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Hanover details plans

Hanover aims to pay all the principal back to debenture holders over a five year plan, but there is no certainty interest payments will be made.

Thursday, November 20th 2008, 11:00AM

by Philip Macalister

Under a debt restructuring proposal released this morning the company has outlined a plan which includes shareholder support of up to $96 million.

This $96 million is made up of a number of elements including cash and the assets of Hanover’s property company Axis Property Group. These assets currently valued at around $52 million will be transferred to Hanover at $40 million. They include property at Jacks Point, Matarangi Beach Estate, apartments at the Viaduct and some property at the Clearwater resort in Christchurch.

Shareholders Mark Hotchin and Eric Watson will also provide:

  • $36 million of cash, being an immediate $10 million to be held in a solicitor’s trust account and applied to principal payment obligations when and if required and $26 million in cash to be applied to debt reduction in the Axis Property Group
  • Commitment to provide a further $20 million by way of personal guarantees from the shareholders that becomes available if required to meet the repayment schedule from 2010 onwards.

There are four classes of investors, debenture holders in Hanover Finance and United Finance, and unsecured investors with notes in Hanover Finance and bonds in Hanover Capital.

Under the plan the 16,000 debenture holders would be repaid their principal, totaling $527.2 million, by December 2013 with payments made each quarter. The 1255 unsecured investors, owed $26.3 million, would get one payment of 50c in the dollar on December 31, 2013.

The average maturity profile of Hanover and United debenture books is 22 months, which means that repayment terms have been doubled.

Investors are being asked to forgo interest payments during this period. Under the plan any interest payment would be made at the end and based on the company achieving a certain level of asset recovery. Hanover Finance chief executive Peter Fredricson says the formula is complex, but the outcome is that if a certain level of recovery is made then the excess above that level would be shared 50:50 between the company and investors.

In some ways it could be considered as a profit sharing arrangement.

Fredricson says the plan has been structured as a principal repayment plan, as various, unspecified tax issues surfaced if it covered interest as well.

The success of the plan hinges on what happens to the property market.

Shareholder Mark Hotchin says the market is “terrible” and has got worse since Hanover started its restructuring process. To illustrate that point he said the timeframe for the recovery had doubled since they started work on it. Fredricson is confident the plan will succeed, but told Good Returns that the company will “require a tail wind” to get there.

He also acknowledged the company was more optimistic on the plan’s outcomes than KPMG who was the adviser for the Hanover Finance part of the deal. (Korda Mentha advised on United Finance).

He says Hanover was about 20% more optimistic than KPMG.

Hotchin says one of the goals of the plan is to see the company come out the other side. He says it is the intention to keep Hanover Finance as a going concern and to continue being in business past 2013.

He says there is a place in New Zealand for mezzanine finance supporting property and infrastructure development.

Investors will be asked to vote on the plan on December 9.

Hotchin argues that the plan is far better than receivership and it would produce “substantially more” and cost less than if the assets were sold off in this poor market at firesale prices.

He says the outcome could be double.

One of the key things which the company needs to do is ensure that the unsecured investors accept the deal.

Perhaps the one thing which will clinch the deal though is that if investors choose to tip the company into receivership then the $96 million from the shareholders won’t eventuate.

“The central plank of the proposal is the commitment of up to $96 million of cash and property assets by the shareholders, which becomes available only if investors vote in favour of the proposal,” the company says.

Hanover Repayment Schedules

Hanover repayment schedules

hanover repayment

Related documents:

Hanover's Debt Restructure Proposal, view the media presentation here.

View the Investor Roadshow dates on Good Returns here.

Investor Q & A here.

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