Tuesday, 3 June 2014

Gunns' clearing sale

The dissipation of Gunns’ forest estate continues.

Korda Mentha, Gunns’ Receivers in control of Gunns’ secured assets, don’t say much. It’s not a requirement except when they need a favour.

PPB Advisory, Gunns’ Liquidator overlooking the whole show reveal a little  more because they’re charged with winding up Gunns’ MIS schemes and preventing Korda Mentha from grabbing the MIS trees for their clients. As a consequence they update growers with regular, and quite helpful explanations of the progress of the wind-up and how much is being received from asset sales and spent by lawyers accountants and consultants in the fee smorgasbord.

In April 2014 New Forests, or more correctly entities managed by New Forests acquired the following assets

·       176,000 hectares of Gunns’ freehold land in Tasmania

·       port operations for the export of woodchips at Burnie and Tamar

·       3 woodchip mills

·       tree nursery at Somerset

·       tree breeding facilities at Ridgley

·       forestry operations and other related assets

Total consideration was $330 million.

Growing on the freehold land were 96,000 hectares of plantation trees.

Of these 54,000 hectares belong to MIS growers, the rest to Gunns and associates.

There are 9 MIS schemes planted over a 9 year period. The weighted average age is about 8 years.

The amount of the total sale price that belongs to MIS growers is likely to be 12.6% of the total or $40.5 million after sale costs of $1 million, once the Supreme Court of Victoria gives the ok.

However there are more costs, another $12 million are expected, some plantation maintenance costs incurred since Gunns went belly up but mainly legal and accounting costs incurred byPPB on behalf of growers in their battle with KordaMentha who, to put it in a nutshell, have been asserting the trees now belong to the Gunns as landowners, or more accurately the punters and hedge funds who now own the debt secured by Gunns’ land.

The growers have had a hard time. They entrusted their money to Gunns Plantations who then lent it all to the parent company Gunns who blew it, whereupon the secured creditors said, in effect, we can no longer look after your trees, thanks for coming, stiff luck but the trees are now ours.

PPB Advisory has and will spend millions basically arguing this point with Korda Mentha who no doubt will incur similar costs. And both will be the first to be paid. The growers will even end up paying some maintenance costs twice. Once up front and again for costs during the insolvency period.

That’s the way the system works.

After all costs, growers may get to share $28 million.

That is before amounts owing to financiers who funded growers in the first instance.

Also the ATO will want a cut as the proceeds are taxable, the growers having already received the benefits of the tax deductibility of the initial upfront fees.

Gunns’ MIS growers with total trees covering 106,000 hectares will all get to share in the meagre spoils, not just those growers whose crops were sold to New Forests

On average the return will only be $264 per hectare. The earlier scheme growers will get more, the later ones less. A far cry from initial expectations. Initial outlays were about $7,000 per hectare. Expected returns were much more.

From New Forests viewpoint paying $41.5 million for 54,000 hectares of hardwood plantations implies only $765 per hectare on average for the trees.

If the average age is 8 years and say the annual growth rates 16 tonnes per hectare, the price paid by New Forests works out at only $6 per tonne.

They should make a double digit return at harvest time.

From 19 expressions of interest Korda Mentha only received two offers for Gunns’assets that warranted negotiations.

The much vaunted interest in Gunns’ assets was overblown, yet again.

Gunns’ MIS growers still own another 51,000 hectares of trees growing on other leased land.

·       14,000 hectares on Forestry Tasmania FT’s land

·       27,000 hectares on land belonging to various third parties.

·       10,000 hectares on land owned by two Australian Forestry Plantation Trusts, essentially Gunns’ entities but being wound up by a separate liquidator McGrathNicol.

The latter trees will be sold with the underlying land and proceeds split similar to the New Forests’ deal.

In the case of the other lots, rental arrears will almost equal the value of the trees so growers won’t be getting fancy prices from landlords. Probably nothing at all. The MISs are being wound up and the trees will pass to the landowners with or without consideration.

FT will have another 14,000 hectares to look after which Premier Hodgman  and Minister Harriss are yet to concede may require funding.

It won’t be called deficit funding. Maybe disguised as a payment for another Community Service Obligation?

The Liquidators have given no sign they’re interested in delving too deeply into possible insolvent trading by Gunns. It’s pretty easy to argue there was a reasonable expectation the pulp mill could be built and all Gunns’ woes would end. After all there’s still some flat earthers who believe it can be built despite no interest and little resource.

The Liquidators haven’t exactly been forthcoming with reports to growers about the specific growth rates of their plantations. Given that yields of MISs generally appear to be between 25% and 50% below forecast it seems reasonably clear that growers were misled, especially the later who were never told about the lower than expected yields.

Lower yields combined with prices between 50% and 75% below forecast has meant proceeds would be lucky to be one eighth of what was promised even for a full term crop. Selling halfway through the rotation doesn’t improve the price. That’s why $6 a tonne was the going rate.

New Forests have established two sub-trusts presumably sub-trusts of the large cashed up Australia New Zealand Forest Fund No. 2 to hold the acquired assets, an investment sub-trust and an operations sub-trust, plus a management company Tasmanian Forest Management P/L to oversee both.

PPB Advisory have been reasonably expeditious in attending to Gunns’ insolvency, compared to FEA’s Liquidator BRIFerrier who are now half a lap behind after giving PPB well over two years start.

