Griffin Coal's collapse has left Perth's business elite agog,
Faded Glory 2
In the early hours of New Year's Day in the eastern states, while those revellers still trying to get home were cursing the traffic and the dearth of taxis, a more sombre observance was unfolding in Western Australia as the clock crept towards midnight.
In Collie, the coal town two hours' drive south of Perth, December 31 was the deadline for Ric Stowe's Griffin Coal group to stump up $US22.5 million ($24.5 million) in interest for US bond-holders, with a further $5 million due to the Tax Office.
One minute into the new year and the heart of Stowe's international empire was toast. KordaMentha partners were appointed as administrators to Griffin Coal and four associated companies three days later.
The crisis had been brewing for at least a month, since Griffin sought a one-month extension from the note-holders after it failed to make the interest payment which fell due on December 1. Negotiating another extension over Christmas had proved too hard.
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Far more was at stake here than just another skipped interest payment. Griffin Coal carries $700 million of debt. But the flow-on costs of its failure could push well past $3 billion.
The default has thrown a spotlight on the mysterious world of Ric Stowe, who spends most of his time in Monaco juggling a global international empire based in the tax havens.
It also is focusing attention on the boutique investment adviser that set up Stowe's network of debt, Corpac Partners, and its principals Robert Crossman and tax lawyer Don Pearson.
The most common response in Perth this week has been disbelief. Stowe is one of the wealthiest men in Western Australia, with a personal value estimated by BRW last year of around $720 million, a figure which makes the missed $29.5 million payment seem at least manageable.
Stowe's not a newcomer. He's been a major WA dealmaker for three decades and handled the 1990 recession with aplomb.
In the 1980s he was one of premier Brian Burke's "Four on the floor" businessmen who set up the John Curtin Foundation to raise money for the Labor Party.
What makes things all the more bizarre is his group's failure to make the tax payment. This failure voids a hugely discounted tax settlement deal negotiated at great length by Stowe's lawyers.
Although Stowe is one of WA's wealthiest businessmen, he's been almost invisible in Perth in the last few years, spending six months a year in Monaco. "You wouldn't pick him out in a crowd," says a long-time business associate. "Socially, he is not flamboyant. He is definitely introverted. He is no A-list sort of guy."
When he is in town, Stowe socialises at various horsing events with the semi-rural communities on Perth's outskirts . "He'd be up the back having a beer with someone and no one would notice him," the associate says.
One Perth-based executive finds Stowe "quite engaging . . . quite clever". Another predicts "a spectacular and embarrassing blow-up", and asks: "Why would you allow a $25 million [tax] debt to become $208 million by missing a $5 million payment if you are supposedly worth more than $700 million?"
One senior resources figure who knows Stowe says he is likely to be distressed by the group's collapse. "He is not someone who would do things negligently," he says. "He wouldn't be enjoying this. He wouldn't be cavalier about it."
The logic runs like this: it was not in Stowe's interest to let Griffin Coal fail. He didn't let it happen by accident. That means it collapsed because Stowe couldn't help it.
This suggests the failure may be merely the first act in a more prolonged drama. Griffin owes some $520 million to bond-holders - notably US-based Clearwater Capital Partners, Harbinger Capital and DE Shaw - and $180 million in other debt.
Rain and start-up costs for a new mine hurt Griffin's profitability. Operating earnings for the September quarter fell to $3 million from $13.2 million a year before. The group's assets, apart from the mining operation itself, include coal reserves which were valued in the June 30 accounts at $728.5 million but will probably sell for considerably less.
Besides property, the major assets the administrator could pursue is Devereaux Holdings, Stowe's principal holding company in Australia. As of June 30, 2009, Devereaux owed Griffin Coal $141.6 million.
The Griffin Coal collapse raises profound questions for Stowe's vast empire. If it could not raise the funds to save Griffin Coal, will it be able to repay its intercompany loans? If the administrator goes after Devereaux, how might that affect the $2 billion of debt raised for power station projects in the last two years? The only thing more vulnerable than a coalmine with no customers is a coal power station with no coal - so are the supply contracts locked in, and if so at what price?
Last month Stowe's assets were shuffled, raising the possibility he was seeking to contain the damage that might flow from the collapse of Griffin Coal.
On December 7, six days after Griffin Coal missed its first deadline with its bond-holders, Devereaux sold its stake in a company called ACN 113 353 638 Pty Ltd to Ellsmere Corporation, a Stowe company located in the Turks and Caicos Islands, another tax haven.
ACN 113 353 638 is a finance company which holds security over most of Stowe's Australian companies as part of a $1 billion facility originally set up by Barclays Bank in 1992. The only secured debt in the Griffin group is $10 million that is owed to ACN 113 353 638 by Griffin Energy Group as part of this facility.
