Saturday, 10 March 2012

Nobody's buying

Nobody’s buying.

At least not Gunns’ assets.

A few are still buying CEO Greg L’Estrange’s story as described in the latest half yearly report and presentation of possibly the worst garage sale ever.

A year ago Gunns owed secured creditors $631 million. Now it’s $587 million.

Included amongst secured creditors are amounts due in respect of leases and what are termed ‘securitised loans’. The latter are still recorded as a liability for Gunns even though a third party has ‘bought’ the debt from Gunns and Gunns now simply acts as a conduit for loan repayments by immediately forwarding loan repayments to the third party.

Lease amounts are due in respect of the woodchip vessel, woodchip plant and other items such as motor vehicles.

Ignoring the lease amounts and the securitised loan amounts which reduce on an amortisation basis each time monthly payments are made, the balance of the secured loans and overdrafts to banks has actually increased over the half year.

Yes, that right. They’ve increased from $497 million to $503 million.

At 30th June 2009 the secured bank facilities were only $466 million.

The loans are proving to be a bit stubborn.

Greg labelled his ASX announcement the other day….COMPLETING THE TRANSITION. How about an alternative headline?.... BANK DEBT INCREASES DESPITE MASSIVE GARAGE SALE

Sure, only a modest increase. But the last 6 months has seen the sale of WA hardwood sawmilling assets to Brickworks for $6 million, the Triabunna mill for $10 million, a few aging Tasmanian hardwood facilities, the disposal of native forest harvesting rights to the State Government and the quite rapid run down of sawn timber inventory.

Before then there was the disposal of the hardware business, the wine and walnut assets, the pubs, native forest land, various industrial sites giving total cash from asset disposals of $180 million in the last 2 1/2 years, plus over $100 million from a reduction in inventory over the same period, plus $23 million from the native forest rights swindle, the latter incidentally included in ‘other income’.

Still not enough spare cash to reduce secured bank loans.

How come? Only a little has been spent on the mill, the rest was needed to cover operational losses and restructure costs.

The banks deserve a medal for patience. Predictably they behaved as all good entrepreneurial bankers do and really stuck it in into Gunns with an extra $30 million bank fee for extending the facilities until Xmas. That’s an extra 7% on top of the usurious rates that are charged when loans with covenant breaches need to be extended for a short period.

The long suffering shareholders have been asked to contribute extra capital to help meet the banks demands due solely to Gunns’ inability to complete major asset sales in an expeditious manner. It is likely to cost at least $50 million.

The sale process for the Green Triangle land and trees has had a gestational experience of similar duration to an African elephant. There is no sign when the sale will complete.

The Green Triangle land is still listed on the balance sheet as a current asset, an ‘asset for resale’. Other assets included here are the Victorian hardwood sawmilling assets, the MIS loan book and the Tasmanian plantation estate, both land and trees. The grand total is $885 million. These assets were reclassified as ‘assets for resale’ prior to June 2011 to offset the large level of current liabilities which had been boosted by the need to classify most loans as current because they were due within 12 months. The Directors needed to sign a solvency declaration saying it was reasonable to conclude that all debts could be paid when due, and they needed to be able to demonstrate a plan to do so. The only way was to sell assets.

Which they have failed to do thus putting them in breach of loan covenants and possibly at risk of failing the solvency test.

It must have been a frantic January at Lindsay Street as Gunns cobbled together a plan to stop the bankers pulling the pin so that life could go on for a while longer. A necessary precondition was the Directors need to sign a solvency declaration attached to the half yearly report required by the end of February.

As at 31st December 2011 the Tasmanian plantation land and trees with a book value of $605 million were still listed as an asset for resale as Gunns planned to sell the assets to a third party or ‘vend’ the assets into the pulp mill joint venture(JV). Again Gunns ran out of time and didn’t or couldn’t complete, probably both. Which is not surprising. The Tasmanian land deal is much more complicated, due to leases with MIS Growers, than the Green Triangle land and look how slow that’s been.

By the time of the analysts’ presentation this week, the Tasmanian land was no longer listed as an asset for resale. It will remain with Gunns, although the December accounts were not adjusted to reflect this change brought about, no doubt, after discussions with Richard Chandler Corporation (RCC).

It also appears certain that a JV partner will not invest in Gunns. Why would they? Even if one thought the mill was a goer most would steer well away from Gunns itself given Directors’ recent performances in failing to meet undertakings, the contingent liabilities resulting from class actions, the worrying disclosure in the notes that the Tax Office is conducting further investigations into Gunns and the uncertainties of income and expenses of MIS schemes.

