Wednesday, 27 February 2013

Gunns lurches into liquidation

It was not surprising Gunns’ Voluntary Administrator recommended all companies in the Gunns group be placed in Liquidation.

The second alternative of passing control back to a Board was never a possibility as Gunns had already disclosed in August 2012 that liabilities exceeded assets and as everyone knows liabilities are rarely understated whilst the reverse is invariably true of assets.

The third alternative of a Deed of Company Arrangement to allow for an extended period of administration so that all parties could achieve a better result was never a possibility because

·        the unsecured creditors aren’t going to get anything  in an orderly administration.

·        The best chance unsecured creditors have of getting a return is if a Liquidator can successfully establish that Directors allowed Gunns to trade whilst insolvent.

·        Grower/investors need a new Responsible Entity (RE) for their MIS projects if they are to continue until harvest and this can occur even if a Liquidator is appointed.

·        If a replacement RE cannot be found for the MIS projects then the growers will vote to liquidate the schemes at the same time as companies in the Gunns Group are liquidated.

·        Grower/ investors hopes for a return may be boosted if breaches by Gunns Plantations of its RE duties can be upheld.

·        The banks’ returns are likely to diminish with every passing day so they just want to get on with the liquidation. Gunns has well and truly tested their patience and forbearance over a considerable period of time.

·        The banks as secured creditors will claw back some amounts from MIS growers if and when the schemes are liquidated for amounts owing to the RE.

·        The Gunns Group structure has been made incredibly complicated with the overlaying of 49,000 MIS growers each with a leasehold interest in land owned in some cases by Gunns and in other instances by third parties. Even if there was a will to keep the structure under Administration there is not the money.

The Voluntary Administrator’s (VA) report prepared for the second meeting of Gunns’ creditors contained little new information on the financial health of the Group and the reasons for its demise.

In that respect the report was a little perfunctory, merely discharging the VA’s statutory responsibilities to report to creditors.

There were however a few bits of information that were new to Gunns’ watchers as the company bumbled its way towards insolvency.

The VA is often fairly non committal about possible breaches by Directors, first because he doesn’t always have the funds to investigate, and second it’s the Liquidator’s job to do a full examination and take the necessary action.

In this instance however the VA was a little more forthcoming about the performances of Directors and auditors.

Gunns were told as early as 2010 that potential pulp mill investors were concerned about

·        The level of debt and liquidity of Gunns

·        Complex and diverse structure

·        Various litigation matters

Gunns recognised in June 2010 the significant cash flow drain caused by Gunns’ MIS schemes (NB this was only 6 months after it had burdened itself with nine Great Southern schemes as well, so work that out?).

The VA report said “the costs of operating the GPL Schemes were deemed high and the timing and magnitude of tree crop sales was uncertain”.

That didn’t stop Gunns from booking a $70 million profit from expected future harvest commissions when it took over the Great Southern schemes.

The report went on to say “it would be in stakeholders’ interest to wind up the GPL schemes.....the process of buying out GPL Growers had significant execution risk as there was a high probability of resistance by Growers especially given the significant decrease in buyback value compared to the forecast values in the respective PDSs is uncertain whether the Gunns Group would have been successful in buying out GPL Scheme Growers and relieving itself of GPL Schemes’ obligations.”

Fancy that.

Any donkey who followed Great Southern’s botched attempt via Project Transform in 2008 knew the pitfalls to buying back trees from Growers.

One can get away with misleading investors in Product Disclosure Documents PDSs for a while but the chickens come home to roost at some stage and these days are often accompanied by a class action lawyer.

So how was the tree buyback ever going to work?

The buyback was continually extended until May 2012 when it was decided to sell the entire Tasmanian plantation estate including trees on freehold and leasehold land, both Gunns’ trees and Growers’ trees.

Great idea fellas. If a simple buyback of Growers’ trees was too hard how was the sale of all land and trees going to work?

The valuer reported back on 3rd July 2012 that values had just fallen through the floor. The sale proceeds would not be enough to stay out of gaol. Gunns told the market on 6th August that it would have to write down its assets, the pulp mill was no longer a goer and the cooperation of its bankers was needed to survive.

After 2 years of stuffing about Gunns failed to tidy up its Tasmanian plantation estate and the associated MIS mess.

