Unsecured creditors from across the cotton industry are being warned to expect to be repaid maybe just a fifth of their losses following the collapse of Chinese-owned merchant Weilin Trade owing about $58 million.
Latest estimates suggest about 195 cotton growers, brokers, merchants and other service providers have lost money after Weilin bought cotton for the 2019-20 and 2020-21 seasons for as much as $660 a bale - or typically about $15 to $30 above mainstream market prices.
However, its contracts were not honoured by buyers or shareholders in China after coronavirus triggered a demand slump in February-March.
A big portion of Weilin's 2020 crop purchases had to be re-sold into a depressed July market for significantly less than $500/bale.
About 40 per cent of last year's modest 600,000 bale Australian crop is mooted to have originally been contracted to Weilin.
The trader, which is registered separately to a sister farming company at Coleambally in southern NSW, had already rolled over a large number of undelivered 2019 crop contracts, but also became particularly aggressive with its post-Christmas bidding at prices above $650/bale.
Unsecured creditors owed $22.5m
The list of unsecured and potential unsecured creditors - representing a veritable who's who of Australian cotton industry names - indicates about $22.5m is owed to growers, traders and brokers to cover the gap between Weilin's promised price and the eventual value of their cotton when it did sell.
Some of the bigger sums outstanding are due to big name producers such as the Robinson family's Australian Food and Fibre; Murrumbidgee family farmers, Commins Enterprises; Queensland-NSW border enterprise, Reardon Farms; the Carberry family at Narrabri; the Statham family's Sundown Pastoral Company, and the Liverpool Plains' Merilong Pastoral Company.
Other industry players including Goondiwindi ginning business Carrington Cotton, Namoi Cotton's merchant partner Louis Dreyfus, and other traders Ecom Commodities, Agvantage Commodities and Omnicotton Australia are also unsecured creditors.
Weilin's Australian financial backer and primary secured creditor National Australia Bank will be entitled to about $35m when the business winds up, while Weilin's eight employees are owed about $64,000 in combined outstanding entitlements.
Liquidation firm Vincents, which took the export company into voluntary administration last month, plans to recommend a deed of company arrangement to ensure some dividend is paid to unsecured creditors.
The DOCA proposes a $5.5m pool to be split among unsecured creditors.
The proposal, to be discussed at an online creditor's meeting this week (August 6), assumed a return of about 20 cents would be paid for every dollar owed by Weiling.
According to administrator Steven Straatz, 20c would "exceed the amount they would receive in liquidation of the company after the contemplation of NAB securities".
He warned, however, Vincents' initial estimates were still subject to final adjudication.
Payout return unease
Growers are concerned the payout could be closer to 15c in the dollar, given the final tally of creditor claims, plus the administrators costs and other administrative expenses are still to be finalised.
A vote on the deed of company arrangement may be postponed while growers seek clarity about a number of concerns relating to Weilin's business structure and its financial backing.
There's no more money coming from China- Steven Staatz, Vincents
One particular query is understood to relate to NAB's examination of Weilin's trading health prior to refinancing the company's operations less than three months before it effectively declared itself insolvent.
"There are also questions over whether these guys were relying on borrowed funds for two or three years, rather than money from Chinese buyers, to pay for the cotton they contracted in Australia," said one grower representative.
Mr Staatz said while his team had been working extremely hard to get the best possible deal for creditors he believed it highly unlikely any more funds would be available to compensate for the unpaid contracts.
"There's no more money coming from China," he said, noting there was also no common law jurisdiction by which the outstanding payments could be claimed by Australian creditors.
Trading queries
However, others within the industry suggest oversas buyers were not entirely at fault as the Australian arm of the Weilin Group business may have been running a largely unhedged trading book.
It appeared to have had a limited safety net in place to protect its aggressive and speculative buying strategy when the market tumbled.
Weilin continued to surprise the market with contract offers via brokers at $15 to 20/bale above the rest of the market until mid-May, long after global prices had started behaving erratically and sliding noticeably.
Also surprising to many in the sector was that more was not done by brokers or growers to query Weilin's unrealistically bullish offers.
Administrator, Mr Straatz, said fortunately all cotton which was exported by Weilin appeared to have been paid for in full.
An industry analyst noted it was also relatively fortunate last season's cotton crop was so small, and therefore the losses related to a comparatively small number of bales.