Dani Ecuyer http://daniecuyer.com/
Going forward, what can we expect. In my humble view, I think Gunns are in real financial difficulty. Cast your minds back to Jarvis Cocker’s excellent piece in March, where he highlighted the deterioration in Gunns balance sheet. Going forward,I forecats that the second half earnings are going to be pretty shabby, the strength of the aussie dollar (which will probably average well over USD90c) will have taken the gloss off the woodchip revenvues. The balance sheet, already geared post the Auspine acquisition, will be suffering from much higher funding costs (interest rates are up substantially), earnings will be down (higher aussie dollar and higher interest charges), which in summary means that Gunns will be looking to raise equity. That is where I think Macquarie Bank may enter the picture. However, I feel that it will be hard enough work to raise equity to fund the company’s existing operations, let alone a $2 billion plus ‘poisoned challis’ pulp mill.
It is only a matter of time before Australia’s worst kept secret is confirmed. ANZ, Gunns historical bankers (22 years) have walked away from leading the consortium to fund the pulp mill. There is no doubt in my mind that there have been a confluence of factors which has resulted in this decision. I have held the view, ( published on the website in January, Funding the mill ), that the severity of the credit crisis would make it very hard for ANZ to find other banks to finance the mill. However, what most of us, or Mike Smith, did not forecast was the Opes Prime debacle, which not only undermined ANZ’s earnings, but became a public relations disaster for the bank.
I have not been privy to any inside knowledge but I reckon, Mike Smith has tightened his reins considerably at ANZ. He was very aware of the intense lobbying and negative publicity surrounding the pulp mill, over the second half of 2007 and into 2008. The combination of the credit crisis, Opes Prime, credit rationing and the risk that the bank’s reputation would be further undermined by approving the Gunns loan, was straw that broke the camel’s back.
In many ways the global credit crisis will prove to be the best foil for ANZ, to walk away nicely from Gunns, saying we just don’t have the funds (credit rationing), rather than we do not have the appetite or inclination to fund one of Australia’s most unpopular investments. Personally though, I really wish ANZ, under the stewardship of Mike Smith (who was a follower and signatory to the Equator Principles at HSBC and a leader in sustainable banking practices), would cite the fact that the pulp mill was completely at odds with the bank’s sustainable investment standards.
Nevertheless whatever is or is not officially said,everyone, from grass roots organisations to NGO’s, individuals, The Greens et al who lobbied long and hard, should all be very proud. There is no doubt that theses groups have made a difference. It has shown that individuals acting together can change the course of dubious greedy corporates and politicians that are working in their own best interests.
Going forward, what can we expect. In my humble view, I think Gunns are in real financial difficulty. Cast your minds back to Jarvis Cocker’s excellent piece in March, where he highlighted the deterioration in Gunns balance sheet. Going forward,I forecats that the second half earnings are going to be pretty shabby, the strength of the aussie dollar (which will probably average well over USD90c) will have taken the gloss off the woodchip revenvues. The balance sheet, already geared post the Auspine acquisition, will be suffering from much higher funding costs (interest rates are up substantially), earnings will be down (higher aussie dollar and higher interest charges), which in summary means that Gunns will be looking to raise equity.
That is where I think Macquarie Bank may enter the picture. However, I feel that it will be hard enough work to raise equity to fund the company’s existing operations, let alone a $2 billion plus ‘poisoned challis’ pulp mill.
At this stage in the credit cycle, I personally do not think Gunns will get the finance. They may look for a joint venture partner, which comes with a fat cheque book, so watch out for Scandinavians or New Zealanders bearing gifts. But on balance I think everyone, can breath a big sigh of relief, break open a wonderful Tamar Valley bottle of vino and toast the success.
But don’t get complacent for too long. The fat lady has sung this aria, although I sadly feel that in spite of all these obstacles John Gay is not a man who rolls over easily and will be behind the scenes trying to pull a rabbit out of the hat.
“Never Give Up” (Winston Churchill).