Retaining MISs scared investors and selling them was difficult.

It didn’t make much sense in any event, seeing as the Tasmanian plantation estate was always listed as Gunns’ equity contribution to any pulp mill project.

By the time the sale became the preferred option the value had evaporated. It was poor strategic planning.

Listing an asset for sale is one thing; whether there are reasonable grounds for believing it can ever be sold for the price needed is a separate issue entirely.

Hence more capital from shareholders was needed.

Richard Chandler came and went in a month. That was going to raise $280 million.

Gunns then tried to raise $450 million, enough to satisfy the banks, from its institutional investors and were told.......... you’re dreaming.

Maybe a reduced raising of $200 million?

Some support had been received and Gunns was talking to the banks. In September Gunns suggested to the banks “that a debt compromise of a material portion of their debt was required to remain viable”. This presumably means the banks were requested to take a haircut, at the time there was a report of a $200 million haircut request.

The banks refused and the VA was summoned.

For nine months the capital raising attempts got nowhere. Asking someone for a contribution is one thing but whether there were reasonable grounds for believing it was ever going to eventuate is another matter entirely.

The disposal of non core assets and consequent debt reduction was also painfully slow.

The Directors always maintained that with asset sales, further capital and the cooperation of bankers it was always reasonable to assume that Gunns could pay its debts as and when they fell due.

The VA has now questioned this belief.

Quite clearly Gunns was insolvent when the banks refused its requests in September.

What about  on 3rd July when the valuer told Gunns the value of its Tasmanian plantation estate had largely disappeared, meaning the likelihood of sufficient funds from asset sales had also disappeared ?

Maybe when Richard Chandler walked out early in March and Gunns soon discovered further capital raising would be difficult?

What about in January 2012 had the Directors revalued all assets for the Mid years instead of its practice of waiting for June to revalue. Had the values been lower the banks might not have agreed to roll over loans at the end of January 2012?

Or had Ms Giddings failed to give Gunns $23.5 million of IGA funds in August 2011 to enable the sham commencement of earthworks at Longreach, insolvency may have occurred in September 2011.

The VA has drawn attention to Gunns’ practice of only fiddling with asset values for the Mid Year accounts, with the approval of the auditor who reviewed the accounts as distinct from auditing the figures.

Most of the major revaluations for 2010, 2011 and 2012 occurred in the second half of the year. The valuations always involved an element of subjectivity because the principal assets were items like loans owing (some from disgruntled investors), future harvest commissions, trees, plantation land,  and old assets in a declining industry with few willing buyers with any money.

The VA said ”given the quantum of these writedowns (particularly during FY12), if they had been brought forward this may have impacted on the level of support the Lenders were willing to provide to the Gunns Group and potentially resulted in earlier solvency issues......... given the significant quantum of the impairment charges and the high degree of variation between the writedowns/impairments identified in the half year review accounts as compared to the charges recognised in the end of year financial statements, we recommend that a liquidator ( if appointed) investigate in more detail the figures and estimates used to value Gunns’ Group assets as well as potential breaches by the auditor of Australian Auditing Standards.”

Maybe some nervous times ahead for the auditors?

The value of many of Gunns’ assets (viz its own trees, future harvest commissions from MIS crops and plantation land) critically depend on tree growth rates, so it will be interesting to see what these rates are (if the Liquidator ever says) which will not only (possibly) affect the value of assets and indirectly the solvency date but also the extent of damages against Gunns by Growers for losses resulting from the over ambitious projections contained in offers to investors.

Secured creditors ($636 million including banks of $446 million) are unlikely to be paid in full, employees should get their $10 million but the unsecured guys ($135 million) are unlikely to get anything except:

·        There is an unsecured amount of $39 million owing to Australian Executor Trustees. Elsewhere in the report the VA stated that $34 million was owing to Australian Executor Trustee Limited on behalf of certain covenant holders. This may relate to trees owned by investors and grown on ex Auspine land in the Green Triangle. Gunns disposed of land and trees and part of the proceeds belonged to the tree owners (the covenant holders). Gunns used the money for working capital. The Trustees have secured a preliminary Court determination that the moneys doesn’t form part of Gunns’ property. Sounds a bit like theft by another name.