The sale to Ellsmere suggests that if creditors pursue other Stowe companies in Australia, they will find themselves ranking behind the debt which is secured to the foreign creditors.
In a second deal, on December 15, another Stowe company in the Turks and Caicos Islands, Windermere Corporation, took a corporate charge over Devereaux with a maximum prospective liability of $920 million, to secure money owing from a deal two years ago by Windermere to sell another Australian subsidiary, WR Carpenter Investments, to Devereaux.
Together Ellsmere and Windermere hold security over key Stowe companies with a maximum prospective liability of $1.92 billion. While the actual debt is probably far less, creditors who move against the companies will find themselves ranking behind the secured debt held offshore.
This is good news for Stowe, but two advisers should take much of the credit: Crossman and Pearson.
Crossman made his name in the 1990s working for Rothschild before he was headhunted to run Hartley Poynton's investment banking division, from which he parted ways in 2001 to set up a corporate advisory business, Corpac Partners.
Corpac's website features a table showing it ranked third in raising project finance in Australia in 2007, behind Australia and New Zealand Banking Group and KPMG, and well ahead of Babcock & Brown and Macquarie. Most of this was work it performed for the Griffin group.
The projects include raising $1.015 billion for the first two stages of Bluewaters power stations, a further $700 million in September 2008 for Griffin Worsley, a multi-fuel cogeneration plant at WA's Worsley Alumina refinery, and $200 million more for the Emu Downs wind farm.
It's lucrative work. Australian Securities and Investments Commission (ASIC) filings show Corpac earned $32 million before tax in 2007 and 2008, and paid out $21 million in dividends.
Corpac's website highlights the role of Crossman and other executives, but it makes no reference to Crossman's co-director, Pearson. ASIC records show Pearson sits on the board of Corpac Partners Pty Ltd with Crossman. Regulatory filings state Pearson owns Corpac.
Pearson has had a stellar career first as an accountant, then in the early 1990s as a lawyer when he was a partner at Corrs, then back to accounting as national tax director at Deloitte Touche Tohmatsu. These days he's Ric Stowe's tax lawyer.
Perhaps that's why some Perth figures speculate that Stowe is a silent partner in Corpac. There would be some logic to such vertical integration.
In fact in the month before Crossman and Pearson became closely involved with Stowe, the existing operating company at Corpac Partners was sidelined and replaced with another entity renamed Corpac Partners. Neither Pearson nor Crossman could be contacted for comment. Stowe's public relations advisers have declined to comment.
What can be said is that Crossman and Pearson have had a major impact on Stowe's corporate strategy. They were appointed in November 2003 to 27 Stowe companies and have since joined the boards of a further 55.
The core of Stowe's empire had always been the bumper profits from Griffin Coal's contracts with WA government power company Verve, which extended to June 2010. But in 2004 Griffin lost the tender to provide coal for Verve beyond 2010 to its rival, Premier Coal, a unit of Wesfarmers.
Stowe had six years to find another buyer for Griffin's coal. The obvious move was to sell overseas, but Stowe's plans to ship coal overseas through Bunbury were blocked by court action over concerns coal dust would affect other Bunbury shipping. Instead Griffin would have to send its coal by rail to Kwinana for shipping - at a cost which, given the lower quality of the coal, made exporting a dubious proposition.
Stowe had already been considering building power stations to grow the market for his coal. He ramped these efforts up while diversifying into alternative energy. He is now committed to $2 billion in power projects with Bluewater, Worsley and Emu Downs. He was also ramping up a substantial property arm.
Griffin Coal was the cash cow for this, providing security for other parts of the group and the cash flow to service debt. But when the global financial crisis blew out margins on the new debt Corpac was raising, and as heavy rain and delays hit coal production, the Griffin money machine ground its gears.
Stowe's decision last October to sell his 16.2 hectare beachfront property at Bunker Bay in Perth - land which had been in his family for generations - was probably a warning sign.
The other blow in 2004 had come when the Tax Office issued 44 assessments to Stowe companies. Two of them totalled $179 million. The largest involved a 1988 deal by Carpenter Holdings International, based in Cyprus, which sold two companies based in Papua New Guinea and Fiji to WR Carpenter Holdings in Australia for $50 million cash plus a $70 million interest-free loan which fell due in 15 years. The Tax Office claimed this avoided tax on interest payments.
During five years of legal battles Stowe's companies deposited $40 million with the Tax Office before reaching a settlement last April. Against the $208 million the Tax Office was claiming, the Carpenter Group had to pay only $25 million more in instalments.
And that shouldn't have been a problem. Griffin Coal had it covered.
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