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Allied’s Hanover deal better than receivership

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

« Rates Round UpThe choice for Hanover investors: Receivership or Allied Farmers? »

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Comments from our readers

On 30 November 2009 at 1:56 pm Ron Palmer said:
Putting aside all emotions and especially vindictive feelings towards Hanover Shareholders it is a really a no brainer and the only logical decision is to vote for the proposal for Allied to take over Hanover/United. It will obviously take time for Allied's shares to increase in value but I'm on the side of the Westpac money guru's and I think NZ will recover quicker than what is expected. In 18 months to two years property valuations will be greatly improved and Allied will be laughing all the way to the Bank.
On 30 November 2009 at 2:27 pm Anne Kerslake said:
I too believe the Allied takeover is the way to go and the best option for us as debenture holders. I'm very angry and want those conmen to pay and suffer as their investors are, but let's face it, they won't whatever happens. I voted against the moratorium but us small fry don't really get a say in these things. One thing, people like Watson and Co will never ever get hold of our money again.
On 1 December 2009 at 9:00 am Richard said:
Hotchin and Watson will get hold of more public money in the future, you can be sure of that. It's what they do. And they will 'loan' it to ventures they own. And they will go bust again. And shareholders will hope in vain for some type of salvation. Nothing will change. Don't fool yourselves.
On 1 December 2009 at 3:55 pm James Parker said:
I am continuously surprised at the language from some with regard to those who ran the finance companies. I believe those directors who acted fraudulently or illegally should be punished but for those directors who like us are victims of the global crisis I bear no animosity. I went into each finance company with my eyes wide open, my adviser was always quick to point out with the higher interest comes higher risk. Many of us over the years smiled smugly at the returns we were getting as opposed to our very conservative cousins who kept their money in the bank and between 1997 and 2007 averaged a return of 4.08%. (My average over this time using finance companies was 7.59%) We were all happy to bank the funds Mr Watson & Hotchin paid for the use of our money in the good times but in the bad times they are charlatans? Oh please grow up and be responsible for your own decisions the good and the bad. As to the Allied deal Yes! Yes! Yes!
On 3 December 2009 at 10:22 pm Gerald said:
So, let me get this straight.

If AF take the assets:
- up to $20m of commitments from Hotchin and Watson are wiped
- Hanover's assets are taken over by the small Allied Farmers, whose staff lack the understanding of the assets that Hanover's staff have. Hanover assets will be 90% of the value of the expanded Allied Farmers. Where's the evidence that they can effectively this massive increase in their loan assets?
Commenting is closed



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