Sprawling Griffin empire muddies waters as resolution sought

FROM the acres of newsprint devoted to the spectacular collapse of Rick Stowe’s Griffin Coal business this month, several significant strands have emerged.

Firstly, it is clear that few saw the collapse coming – either in the local business community, the Collie community or the company’s 500-strong coal workforce.

In particular, most observers have been left scratching their heads over how a man supposedly worth more than $700 million could allow the centrepiece of his empire to collapse by missing a relatively paltry $25 million repayment to bondholders due on December 1.

Probably the most significant single indicator of just how tight money has become within the Stowe universe in recent months is that the reclusive Monaco-based tycoon did not even stump up $5 million owed to the Australian Tax Office the same day.

The significance of that one missed payment cannot be overstated, given that it voided a hard-fought agreement to settle a disputed $208 million tax bill after five years of legal battle for just $65 million. Griffin must now repay the $208 million in full.

Since administrators were appointed to Mr Stowe’s flagship Griffin Coal and four other related companies early on New Year’s Day, the first rays of light have started to be shone on the complex inner workings of the notoriously private group.

That brief flicker of illumination has revealed the sprawling empire of coal mining, power generation, livestock and property interests may be a house of cards in which all has the potential to be sucked into the Griffin Coal vortex.

So far only those companies directly associated with the Collie coal operations, including the owner (but not operator) of Griffin’s coal-fired power stations, have been put in the hands of KordaMentha administrator Brian McMaster.

The five companies are estimated to owe at least $720 million, primarily comprising $520 million owed on unsecured US bonds issued in late 2006 and the $208 million owed to the tax office.

In addition, the entitlements of Griffin’s coal workforce stands at around $12 million although that would grow to $55 million if the workforce is retrenched, and redundancy entitlements based on length of service are triggered.

But Griffin Coal’s debts are just one piece in the jigsaw.

On top of the above debts, a further $1.2 billion is owed to a syndicate of banks which bankrolled construction of Griffin’s Bluewaters 1 and 2 coal-fired power stations near Collie, and the $200 million Emu Downs windfarm near Cervantes.

The funds were arranged by Sydney-based Corpac Partners in late 2007, replacing an existing $460 million facility used to construct Bluewaters 1 and providing funds for construction of Bluewaters 2.

Corpac also arranged a $700 million loan facility in late 2008 for a co-generation plant at Worsley Alumina owned jointly by Griffin and Worsley.

Against that backdrop, Mr Stowe’s Devereaux Holdings owes Griffin Coal more than $140 million, but two other offshore Stowe companies hold charges over Devereaux and his other Australian companies to a maximum of $1.9 billion.

Hindsight now suggests it was the move into the capital-intensive power generation sector that has brought Griffin to its knees, because its limited early power revenues left it reliant on the coal operations to service its debts.

Bluewaters 1 only came online in March, six months late due to delayed approvals, in turn delaying the start-up of Bluewaters 2 to early December.

Those delays put a huge dent in Griffin’s forecast revenues for much of last year, meaning it could ill afford any hiccups at Griffin Coal.

But wet weather and mine planning problems meant Griffin could neither meet its tonnage nor quality budgets, with the resulting shortfall in revenues leaving Griffin increasingly desperate as the bond repayment deadline loomed.

When efforts to secure breathing space from US bondholders failed last month, Mr Stowe had no choice but to appoint administrators.

Contrary to popular opinion, Griffin did not move into the power sector simply because it lost a 25-year coal supply deal to state power utility Western Power (now Verve Energy) to Wesfarmers in 2005.

In fact, Griffin first announced plans for Bluewaters in 2003 viewing a vertically integrated power supply business as a logical extension of its coal mining activities.

It also saw significant opportunity in the proposed deregulation of WA’s electricity market and eyed a 2004 state tender to provide third party base-load power as a possible launch pad.

However, the government instead favoured a gas-fired proponent over Griffin for the base load tender. In a further blow, Wesfarmers subsequently won the tender to become Western Power’s exclusive coal supplier from mid 2010 (at half the price of Griffin’s coal), leaving Griffin little choice but to find alternative customers for its coal.

A power supply deal with the Boddington gold mine in late 2005 underpinned development of Bluewaters 1, while Griffin believed it could secure enough third party power contracts to underpin Bluewaters 2 plus two additional generation units.

That optimism also reflected the break-up of Western Power and newly formed electricity retailer Synergy’s obligation to displace a growing portion of the supplies it received from generation sibling Verve.

Griffin won a 200-megawatt supply deal in Synergy’s first procurement round in late 2007, underpinning Bluewaters 2. But it was overlooked by Synergy’s last major procurement tender in November that could have underpinned Bluewaters 3 and 4.

Griffin also looked to alternative customers for its coal to supplement the small volume already sold as reductant to miners Iluka and Simcoa.

While exporting promised the best return, the difficult characteristics of Griffin’s product made it problematic.

Griffin’s sub-bituminous black coal lacks the quality to be used in steelmaking, while a moisture content of around 40 per cent limits the viability of transporting it further than the nearest power station.

The coal’s tendency to self-combust as it dries out also poses major problems for ship owners.

Griffin subsequently built a trial coal carbonisation plant to create a more stable and higher value product for export, only for the plant to be ripped apart in an explosion in late 2008.

That was itself enough for ratings agency Moody’s to downgrade its already poor rating of Griffin’s US bonds in January last year.

Bond markets have always been a dog-eat-dog world, and Griffin joins a long list of Australian companies to hit trouble over disputes over bond repayments in recent years, such as Anaconda Nickel, Western Metals, and Preston Resources.

Because bonds are actively traded, only a small proportion of the original buyers are usually still at the table should a company later strike trouble.

Furthermore, the competing commercial objectives of individual bondholders also complicates efforts to secure the near-unanimity needed to restructure bond repayment schedules.

Local sources have suggested that Mr Stowe may have arranged to cover Griffin’s immediate bond obligations in return for greater security over Griffin’s assets only to be knocked back because it would have ranked him ahead of bondholders in any liquidation.

With the market value of the Griffin bonds plummeting, it has also been suggested that bondholders preferred administration to allowing Mr Stowe to buy back bonds at a fraction of the price paid by other bondholders.

Regardless, the hopes of Collie’s coal mining community now rest with Mr McMaster’s efforts to either come up with a restructure plan to save Griffin or, as is considered more likely, find a buyer for all or parts of the business.

So though interest in the assets is unquestionably high, the complex web of Griffin’s affairs means a definitive outcome is likely to take months to achieve.