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Tachikawa in breach of bank covenants ahead of receivership

Tachikawa in breach of banking covenants, tagged by auditor in lead-up to receivership

By Paul McBeth

Oct. 21 (BusinessDesk) - Tachikawa Forest Products (NZ), the owner of the Rotorua sawmill tipped into receivership last week, was in breach of its banking covenants for the past two years, and had its 2012 accounts tagged by auditors over a working capital deficit.

KordaMentha’s Grant Graham and Brendon Gibson were appointed receivers on Friday, ending the Japanese-owned wood processor’s attempts to regain profitability after successive years of losses that had accumulated to $12.5 million as at Dec. 31. The sawmiller narrowed its annual loss to $3 million in 2012 from $4.5 million a year earlier, though its working capital deficit widened to $1.3 million from $552,000 in 2011.

Financial statements lodged with the Companies Office show Tachikawa was in breach of its banking covenants in the 2011 and 2012 calendar years, and had reached an agreement with Bank of New Zealand to operate within a capped overdraft of $1 million. BNZ was owed $8.3 million as at the end of 2012, down from $9.3 million a year earlier.

Auditor Iles Casey tagged Tachikawa’s 2012 financial statements with an ‘emphasis of matter’, saying the breached banking covenant, net loss and working capital deficits meant there was “an uncertainty that may cast doubt on the company’s ability to continue as a going concern.”

On Saturday, First Union general secretary Robert Reid, whose body represents about two-thirds of the 120 staff at the mill, said he understood Tachikawa was working towards returning to profitability, but ran out of working capital and wasn’t able to buy logs to meet its order book.

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The failure comes as the country’s forestry sector faces a split between strong global demand for logs pushing up prices wood manufacturers have to pay for raw materials. Government figures show forestry and logging producers have fattened their margins, with output prices up 7.6 percent in the year ended June 30, while input prices rose only 0.9 percent. Output prices are what manufacturers receive and input prices are what they have to pay.

That’s made life tough for manufacturers such as Tachikawa, as wood product manufacturers faced a 1.2 percent annual increase in output prices in the June quarter, slower than the 2.2 percent increase in input prices. Pulp processors had it worse, reporting a 0.4 percent fall in output prices, while facing a 1.6 percent increase in input prices.

The Ministry for Primary Industries latched onto the discrepancy between loggers and wood processors in its 2013 situation and outlook report for the primary sector, with a strong harvest lined up for between 2015 and 2015 as a series of forests planted in the 1990s mature.

Log exporters’ biggest constraint was capacity, whereas sawn timber exporters faced challenging conditions as Chinese demand for logs pushed up domestic prices for processors, and pulp, paper and woodchip exporters in a worldwide shift away from pulp manufacturing.

Statistics New Zealand figures show the value of logs, woods and wood articles exported in the 12 months ended Aug. 31 climbed 16 percent to $3.56 billion, the fastest pace of growth among the top 10 exported commodities. Foreign sales of wood pulp and waste paper shrank 4 percent to $595 million and paper and paperboard sales sank 12 percent to $485 million in the same period.

Tachikawa is about 49 percent owned by Japan’s Tachikawa Forest Products and 38 percent by Sojitz Corp.


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