When bad things come in trees Andrew Main From: The Australian November 30, 2009 12:00AM
THERE'S a very interesting stoush looming over the wreckage of the Great Southern timber group that will pit one medium-sized bank, Bendigo and Adelaide, squarely against the group of major banks that brought in the receivers in the first place. In simple terms, Bendigo wants Great Southern's 10 major managed investment schemes to keep going under one or other of three groups that all want to take over the responsible entity (RE) role.
And the big banks just want to wind them all up so they can start trying to get some money back.
Why do their aims differ? Because Bendigo and Adelaide is in the hole for more than $500 million in loans to the mum-and-dad "grower investors", whereas the big banks lent money to the scheme managers. The big bank syndicate, which is owed a bit over $400m, is CBA/Bankwest and the Mizuho Bank of Japan.
The way it's all panning out -- and this is a saga that's going to run for a while yet -- is that it's not the receivers and it's not even the banks that get first say in what's going to happen:
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((( it's the 43,000 grower investors who have sunk more than $1.8 billion into more than 100,000ha of schemes that are mostly in the "green triangle" where Victoria meets South Australia, but are also in WA, where the company was based.---))))
Great Southern Managers Australia Ltd (GSMAL) is the responsible entity that with its listed parent was placed in receivership by the banks on May 18, two days after the directors called in Ferrier Hodgson as voluntary administrators. On November 19 creditors voted to tip the company into liquidation.
Neither of the bank protagonists is looking all that great, but the big ones are looking better. The biggies hold mortgages over the land on which most of the plantations are situated, but their headache is that the trees on the land (planted variously over the last 10 years) are owned by the grower investors. The trees are, in legal terms, an encumbrance that by some accounts could be perceived as a first mortgage, so the big banks can't just treat the plantations as open farmland and put them up for sale to the highest bidder.The further the trees are from maturity, then effectively the bigger the discount that may have to be offered to potential buyers of the land, because they're contractually obliged to leave the trees growing until they're ready to harvest.
It's also worth noting that receiver McGrath Nicol's favoured candidate to take over the RE role, Tasmanian timber group Gunns, has been accused by at least one other aspirant for the RE job of trading away a "right of second rotation" of trees on the plantations in a bid to get on-side with the big banks and/or the receiver, who was appointed by the banks.
If one crop of trees is regarded by the banks as an encumbrance, you don't have to be Mandrake to work out what they would think of a second one. Anyone who remembers standing outside an old-fashioned phone box on a windy night will remember how they felt when the caller in the box finished one seemingly interminable conversation only to dial up a new friend and start another.
The other two bidder groups are Pulpwood Plantations Ltd, chaired by respected WA industrialist Gordon Martin but also involving former Great Southern exec Philip Butlin, and Black Tree, which is reportedly representing the Bunning family. PPL has called a meeting for December 10 for grower investors to decide whether to support them, but the fact that there are three proposals on the table means it's likely that sooner or later investors will be offered one omnibus meeting to vote for or against all of them.
If that happens, it won't be before January, just because of the sheer complexity of these schemes and the proposals that are still being devised to re-energise them.
It's worth noting that the big bank syndicate has had to put in more than $20 million in maintenance expenditure since the company collapsed in May, to maintain the value of the plantations.
That's not a job you'd normally expect bankers to do but since there is no solvent RE (what we used to call a trustee) they haven't had a lot of choice.
And if there is a wind-up, which is what will happen if the proposed RE candidate can't muster more than 50 per cent of the grower investor votes in any scheme category, at least the banks have a good chance of getting their $20m back.
And Bendigo and Adelaide? If you thought the CBA crowd were scratchy, they've got nothing on the smaller bank.
Adelaide was a big lender to rural managed investment scheme investors in the early years, usually via "split" loans whereby the bank took the investor's house deeds as collateral against two loans, one a tax deductible investment loan and one a more conventional mortgage.
The bank's MD, Mike Hirst, has made it clear there's not a lot of room for negotiation over the investment loans. "Our intention is to recover that money, and if it means we have to sue people and bankrupt them, that's what we'll do," he said on November 19.
Bendigo and Adelaide Bank really doesn't want a wind-up, because if that happens they'll have to call in all the loans simultaneously.
A lot of investors with split loans will have to consider letting their mortgage blow out to pay the investment loan back, because if they don't do that the bank will enforce its rights as mortgagee and put the house up for sale. It will be a very serious affair all round, not to mention a public relations horror story for the bank.
Some sort of compromise whereby the managed investment schemes could keep operating under a new RE would be greatly preferable for the bank, on the classic basis that where there's life, there's hope.
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