Ann: Trading Update, page-32

• Jun 7 2017 at 7:51 PM
• Updated 11 mins ago

Quintis appears to be on cusp of default as liabilities loom

Troubled Sandalwood group Quintis appears to be in danger of missing its next interest payment to bondholders due on August 1 unless its cash improves significantly in order to avoid a default.

The former TFS disclosed on Tuesday that it had $17 million in cash at the end of May, meaning it has spent $72.8 million in five months given it reported an $89.8 million cash balance at December 31 last year. The cash burn rate is equivalent to roughly $15 million a month, but that includes some one-off factors, such as the purchase of a 659-hectare farm in the Northern Territory in April.
Quintis is aiming to recapitalise.

The company is not offering a retail managed investment scheme product this year, meaning it is reliant upon institutional investors and sophisticated investors for sales of new plantations in the critical lead up to June 30.

The fees it earns from those sales are vital given revenue from product sales has been downgraded to between $25 million to $35 million for 2016-17, from a previous forecast for as much as $55 million, and it has still not shipped any timber to China this calendar year.

Soren Aandahl, the head of research at hedge fund Glaucus Investments, which revealed a short position against Quintis shares in March, pointed to Quintis' inability to lock down a new contracted buyer in China.

"This begs the question: if sandalwood was as valuable as the company claims, why are they having trouble selling it? Also, with so little cash left, and given they admitted that product sales are unlikely in scale, how will the company continue to operate? In our opinion, given its dire cash situation, [Quintis] is likely headed for administration."

Quintis' battle with short sellers was lost when the company admitted in May that it lost a prestigious, but financially immaterial contract, with Nestle's Galderma in December 2016 without the knowledge of its current board or management. It has since emerged that it had not shipped any oil to Galderma since June 2015.

Interest on the $US250 million ($331 million) of debt raised last year is payable the first day of February and August. Quintis has not shied away from the fact that it has failed to provide quarterly financials as it is required to do under the terms of the bond offering. That omission ordinarily would pave the way for a default scenario, but bondholders have not issued a notice stating as much, and they are in talks with the company about its liquidity position.

BlackRock is believed to be the biggest owner of Quintis debt.

As well as its semi-annual interest payment to bondholders, the company faces another imminent liability with one of its institutional plantation investors potentially striking a put option as early as July 10, entitling that investor to $33.9 million cash in exchange for their trees. The unnamed investor was awarded the option as part of the purchase of 400 hectares of sandalwood trees in June 2014.

Quintis shares remain halted until June 21. A 72 per cent slide over the last days the shares traded has reduced its equity value to $115 million. Its biological assets were valued at $839 million at its first-half results.

Under its revised guidance, Quintis factors in between zero and $8 million in timber sales to China this financial year. It has been in "advanced" talks since March with alternative customers after orders from a previous buyer, Shanghai Richer Link, disappeared coinciding with a customs duty avoidance investigation by Chinese authorities. The company is confident that it can restart shipments to China, but it is not certain when that occurs and sees "solid" 2017-18 sales figures.

While June 30 looms as a hard deadline for signing up new high net worth investors to its plantations, institutional investor subscriptions are not as beholden to the financial year calendar. International investors would be ineligible for the tax benefits some Australian investors receive.


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