FEA’s Tasmanian MIS plantations still looking for a new owner total 16,000 hectares on FEA’s land and a further 8,500 hectares growing on leased land.

It wouldn’t surprise to see New Forest interested. They seem to have little difficulty in outbidding their rivals and there is little evidence they have overpaid for assets.

It’s been a shameful and extravagant hit to the public purse and to growers’ pockets, so hopefully New Forests make better use of their publicly subsidised investment with more acceptable and profitable value adding than that practised and proposed by the rogues who preceded them.



  1. Thank you John for such a full summary.

    As a grower (I hesitate to use investor), I have been very concerned over PPB’s predilection to close legitimate and reasonable lines of enquiry. As they should, PPB have kept growers informed of the process but they have not been at all helpful with my simple questions of them. As a consequence I have lodged a complaint with ASIC.

    In recent months:

    • I discovered that PPB had no knowledge of the nitens furniture that has been made and have been discounting potential value-add while at sale. Worse still, is that they declined invitations to view the products before the sales process had closed
    • I have been unable to procure any current status reports on my holdings. Neither conclusion, that they don’t have access to the KM data room or won’t disclose it, is acceptable while I still own my trees

    If it’s true that PPB still have a costly case to make to even secure a share of the sales proceeds for growers, they’re going to have to toughen up. In the preparation of the sales inventory and negotiations they’ve not held KM properly accountable for ‘the best possible price under the circumstances’, Daniel Bryant, Partner, PPB.

    My woodlots include Option 2 plantations originally destined for veneer and already proven at maturity to be suitable for furniture and most probably still veneer. Yields in those early years, according to the expert forester, VDFC were tracking better (2001) and very close (2000) as of 2011. Important to me is that the final distribution reflect this closer management.

    Without current data on growth increments, I struggle to see how you’ve arrived at a cost apportionment of 12.6%, and these lots have a significant bearing on estate value in relation to the plant assets etc. Moreover, in these instances I’m presuming your discounting would be much less.

    Finally, I have a couple of lines of questioning:
    1. Why, if after the MIS structural separation of responsibilities, should other parties not wear more of the losses, rather than the land owners interests reign supreme? Do the Head and Sub-leases really include such liens?
    2. Would any insolvency practitioners ever impose sale conditions where a value-added return could be passed to growers in the future, rather than wholly transferred to New Forests? Of interest is that I’m still waiting on PPBs thoughts on this.

    Regards Trevor Burdon

  2. Trevor

    Before KM and PPB proceeded with the joint sale process they agreed how the proceeds would be split. The figure of 12.6 % was the apportionment they decided.

    It’s not my figure.

    In order to protect their arses lest they get sued by growers, PPB has applied to the Supreme Court of Victoria for the stamp of approval that they have acted reasonably in the best interest of growers, to whom they owe a fiduciary duty as Liquidator of the MISs.

    Interestingly the 12.6% figure was what was agreed to be the MIS trees owners’ share of all Gunns’ assets plus joint assets for sale.

    That is the only conclusion to draw from PPB’s admission that MIS growers will get an additional distribution should the pulp mill permit be sold!!

    At the same time I understand it was agreed how the split would occur between all 9 MIS schemes.

    I’m not sure whether any amount split to a particular Project will be further split between the Option 1, Option 2 or whatever was available.

    If not Option 2 guys like yourself will be disadvantaged, especially as you indicate you growth rates have been good, but I understand your only course of action is to make a submission to the Court.

    The imprimatur of the Court is the de facto closing of the ranks by the boys and it will be hard, certainly costly, to challenge them.

    As I said I didn’t think PPB had been particularly forthcoming about the growth rates of your trees. I wasn’t sure whether that was available to you via secured sites.

    Your confirmation that the growth rate of your trees has not been available to you appears to me to be confirmation that the Liquidator has been remiss, although I’m not exactly sure what his minimum obligations are in this regard.

    Certainly if the growth rates have been awful that may give grounds for a grower to pursue an action against the original Directors and I would have thought it was amongst one of the Liquidators fiduciary responsibilities to growers to advise him/her of the situation.

    I was told at an FEA creditors meeting that BRIFerrier who were winding up the FEA MIS schemes would be updating growers on the growth rates of their crops but this has never eventuated to my knowledge.

    The boys are closing ranks.

    Whether a grower wishes to take action against the promoters for misleading claims about growth rates is one that the Liquidator should support, maybe not actively, but at least by providing all relevant information at their disposal further to the discharge of their fiduciary responsibility to growers.

    The non disclosure of growth rates may simply be due to the fact that the Liquidators don’t which to open a Pandora’s Box in respect of claims against the Directors of Gunns which may in turn lead to claims against the Liquidator for acting against growers’ interests.

    Hence the buggers are trying to expedite the matter, get the nod from the Supreme Court, grab their fees and move on.

    Bugger the growers.

    That’s what’s happening.

  3. Great to see some healthy scepticism from a finance professional. It gives me some solace!

    On that second point of mine, are you are aware of any insolvencies whee the original owner retains some interest in the proceeds from an asset's ongoing management?

    This would be much fairer than John Gay, but not me, reaping further reward when New Forests pay for it to be converted to high value veneer in his plywood mill.

    I don't condone his behaviour mind you. If only we could rely on proper regulatory and judicial support to trammel that energy.

    Regards Trevor Burdon / Anonymous
    (I'm off most social media - I've read their Ts & Cs)