If the mill proceeds it will be via another entity. Gunns’ latest presentation indicates that Gunns expects a JV partner to provide $750 million to match Gunns’ contribution of Tasmanian land and trees and pulp mill expenses to date. Sometimes with JVs each partner may retain ownership of its assets but there may be jointly owned assets as well. A JV is different from a partnership in that sense. There’s any number of permutations and combinations to suit any situation. Then with a financier providing $1.5 billion it’s up and away. That’s the latest plan.

But the numbers don’t quite add up.

Existing shareholders’ paid up capital is $921 million, say $1.09 per share on average. The share price passed through the $1.09 barrier in 2009 heading southwards, so those who bought on the market before then paid more, in some cases much more.

Current shareholders are about to be asked for an extra $132 million for what may become, at best, a 30% share of the mill deal, if the JV partner can be coaxed from the closet with his cheque book.

The White Knight RCC is being asked for $150 million for what may become a 20% share.

Meanwhile if one can believe Gunns, the JV partner is being asked for $750 million for a 50% share.

Why is the JV partner being asked to pay twice as much for his share on a pro rata basis as RCC? A partner with skills and capital to run the joint would demand a discount not pay a premium, surely?

More for JV means less for existing shareholders and less for RCC.

Screw the shareholders anymore and they won’t cough up. And without them contributing, RCC is unlikely to show anyone the colour of his money. Screw RCC anymore and he may just as likely opt to watch from the sidelines. Without RCC there’s no pulp mill.

Or maybe it’s not about the pulp mill any longer?

It’s a delicate deal, not a fait accompli. I’m sure there’ll be times during due diligence when the thought crosses RCC’s mind….just what are we doing even talking to these guys?
I also get the sense that RCC is not the sort of entity that will relish the limelight and additional burden that comes with running a listed company.

Apart from the Green Triangle assets which have a net book value of $121 million, the remaining assets for sale are sundry hardwood assets which are hoped to net $44 million and the MIS loan book with a hopeful net of $51 million. The latter are the loans still considered collectable after all the amounts lent by Gunns to Growers to enable them to invest in MIS Woodlots.

Twelve months ago the loans had a net value of $200 million. Some repayments have since been made but there are some recalcitrants out there who have defaulted, in many cases leaving Gunns with their Woodlots which in turn have to be written down on the books because they’re not yielding as well as expected. And with what loans remain, given the attendant risks, a buyer will offer less than $1 for every $1 of loan. Given Gunns’ desperation much less.

One asset not included for resale at 31st December 2011 but listed in the analyst’s presentation as an operation ‘to be discontinued’ is the Great Southern management role. The assets, mainly the present value of future commissions receivable at harvest time were purchased during the last months of John Gay’s reign for $7 million and which immediately led to the booking of $68 million of extra revenue, still have a book value of $53 million according to Gunns.

No details were provided about Gunns’ cessation as Responsible Entity of the Great Southern projects. It looks like a hurried decision in January as part of the negotiations with RCC. Which may shed some light on what RCC plans to do?

One problem with half yearly accounts is the lack of supporting notes. The appearance of a sizable non-current payable of $42 million is a warning that all may not be well with the MIS sector. In prior years a note re future expenditure commitments has always served as a scary warning of the looming cash outflows problems with MISs. They affected Great Southern, so why Gunns considered itself immune from the risks, and still be able to make money from only 5.5% of harvest commission whilst paying all expense on the way as required by the deferred payment arrangements, was never adequately explained. John Gay and Robin Gray were in charge at the time. We know about plantations was about the only reason ever advanced, not like the paper shufflers at Timbercorp and Great Southern.

It is difficult to imagine anyone paying to take over such a headache as the Great Southern projects. A more likely outcome is that one of the current co-owners of Great Southern’s land, New Forests, will move to do a deal with Growers and collapse the projects.

Interesting to note the analysts’ presentation indicated mainland woodchips will not be required for the first few years of the mill, only Tasmanian sourced plantation chips.

With the half yearly loss of $173 million, Gunns have elected to join the not-for-profits like Ta Ann Tasmania Pty Limited by not bothering to recognise in the accounts, a future income tax benefit resulting from carry forward losses. The following is a note I posted recently on TT concerning Ta An:

“Usually when companies make tax losses they record in the financial statement an asset called ‘deferred tax asset’ or ‘future tax benefit’ which recognises that future profits will not attract tax to the extent of the carry forward losses. In other words, 30% of losses are included as a future income tax benefit.”

Given the uncertainty of the mill and the unlikiehood of profit without it, Gunns has chosen not to recognise the future benefits of the losses. Not a particularly optimistic sign.

In hindsight Gunns has been very fortunate with the timing of its capital raisings.

It raised $335 million in 2008 just before the woes of Great Southern became common knowledge and a further $145 million in 2009 whilst it could still lay claim to being a timber Company. And then it discovered RCC whilst in a tumbrel en route to a meeting with its bankers.

How long can its luck last?


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