Allied’s Hanover deal better than receivership

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Hanover's two independent directors, David Henry and Des Hammond, have given their approval to Allied Farmers' proposal to acquire the finance company's finance assets for shares.

Monday, November 30th 2009, 12:32PM 5 Comments

Grant Samuel, in its independent report, has also said it is the best of all the options available, including receivership. It has also described the deal, which was initiated by Allied Farmers, as a "back door listing" of Hanover.

An explanatory memorandum and Notices of Meeting booklet is being sent to Hanover and United investors today.

The main points in the 88-page booklet are:

• The Independent directors, Henry and Hammond, "unanimously recommend that investors vote in favour" of the proposals.
• The independent report from Grant Samuel also recommends investors should vote for the proposal as it is "superior to the status quo (and the prospect of potential receivership)".
• Guardian Trust, the trustee for Hanover debenture holders, warns that if the proposal is accepted and investors decide to sell their Allied Farmers shares straightaway they are likely to get less than 72c each (the value ascribed to the shares in the deal).
• It also warns that if the deal is approved, Hanover investors will "cease to have any claim against the company, its residual assets or rights, or any shareholder support regardless of whether you voted in favour of the resolution or not".
• Guardian Trust general manager corporate trusts, Bryan Conner, also makes it clear that if investors vote in favour of the proposal they are swapping illiquid debt securities, which are secured against the assets of Hanover for shares in Allied Farmers which are liquid, but rank behind Allied Farmers' other liabilities.
• Also the report says there is little likelihood another offer will eventuate, and that if Hanover stays in its moratorium there is "every likelihood" the company will end up in receivership.
• Grant Samuel says that investors are likely to receive less from a receivership than from the moratorium.

Shareholder support package
The documents also disclose that Hanover's shareholders, Mark Hotchin and Eric Watson, $96 million support package agreed to in the moratorium proposal has actually ended up with a lower value.

Henry says the main reason for that is that the value of the Axis assets has fallen as have other property assets.

Their contribution is in a number of parts:

• A $10 million cash injection - this was made in December 2008 and is valued at $10.5 million by Allied Farmers due to interest.
• Property assets of $66 million in the form of Axis Property Group - PriceWaterhouseCoopers (PwC) estimates the value of these assets is $26 million, however Allied values them at $34 million.
• A further $20 million from entities associated with shareholders which could be called on to meet repayment schedules - PwC values this at between $0 and $20 million under the moratorium, however it is not part of the Allied deal.

Each party has valued the support package differently. The Hanover directors put $96 million on it, PwC valued it at between $36 million and $56 million, while Allied Farmers have it at $44.5 million in its proposal.

The Grant Samuel report says that it is arguable Hotchin and Watson's "motivation for advocating the proposal is to avoid their obligation to provide the up to $20 million pledge which was available under the support package".

It says the guarantees will "fall away in the event of receivership which is an increasingly likely scenario".

It also says the $20 million is halved if the company makes its scheduled moratorium repayment on December 31.

State of loan books
The documents released today also show the poor state of Hanover's loans. The five largest loans made by Hanover and United make up more than half the gross value of loans.

These five loans are Five Mile ($72.4m); Kawerau Falls ($88.7m); Jacks Point ($44.9m); Kinloch Golf Course ($24m) and Silverdale ($23.1m).

The performance of these loans will have a significant impact on future cash availability.

The report also notes that at June 30, 73% of Hanover's loan book was impaired, and almost 90% of United's loan book is either unsecured or secured by second mortgage. At June 30 around 44% of United's loan book was impaired.

One of the key questions for investors is whether Allied will be able to manage the loan books better than Hanover and United.

Grant Samuel says: "It is unclear whether Allied Farmers currently has sufficient in-house management capability to actually manage and collect the acquired assets, although it is understood that it may make offers to some Hanover employees to assist with expertise on the loan books being acquired.

Henry says that the independent directors, "believe that Allied farmers will be better placed to achieve higher realisation values for investors over the long term, as it will be able to arrange new funding and use the proceeds from asset realisations, to support the business instead of using such proceeds to meet the short-term repayments required under the debt restructure.

"We are of the view that Allied Farmers has the potential to add real value enhancement to the Hanover and United loan and property assets that is not possible under the debt restructure because of the cash constraints imposed by the repayment schedule."

 These value enhancements potentially include:

• An ability to provide ongoing funding support to complete property developments commenced by borrowers with Hanover/United and senior lender support. There are a number of impaired loans where the developer cannot finish the property development through lack of funding.
• An ability to negotiate with prior ranked lenders over borrowers' assets in order to ensure an orderly realisation over time. There are a number of impaired loans where Hanover/United are not in a position to control an orderly realisation to obtain best value due to a prior ranking security holder.
• An ability to pay down the first mortgages over the Axis property assets transferred under the debt restructure Shareholder Support Package, which otherwise cause increased pressure on cash flow and the realisation programme for these assets.

More on this story: The choice for Hanover investors

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