who owns the land, page-24

debt a tragedy
Steve Spencer

May 4, 2009
TIMBERCORP's recent capitulation to the pressure of an unsustainable financial structure is a tragedy.

It's a tragedy for investors in the company and its many project funds, external managers and the growers who supply its operations.

While the company reported a net operating profit after tax of $45 million in the year to the end of September 2008, it had a balance sheet that was laden with what is now impatient debt.

At that time, it reported current borrowings of more than $560 million, with current assets of just $250 million, and a lump of assets held for resale.

A refinancing of its financial position through asset sales and significant faith from lenders was Timbercorp's primary focus since mid-2008, but this has no legs in the financial conditions the world has descended into.

The company continued a heavy investment program in 2007 and 2008, but struggled to reinvent itself into a more conventional form of corporate investor in agriculture, from the model it used for much of its previous 15 years.

And it ran out of time, engulfed in a convergence of drought, a drying up of bank credit and falling asset values.

The farm sector cried foul as Timbercorp grew, alleging its tax-based schemes gave it an unfair advantage to buy up land and water.

Ironically, the claims that the company inflated land values with its investments on the way up will be echoed, as significant portions of its land and water bank now overhang those markets.

Korda Metha are experienced managers of troubled businesses, and they face a tricky, case-by-case management of the company's complex activities, which puts many investments and jobs into doubt.

But while Timbercorp established its elaborate financial structures to provide investors with a secure ride, the administrator will be making sense of its financial position with very different priorities - primarily in the interests of a set of banks owed about $900 million.

It is not assured Timbercorp will vanish - the current process is a voluntary one, and several further steps are required before it is formally regarded as being "belly up".

People and towns that have depended on the investments across six horticulture sectors have a nervous wait.

Hopefully Timbercorp's problems won't sour the attraction of large-scale agribusiness for the corporate sector, but surely mum-and-dad investors will be more wary of chances to "buy a stake in the farm".

In reality, many of those who jumped on board the MIS ship were doing so to gain a tax break.

Timbercorp's situation will add a new item to the long list of examples of failed tax-based devices that get in the way of commercial reality.