Merrick Howes's purchase of the debt of bankrupt Tasmanian timber company Gunns may turn out to be one of New York-based Anchorage Capital Group's best investment decisions in Australia.
Anchorage may have as much as 70 per cent of Gunns debt, acquired for between 45c and 55c in the dollar from banks including ANZ, which was formerly Gunns' largest secured creditor.
Howes and his team are hopeful that they will surpass their internal rate of return target on their Gunns investment of 15 per cent to 20 per cent a year as the Gunns auction has drawn bidders from around the world.
Sovereign wealth funds, US timber investment management organisations and pension funds are all anxious to secure 175,680 gross hectares of timber, wood chip mills, a leasehold interest in a Burnie Port facility, nursery operations, a laboratory and a licence to build a pulp mill*.
Final bids are due by March 31.
Interested parties can bid for the timber assets separately from the pulp mill* licence. A data room, controlled by Gunns receiver Korda Mentha and Moelis & Co, is open to as many as seven final bidders.
The successful bidder for Gunns is not expected to pay as much as the $635.9 million owed to secured creditors.
Gunns debt was trading in the "mid-40s to mid-50s", according to distressed debt traders, giving the total debt owed to secured creditors a market value of about $286m-$350m. Anchorage may control $200m-$245m of Gunns debt at current prices.
The 139-year-old Gunns is seen as a strategically important global fibre asset in a politically stable country with well-developed infrastructure services such as a secure electricity supply and a port.
Moreover, as the Australian dollar has depreciated against the US dollar from more than $US1.05 to about US89c, the production costs for a prospective Gunns owner are falling while the price of pulp, denoted in US dollars, is rising relative to the Australian dollar.
The new Gunns owner is likely to see the value of the asset increase immediately as the Gunns receivership has meant the company could not enter long-term contracts with buyers.
Once the Gunns auction closes, the new owner is expected to be able to sign long-term supply contracts with the world's biggest paper manufacturers.
Some of Gunns' final bidders may be just interested in the company's trees, the licence to construct a paper mill, or both.
Korda Mentha will accept the highest offer by any bidder even if it is for one asset.
It will then seek to sell the remaining asset in another auction.
* the original story erroneously referred to the proposed pulp mill as a 'paper mill'.
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