As Timbercorp creditors voted to place the company in liquidation earlier this week, the list of victims of its collapse and that of Great Southern Plantations continues to grow – including more than 60,000 grower-investors who sunk almost $4 billion into around 100 managed schemes, trade and bank creditors and of course, shareholders have witnessed their holdings in the MIS twins shrink to nothing.

Timbercorp’s administrator, Mark Korda, of KordaMentha, is seeking to have the managed investment schemes wound up. Korda stated last month that “the responsible entity, TSL [Timbercorp Securities Limited], can’t continue as the responsible entity because it is hopelessly insolvent, with the costs of running the olives and almonds projects at $300 million over the next 12 months. TSL is broke and cannot fund them. It has no cash and no access to new cash.” Similarly, Great Southern’s receiver, McGrathNicol claimed that the responsible entity of its schemes will also most likely need to be wound up, with Great Southern Managers Australia believed to have insufficient cash reserves and no chance of securing additional funds.

The roll-call of wrongdoers in the agribusiness saga is growing by the day. Some blame has been attributed in the direction of Timbercorp founder and major shareholder, Robert Hance, and Great Southern founder and majority shareholder John Young (who reaped more than $30 million from selling Great Southern shares in 2005). Others have accused financial planners and accountants, who collected commissions of upwards of ten percent of funds invested for recommending the tax-effective schemes to often unsophisticated clients.

Another group which has so far managed to escape attention has been research houses, specifically Lonsec, Australian Agribusiness Group (AAG) and Adviser Edge, which provided ratings and investment research to financial advisers pertaining to managed investment schemes. (The research houses performed a similar role to ratings agencies Standard & Poor’s and Moody’s, who provide independent ratings on instruments such as collateralized debt obligations). Like the US credit agencies, Adviser Edge, AAG and Lonsec were paid by the companies upon whose products they were assessing.

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Managing director of Adviser Edge, Shane Kelly, has been quoted by various media outlets since Timbercorp’s collapse, noted on 2 June 2009 that “the majority of schemes have better management models than Timbercorp and Great Southern, and their cash and capital requirements are not of the same huge scale…one of the things we’re seeing now is sales (to investors) will pull right back and no one is going to try and be the next Great Southern or Timbercorp. The days of the mega-projects are dead and gone.”

While Kelly’s criticism of Timbercorp and Great Southern appears entirely correct, it seems that such views have not been long held by any of the research houses. For example, in its assessment of the Timbercorp’s 2008 Olive Project (which was until recently still available on Timbercorp’s website), Adviser Edge rated the project 4 out of a possible 5 stars, telling clients that “with net assets exceeding $519 million and a focus on investment in key industries with significant opportunities for domestic and export growth, Timbercorp remains well position to take advantage of expected consumption growth of its core products, albeit with considerable risks remaining.” Adviser Edge later noted that “ongoing fee revenue should be sufficient to sustain project operations.”

Adviser Edge also stated that Timbercorp’s 2008 Olive Project “offers many benefits to growers [including] an experienced management team and RE [and] sound risk adjusted returns.” Approximately fifteen months after the Adviser Edge report was published, Timbercorp’s administrators stated in an affidavit to the Victorian Supreme Court that “in relation to the Olive Schemes, approximately $62 million is required for operations, rental and other expenditure for the 2010 crop management and harvest. TSL does not have $62 million in available funds.” (It should be noted that simply because the responsible entity of the schemes in insolvent, that does not mean the schemes themselves are worthless, it does however, place the grower-investors in an unenviable position).

Adviser Edge also gave Timbercorp’s 2006 Mango Project 3.75 out of a possible 5 stars, noting that “Timbercorp’s business model has underpinned strong growth in the scale of its offerings while maintaining operational efficiency and assisting in the timely and high-quality development of project assets.” Timbercorp’s 2007 Almond Project also received 4 out of 5 stars. In relation to Timbercorp’s Almond projects, KordaMentha noted that they require “approximately $247 million is required for [operational expenditure] for the 2010 crop management and harvest over the next 12 months. TSL does not have $247 million.”

In its defence, the detailed reports prepared by Adviser Edge also outlined the myriad risks associated with investments in such schemes, including the adverse implications of the legislative taxation changes relating to non-forestry products and various agricultural risks. Those stated risks however did not appear to impact the overall ratings provided for the respective products.

Adviser Edge was also certainly not alone in its favourable assessment of Timbercorp’s products. Lonsec, which provides investment product advice (and brokerage services), predominantly to financial planners, was equally ebullient in its assessment of Timbercorp’s projects.

In April 2008, Lonsec Agribusiness Research rated the 2008 Timbercorp Olive Project 4 out of 5 stars, stating that the project was a ‘recommended’ investment (which was a higher rating than ‘investment grade’). Lonsec stated that “the project attained its highest major determinate rating for Business Strategy and Corporate Resources. Timbercorp Securities Limited (TSL) is one of the largest and most experienced agribusiness project managers in Australia and has a sound record in establishing agricultural projects.” Approximately one year later, Timbercorp’s administrator deemed TSL to be ‘hopelessly insolvent’.

All three leading agribusiness research houses also rated Great Southern’s investment products highly. Great Southern’s website noted that its 2008 Diversified Olives Income Project and its 2008 Almond Income Project both received 4 stars from Adviser Edge and AAG, while Lonsec ‘recommended’ both projects.

While their ratings, with the benefit of hindsight, appear generous, it is unfair to sheet blame solely on the research houses for failing to forecast the collapses of Timbercorp and Great Southern and the subsequent adverse implications their failure would have on the managed schemes. The research houses relied on financial statements prepared by both companies and audited by large accounting firms which showed both entitles possessing hundreds of millions of dollars in net assets on their respective balance sheets (Timbercorp was audited by Deloitte, while Great Southern’s financial statements were audited by Ernst & Young. Both auditors provided unqualified opinions in relation to the companies’ 2007 financial statements, it was not until 2008 that Deloitte conceded that there was material uncertainty regarding the continuation of Timbercorp as a going concern).

Crucially, while the responsible entities of the various schemes may be ‘hopelessly insolvent’, that is not to suggest that all of the schemes themselves are in an equally desperate position. Various MIS investors have argued that some of the schemes may be able to be saved if their responsible entities were replaced. A Timbercorp creditors committee is arguing this very point before Supreme Court of Victoria, alleging that KordaMentha should be replaced as the responsible entity for various almond and olive projects to assess their viability. On 28 June 2009, grower-investors in three Timbercorp schemes were successful in having KordaMentha removed as the responsible entity, in favour of Huntley Management. The argument proffered is that KordaMentha is badly conflicted in acting for the creditors rather than specifically, grower-investors.

It appears however that even if KordaMentha is unsuccessful in having the schemes wound up and is replaced as the responsible entity, grower-investors will realise far lower returns than what was rosily forecast by the agribusiness companies and supported by the research houses.

While the likes of Lonsec, Adviser Edge and AAG had an extremely difficult task in fully assessing the quality of the various projects (and were forced to rely on audited financial reports to verify the solvency of the publicly listed operators), they nevertheless face a similar predicament to S&P and Moody’s in assessing the credit-worthiness of structured financial products. If Lonsec, AAG or Adviser Edge were to assess a low rating on a product, it is possible that they may lose future mandates and effectively, sales revenue.

No matter how well intentioned (and there is nothing to suggest that Lonsec, AAG or Adviser Edge would ever actively avoid angering their clients to maintain revenue), it is difficult to ignore the apprehension that their conflict (whether real or merely perceived) may have adversely affected the quality of research produced.