Common sense is not so common – Timbercorp/ Great Southern


The demise of Timbercorp and Great Southern has highlighted the difficulties of running an investor-focussed regulatory environment in a capitalist based system.

For once, i will be brief.

The agricultural projects operated by Timbercorp and Great Southern on behalf of grower-investors are presided over by a “RE”, or Responsible Entity. It is the job of that Responsible Entity to protect the growers’ interests and ensure that the projects are run according to the rules and contracts formulated when it was established. In the case of Timbercorp and Great Southern, the RE’s were components of the parent companies.  When those parent companies got into trouble and called in the Administrators, the Administrators became the defacto RE’s.

The problem with an Administrator being an RE is that it potentially leads to a conflict of interest. In fact, it would be ludicrous to suggest that an Administrator could NOT have a conflict of interest. The Administrator is going to be driven by the creditors to the company in administration. That is, the primary lenders who have lent large sums of money to the company on a secured loan basis. Simply put, they want their money and, if the last 2 years have taught us anything about the operation of banks, it is that they are quite prepared to do whatever it takes to secure their own individual interests when a company is close to, or in, administration or insolvency.

Here is the example as it applies to Timbercorp and Great Southern.

The primary assets secured by the lenders is the land holdings. This is very valuable stuff, and would most likely realisable at a reasonable discount to book value, even if not at book value.

The problem for the banks is that growers hold contracts (or charges or liens or whatever) over the use of that land for quite substantial numbers of years. This limits the ability to sell the land to realise funds to repay debt.

However, if the projects can be declared “void” or if they can be in some way closed up, then it is possible to remove those charges or limitations on the use of the land. This makes the land far more valuable to the Administrator and allows for realising more money, quicker.

It also destroys any chances of the growers obtaining a reasonable return on their interests.

This is not a matter of “bank bashing”, as any shareholder of the banks would be very keen to see their loan funds returned, and hopefully as soon as possible. It is more a matter of pointing out the relative bargaining strength of the respective parties in a situation where a MIS provider goes under water.

The MoneyManagement magazine (a financial industry publication) has pointed to a pressure group forming with the aim of replacing the RE for Timbercorp.

This can only be encouraged, as it provides the individual growers with a fulcrum of leverage to ensure their interests are maintained in any negotiations relating to their holdings.

Back to the point of this note… The regulator of all things financial, ASIC, have a difficult time with this situation. If they attempt to replace the RE, are they interferring with the free and fair operation of the market? Will replacing the RE be seen an providing growers with some kind of protection or expectation of protection from ASIC that ASIC does not feel capable of, or obligated to provide?

In the case of these projects, the growers’ interests are only protected by the strength of any contracts put in place. As the growers are individuals who take part in a pooled investment exercise, they have close to no bargaining power if they do not have a representative RE that is NOT tied to the other parties sitting at the table. This would be a matter of common sense.

However, common sense is not really so common, and commercial interests, ideology, political pressure and the present value of a dollar are very strong disincentives for common sense to apply in this particular case.

If the Timbercorp RE is replaced then this would greatly assist growers in all agricultural projects to clarify the fundamental strength of the system.

As a by-the-by, some people have asked about various forms of investment trust or superannuation and how they would be impacted if the holding company went into Administration or insolvency? This is a short question but has a long answer. The very short answer is that most investment trusts and superannuation accounts have are set up in a more clearly delineated manner, and the protection for investors is more transparent. More on that another 60 seconds… This note was supposed to be very brief…

DISCLOSURE: The writer (that is, the “i” of this site), holds interests in Great Southern projects.


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