FEA business model fatally flawed

The business model underpinning Forest Enterprises Australia Limited (FEA) was simply not able to fund its existing cost base, according to a report issued by the company’s receivers and managers, Deloitte.

The report, issued to the Australian Securities Exchange by Deloitte partners Tim Norman and Sal Algeri, confirmed that the FEA group’s business model was fundamentally reliant on annual managed investment scheme (MIS) product sales to fund ongoing operations.

“With an 80 per cent fall in annual investment scheme product sales in June 2009, and worse expected again in 2010, the business model was simply not able to fund its existing cost base,” the ASX announcement said.

The Deloitte announcement also dismissed criticism of the secured creditors and suggestions that their actions had been inappropriate or premature.

It said that there was no financier in place to fund grower subscriptions for the proposed 2010 Scheme, and late in the process FEA’s main MIS distributor withdrew support for the FEA Scheme product.

“Despite the significant efforts of the board and management team, particularly over the last 12 months, they were unable to submit a restructure plan that showed a return of the business to a viable position that was able to address the significant operating cash outflows forecast over the next few years,” the announcement said.

Dealing with the actions of the secured creditors, it said “eventually one needs to face the reality that if the business model could not be restructured, funding continued cash deficits through asset sales and stretching creditor payments was not in the interest of any class of creditor, including MIS investors or the FEA shareholders”.

The announcement said that the priority for the receivers would be to firstly seek the viability and funding requirements of each scheme and then to start the sale process for the Bell Bay Mill, which, on a standalone basis, represented a valuable asset.