Timbercorp collapse shows crisis in confidenceBroadcast:...

Timbercorp collapse shows crisis in confidence

Broadcast: 26/04/2009

KATHY SWAN, REPORTER: Debt and tax deductions fertilised Timbercorp's growth into one of Australia's largest agribusiness ventures.

But the credit crunch finally ringbarked the business, already weakened by drought, a drying up of investor funds and falling asset values.

MARCUS ELGIN, AUSTRALIAN AGRIBUSINESS GROUP EXEC CHAIRMAN: There'll be knockers out there who'll be tickled pink to see that Timbercorp has gone into administration and be able to say I told you so.

SAM PATON, SAM PATON & ASSOCIATES: I have not struck any MIS scheme yet in any form of commodity - trees olives almonds - where I would say I was comfortable

IVOR RIES EL&C BAILLIEU: Will see a collapse in MIS sales, they won't disappear entirely but there'll be very little on offer this year and it'll go from being a billion dollar a year market to maybe 100 million.

KATHY SWAN: Loved by some but loathed by others, the tax effective managed investment schemes propelled Timbercorp's growth, til it straddled more than 120 000 hectares in forestry and horticultural projects with more than 18 000 investors.

But by last November Timbercorp's debts had also grown to $900 million... with assets worth about $600 million and a structure reliant on fresh capital to fund new projects.

STEVE JOHNSON, THE INTELLIGENT INVESTOR: Timbercorp had sold these 30-year projects that they were expecting to collect rent on and they'd financed it with two and three year debt.

MARCUS ELGIN: The share price has fallen from $2.80 odd down to nothing and in that time banks look at the business and say there has to be a flaw here, fix it fix it fast.

IVOR RIES: Their whole business was based on putting more assets on their balance sheet using debt so once the debt merry go round had ended their life was over.

KATHY SWAN: Ivor Ries, senior analyst at EL and C Baillieu, says the entire scheme sector is facing some sort of financial pressure at the moment

IVOR RIES: Obviously they need to re finance to repay bank debt and obviously they need to get more equity into the business so yeah more enormous pressure on everyone else in the industry with the sole exception of Gunns the Tasmanian Company which has a much stronger balance sheet.

SAM PATON: I think the MIS companies in the last 24 months have been far less active in say the green triangle...

KATHY SWAN: Agribusiness specialist Sam Paton says a slowdown in those companies buying property has driven down values in prime farming land, and their own assets, by as much as 20 per cent.

SAM PATON: The growers and the investors don't own the land - they own the crop. Now that automatically over the period I've been covering this sector creates problems for banks.

KATHY SWAN: Which means companies like Timbercorp trying to raise equity from bank loans find it hard to get credit. And when push comes to shove potential buyers for Timbercorp's assets are also proving to be wary of encumbered land.

SAM PATON: Lay farmers like things... they've got enough headaches with climatic and environmental risk and diseases and other issues without becoming a landlord owning a plantation of trees with grower investors. I think they would tend to shy away from that structure - instead they would probably say well when the trees are harvested give us a call and we'll have a look at the property then and we may make you an offer...

STEVE JOHNSON: One of the fundamental issues Timbercorp faced - outside the credit crisis - is that these projects aren't producing the returns they're supposed to produce and that means that anyone that comes in here and looks at the situation is not going to come in here and pay anything like the asset values that Timbercorp paid.

KATHY SWAN: Steve Johnson, from market watchers the Intelligent Investor, says Timbercorp's business model was similar to another MIS company, Great Southern.

STEVE JOHNSON: We actually thought that its business model was flimsier than Timbercorp's but they have solidified their balance sheet a little bit over the past 12 months by swapping their growers' interests in their projects for equity in the business.
IAN FRASER, GROWER INVESTOR/ACCOUNTANT: I was a tree lot holder and when Great Southern wanted us to change over last year to shareholders I declined to be part of that action.

KATHY SWAN: Darwin accountant Ian Fraser says he stuck with his trees because they'll still be worth something - even if it's less than the profit originally promised.

IAN FRASER: I expected to get about 1.5 cents in the dollar on my investment and at this stage I'd be tracking at about 70 per cent of my investment so yes I'm very disappointed that the projections that were provided to me were not correct.

ALLAN HANSON, NATIONAL ASSOCIATION OF FOREST INDUSTRIES: In relation to expectations of the MIS - I think they've been more than met.

KATHY SWAN: Allan Hansard, CEO of industry body the National Association of Forest Industries says MIS projects have rejuvenated regional areas and still have growth potential.

ALLAN HANSON: What the investors are really here is investing in trees and trees are an appreciating asset, there's a very strong market for timber products going forward so the fundamentals of the investment are largely there.

KATHY SWAN: But others warn the volume of timber heading for the woodchip market will push prices down.

SAM PATON: We have a glut in terms of the amount of plantation that's immediately coming ready in the next 12 to 24 months - woodchip prices I gather at the Corio and Portland wharf are under pressure.

ALLAN HANSON: What we've seen is commodity prices for our major commodities iron ore coal for example - dropping dramatically but what the plantation woodchip exporters have been able to do is maintain price and that's fairly significant.

MARCUS ELGIN: There are a range of factors as to why performance hasn't been there.

KATHY SWAN: On top of drought, commodity price fluctuations and high input costs, Australian Agricultural Group's Marcus Elgin, says Timbercorp's fall will add to the pressure on other companies in the sector and investor confidence in those companies and their products.

MARCUS ELGIN: The administrators are going to have to find someone new and different or a new set of circumstances to sell into. Maybe they can maybe they can't. The administrator also has to maintain the quality of these assets and a lot of these assets require day to day attention and TLC - care.

IVOR RIES: The people in those schemes will have paid monies for the maintenance of those plantations and they will expect that to continue

KATHY SWAN: Administrators Korda Mentha say workers on the various Timbercorp plantation sites have only been paid up til Thursday. For work to continue, there'll need to be a deal with the banks to restore cash flow which may be a hard ask.

STEVE JOHNSON: We expect the banks to lose hundreds of millions of dollars out of this on the debt side of the equation so equity investors can basically give up on getting anything out of it. As for the project investors - they're in a very different scenario.

KATHY SWAN: The administrators are nutting out the fate of grower investors and while their trees may survive and deliver crops, the chance of regrowth in an industry starved of cash and confidence looks bleak.