the Receivers strive to kick the Growers off the land. The Administrators have done a sterling job arguing the case of the other stakeholders.

It is estimated the present value of FEA’s MIS trees are $100 million, on internally leased land, and $12.5 million on externally leased land. This is the amount the banks are trying to ‘pinch’ from Growers.

FEA’s slide towards insolvency was accompanied by fiddling with documentation, leases etc in such a way that appeared to favour the interests of the secured creditors at the expense of the unsecured, the shareholders and the Growers. A liquidator will always be interested in undue preference arrangements.

It is possible that Gunns’ bankers might be having a close look at all the documentation surrounding their security, and all the MIS assets in the light of their first hand experience with FEA, made even more complicated by the fact that Gunns also acts as Responsible Entity for the old Great Southern MIS projects.

Avoiding default on the rent arrangement is the key for Growers trying to look after their tree interests. In FEA’s case FEA is itself the owner of about 6% of woodlots established before 2003. This occurred when Growers defaulted on loans from FEA used to pay the upfront fee to join the FEA Growers’ Club. It now means that FEA being unable to pay the Administrator for rent and maintenance costs of its woodlots, if applicable, is putting the interests of the other 94% of woodlot owners at risk of a rent default. The banks aren’t chipping in, instead they’re doing everything possible to ensure the leases fall over quickly.

The same will happen with Gunns. It owns an increasing number of woodlots in its own MIS schemes. In fact the numbers are likely to be much larger than FEA, both the number of woodlots and the level of rents payable. Gunns’ woodlots were valued at $36.2 million at 30th June 2011 and the level of future non cancellable operating lease expense commitments (see Note 28 of Gunns’ Financial Statements for 2010/11) was $260 million.

FEA’s bankers via the Receivers are also playing hardball by refusing to sign, as landowners, Forest Practice Plans (FPPs) when woodlots are ready for harvest. Who will pay for the required reafforestation after clearfall? The landowner or the Grower? FEA hadn’t bothered to address the issue. It probably hadn’t envisaged its life span being less than an E Nitens, and just assumed that MIS punters would keep lining up at the gate each year with chequebooks in hand ready to pay for the next crop. The Growers’ leases terminate upon clearfall, the Administrator argues, therefore the Grower has no reafforestation obligations, and that responsibility falls to the banks, being the landowner.

When one reads of the trials and tribulations of all those still involved with the failed MIS schemes, not least of which have been the problems faced by the banks, it is easy to see why Gunns’ bankers have been pushing to reduce their exposure, even better if a White Knight JV partner can be persuaded to relieve the burden.

The poor old Growers having been conned, now have to fight off robbers to hang on to what remains of their life’s dream. They can’t do much except sit and wait and hope that the Responsible Entity is paying the rent on time and looking after their trees.

There’ll be interesting times ahead should Gunns fall over? And no doubt profitable times for the lawyers and insolvency practitioners? But it’s the bankers who will determine the timing. We’re unlikely to see an Administrator and a Receiver battling it out in court as with FEA. The banks will ensure that they remain in control.

Thus far the bankers have been much kinder towards Gunns than they were with FEA. They would have learnt a lot from the latter experience.

But at some stage, the banks’ patience will waver and they’ll ring the bell for the last lap. Greg and his boys will then have one last chance.

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