Border Timbers doomed?
LISTED forestry concern Border Timbers Limited (BTL) — currently under provisional judicial management — is surrounded by two other large but presently unstable forestry companies in the Eastern Highlands: Allied Timbers and The Wattle Company.
With the timber industry in Zimbabwe generally battling for survival, there is a temptation to believe that all three businesses have suffered from similar problems and can be turned around by identical policies.
But, although they all had inappropriately high overheads, closer analysis shows that they suffered from different management problems. They, therefore, need different solutions. BTL was an Anglo American company, and had many layers of management and staff when control of the business was transferred to the present owners.
When labour costs were low in Zimbabwe, this generous system of management and staffing was affordable, if not over-indulgent, for the simple forestry sector. When Zimbabwe went through its various economic changes including dollarisation: Changes were required in Zimbabwean companies if they were to survive.
BTL was a rich, well-financed company, but debt rose steadily in the past six years. It would appear that too little change occurred too late. The judicial manager (JM) put it too politely when he stated that management did not react to economic events.
The various areas where management could have made a difference over the last six years are outlined below, with a view to seeing what went wrong and whether a recovery plan is possible at this late stage.
With only modest changes, BTL should be a viable business as the JM has already put it into a cash neutral position before financing costs.
Of course there is more action to take in this area of right-sizing. Now the JM must see if the challenges of management control, land title and financing can be as easily sorted. The company cannot afford the debt burden of over US$22 million in loans, nor can it afford to pay staff arrears, trading partner debts as well as undertake crucial investment.
The line-up of loan holders would appear to be rather complicated as the controlling shareholder appears to own US$6 million of debt as well as controlling most of the shares in BTL.
Given the state of the business as revealed in various reports, there would appear to be little economic value in the equity of BTL, but the same equity and debt holders would have significant rights in any restructuring programme.
DEG, the German bank, has secured the debt of US$6 million.
The remaining unsecured loans are to a number of Zimbabwean banks. Getting an agreement among loan providers — who each has different security as well as different motives — may only be possible against the threat of liquidation.
There is little doubt that liquidation is the certain outcome, unless debt holders agree on a fixed timescale to a restructuring. Continuation of the status quo may be the best outcome for the existing controlling shareholder pool, even though restructuring is required to ensure the future stability of BTL and its employees and to secure an agreed repayment plan to the banks.
It will be recalled that in April this year, the banks blocked BTL’s bid to be placed under final judicial management, arguing that they needed more time to consider existing options.
It would appear that progress has been made in BTL to re-organise and right-size the business especially after cash flow liquidity started to dry up. The value added businesses in BTL were doomed as soon as Zimbabwean labour became too expensive to compete regionally, post dollarisation.
The weakening of the South African rand against the dollar destroyed the competitive position of most Zimbabwe value-added businesses against South African imports.
The question of why they were kept open for four years at huge loss is no longer relevant for the future of BTL as they are now closed and are no longer losing cash. When employment costs rose, labour for tree felling had to be closely managed to be economic, but BTL lacked that ability.
Alternatively, contract managers have proved to the sector over the last decade that they could harvest timber cost-efficiently. The Wattle Company introduced subcontracted felling 14 years ago for their eucalyptus plantations and reaped big savings.
Albeit late to the party, BTL has introduced that sub contracted approach to its harvesting operations. It is sad that BTL employs fewer staff members today, but if these changes had happened sooner the company would have avoided accumulating its unacceptably large burden of debt.
With focused attention, new structures and some new investment, there are many further economies possible to be achieved in BTL. Some more rationalisation appears to be needed while the company is in JM. However, the viability of the business has been established.
The accounting principles adopted by BTL disguised both its management inactivity and its cash flow problems over many years. BTL revalued its timber assets (biological assets) every year and arrived at new balance sheet figures that supported a net asset position of over US$100 million.
The annual increase in the value of these timber assets, as young trees grew in the plantations, was taken to profit. However, in the hard world of cash flow, the company was losing money every year and increasing debt to fill the funding gap.
The revaluation of biological assets is required by international accounting principles but the details are open to interpretation. In addition, it was not designed to hide cash flow problems. This period also saw log prices in Zimbabwe increased.
But if BTL had no ability to make a net trading profit — due to its high cost structures — should there have been a revaluation upwards of biological assets? Should there have been a revaluation downwards? Certainly a downward revaluation may have given the banks a warning that trouble was coming.
(This analysis continues next week with further scrutiny of the activities of BTL shareholders and management and options that could be taken to bring the company back to winning ways)