·        $22 million is also listed as being owed to ex Great Southern MIS schemes. Again this sounds like moneys received in trust for MIS growers. The Report talks about up to $11 million received that may belong to Growers. The discrepancy with the $22 million figure is not explained.

·        Growers also paid $1.2 million in tree insurance premiums to Gunns which it failed to forward to the insurance company. Fraud is being alleged by Growers.

Other breaches of RE duties including agreements and dealings between Gunns and the RE, Gunns Plantations, will be investigated, as well as fending off the class action claims by Growers, already in train, involving deceptive and misleading conduct, failure to comply with disclosure obligations, in fact the whole book of torts and misdemeanours by Directors.

In addition the class action against Gunns for lack of market disclosure at the time John Gay offloaded a swag of shares before the release of the disastrous Mid Year report in February 2010 is continuing, as is the ASIC action against Mr Gay for insider trading.

What is most surprising is not that Gunns ended up round the S bend, or that the shortfall at the end was greater than previously disclosed, or even that they did some dodgy stuff towards the end just to survive.

It’s that Gunns lasted as long as it did.

It’s not that Directors didn’t see it coming. Mr Gay had an inkling and managed to get his own personal house in order in December 2009.

But as for Gunns itself the restructure plan was forever changing and poorly executed.

Assets were listed for sale in one set of accounts. Next time they would reappear back on the balance sheet. The strategy was forever changing.

The perception and the reality of Gunns’ significant land assets being enmeshed in a complicated web of legal interests via MIS which caused investors to shy away, was not addressed. For 2 years Gunns stuffed about until the plummeting values meant a restructure was pointless.

Plan B was capital raising which it stuffed up as well. It was made  more difficult as it relied on favourable asset sales and tidying up the MIS mess,.

The whole charade was unbelievable.

Operating cash flows were boosted by a run down in inventory following the Auspine and ITC Timber purchases and by the treatment of some MIS securitised loan receipts as operating amounts.

For the last 3 years there were underlying cash deficits from all operations.

Gunns didn’t exit native forests for noble reasons, to search for a social license as is popularly assumed by commentators and others writing a social history of Gunns, Tasmania and other tipping points.

Gunns exited native forests because it was unprofitable, the future looked grim and its crappy old assets were in a bad state of disrepair.

The ostensible search for a social license is Goebbels gobbledegook.

Gunns exited native forests purely to survive, to rationalise assets and maintain a going concern and at the very least avoid trading whilst insolvent.

How a company like Gunns’ expected to attract a partner to build and operate a large state of the art international processing facility when one closely examines Directors’ performances over the last 3 or 4 years is indeed mind boggling?

Without a sale of native forest and other non core non productive assets and Ms Giddings’ benevolent gesture of a $23.5 million handout, Gunns’ lurch into insolvency would have occurred sooner.

With hindsight it was only a postponement of the inevitable.



  1. And your odds on a successful prosecution of the guilty in the Tasmanian jurisdiction, John?

  2. Ah, but will it be in the Tasmanian jurisdiction? This criminality looks like it will cover ALL jurisdictions & even drag some politicians in to court. Oh to be a lwayer...

  3. I think it was the CEO of Scandinavian Airlines who famously said, when shown a hanger filled with aeroplanes and told that these were SAS asssets, "These aren't assets...they're liabilities until we have customers who wish to pay to use them"

    Gunns plantations were never assets, they were costs (thinning, pruning, harvesting, making safe from fires etc) that couldn't be recouped unless Gunns also had access to a processing facility, and even that wouldn't make money unless a whole set of other conditions were true.

    Mr Gay has been described as Australia's most inarticulate CEO. Just listening to him and his various 'directors', coupled with the senior management of the various Tasmanian forestry interests, would tell any competent analyst that they had no idea how to produce value in an industry.

    It's time this tedious and unenlightening period was behind us.

    Well done John.

  4. Really nice post. Appreciated. Also have a look on

  5. Obviously it’s great that Gunns’ allow all companies to be placed in liquidation. We are thankful to Gunns and also thanks for John Lawrence for this post as I never knew all these information about Gunns before.

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  6. his article was awesome!! Thank you. It is absolutely necessary for a person to have sufficient amount of control over his financial condition.

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