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My take on Hanover's plan

Thursday, November 20th 2008, 10:18AM 10 Comments

by Philip Macalister

Hanover’s always been good at selling its wares, but now the true test has arrived. Can it sell its debt restructuring plan to its 16,000 investors? On presentation the company has started well – indeed done much better than other finance companies. It has today given the media a detailed briefing. Next it embarks on a series of investor presentations around the country. It has been pretty open about its situation and its plans. That is a major plus. As for the plan itself. Well you would have to give the shareholders (Mark Hotchin and Eric Watson) a top score for stumping up with $96 million in support. However, don’t be fooled by the size of the number. It includes property assets which may be worth less than what they are put into the company at (even though their value has already been discounted), and some of the cash support is in contingent form, rather than a cold, hard cash payment. But at least they are backing their company. What’s more than have aspirations that it has a future after this plan is finalised in 2013. One thing which struck me in the media conference today and with my interview with Mark Hotchin and chief executive Peter Fredricson, is the repeated use of this phrase: “We don’t know what we don’t know.” It was used many times and sums up their dilemma. The fate of the business and the debt restructuring plan is predicated on what happens to the property market over the next few years. If it picks up, or more importantly doesn’t tank, then the outlook is optimistic. If it does tank…well, I think you can work out the answer. What I also like is that the shareholders and management are backing themselves to do a better job than receivers. I support this argument, even though some of my peers don’t.
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Comments from our readers

On 20 November 2008 at 8:36 pm Tony Ryburn said:
The shareholders and management would never admit in a thousand years that they might not do as well as Receivers. And it is a no-risk option to claim they will do better. You can't have it both ways so the point can never be proved or disproved.

It will be interesting to see whether investors will trust these guys trade again with what remains of their money.

At a 10% discount rate the repayments as proposed amount to a smidgen over 70c in the dollar so the suggestion that investors might get their all principle back is only correct if you ignore the time value of money.

Given the company's track record you would have to say that the prospects of doing better than a competent receiver are low and the prospects of doing worse are high. Remember that the finance companies have given receivers plenty of practice in cleaning up their messes in recent years so they should be quite good at it by now.

On 20 November 2008 at 9:41 pm Tony R. said:
They are certainly backing up their company and will be using investor money to do it.

I can't believe it took over four months to conjure up this so-called proposal. If they think Hanover investors will accept this rubbish, they certainly have another thing coming. This proposal is all designed around the survival of the company and nothing else. To hold investor money for five long years and not pay any interest at all is nothing but shameful, to say the least.

Let's not forget that Hanover isstill being investigated by the Ministry of Commerce and encouragingly will find enough on the shareholders to put them in jail, hopefully for many years. They need to pay for squandering our money in such a reckless manner. But then again, I think they knew what they were doing alright because if one does some simple research and puts two and two together, it was all planned at least two years before the freeze announcement on July 23rd 2008. Hanover must really think they have the investors over a barrel.

I for one will not accept this ridiculous proposal. They need to take a deep breath and do some honest thinking and put investors first.
On 21 November 2008 at 8:02 am Suzanne Edmonds said:
One always has to be positive in these situation, however the writing is on the wall and trusting this company's word falls in a dark hole for many investors. Is it time for insolvency laws to prevail as the 100% promise is from the same place that a possible investor received only weeks before 23 July 08. That investor would have been looking into a dark whole now if they had believed the Hanover reassurances and spin.
On 22 November 2008 at 6:34 pm Bob Howard said:
I don't know enough to judge. However since Marac have carried through and Hanover hasn't that tells me a lot about Hanover management. I am inclined not to trust them to manage the moratorium unless they are supervised by one or two experts of the quality of the receivers.
On 24 November 2008 at 2:03 pm Peter said:
I am a little concerned with the comment I saw in this morning. "It's new money," he (Hotchin) said. "To just put it in and never see it again under any scenario would tend to be non-commercial. I mean it's pretty non-commercial anyway." That sounds a wee bit like a parent buying a $20 gift from the warehouse to keep the kids quiet on a long trip. We know the gift won't last, but it's "new" so it will keep the kids quiet for a bit, and there will be some value in keeping the kids quiet (so there is not a sense of "never seeing it again" or not getting any value) and it won't really cost that much so "it's pretty non-commercial anyway". Does the proposal have an "icecream-on-a-hot-day" feel about it?
On 24 November 2008 at 2:29 pm Bill Cowan said:
I am not an investor in Hanover. I have had considerable experience in the insolvency area.

An advantage that a liquidator would bring ( and this need not happen yet) is that the liquidator could look at other means of recovery. Action may be considered against the directors, the auditors but I think that it is more likely to succed against the trustee. ( Their insurers will have deep pockets.)
On 24 November 2008 at 7:25 pm Ollie said:
How much of the money Mark and Eric are putting in has already been sucked out of the company in fat dividendts?
Is Mark still building his $30m house in Paratai Drive? Put the company in receivership. Shame on you two for your naked greed. Don't give these guys a second chance.
On 26 November 2008 at 7:24 am adam smith said:
I note that unlike other restructures where they are independent expert, PWC makes a definite recommendation to debenture holders to accept the restructure.

But I wonder whether they have been taken in by the nature and who benefits from the apparent shareholder support. The sceptic in me wonders whether this Plan isn't just a way for the shareholders to offload dodgy assets off their personal or corporate balance sheet, get a free run on the Hanover balance sheet, and then take all the gains if there are any.

Let me explain. The shareholders own the Axis companies. One of those companies has a loan from another of the shareholders companies. One assumes that the Axis companies are themselves heavily indebted, with the loans probably capitalising interest. Third party lenders are probably asking for (demanding?) a change to cash payment of interest.

So why not engage in a bit of smoke and mirrors - $26 million of the shareholder support to Hanover is a loan that enables Hanover to buy the $26 million loan to one of the Axis companies off another of the shareholders companies. So this is just a money-go-round .

The shareholders are loaning Hanover another $40 million to buy the Axis companies off them. Since it seems the Axis companies own a number of sections at Jacks Point and Matarangi - I can't imagine sales are going to be great! The shareholders offload their direct liability to the Axis lenders onto Hanover. This transaction gives the appearance of shareholder support but I wonder if the Emperor has any clothes.

The only real support seems to me to be the $10 million cash up front and the guarantee of another $20 million in the future.

For this support, the plan delivers the shareholders the first 20% gain on the Hanover book over the next five years. If achieved this would be of the order of $200 million. After 20% the shareholders share the gain 50/50 with the poor investors.

If this sceptical analysis is correct, then PWC and the Trustee have some answering to do about the merits of the plan. If it is not correct, then I would invite PWC and the Trustee to publicly show why it isn't.

On 26 November 2008 at 11:28 am David Smith said:
You would have to say the outlook for both the commercial and residential property market, in which Hanover is mainly invested looks poor deleveraging will continue and prices will fall. Liquidating the company today, in my view will maximise the return to investors, the plan will increase costs and reduce the sale proceeds as the property markets continue to fall.
On 30 November 2008 at 3:35 pm C de Lautour said:
To Whom it may concern

Re: Proposal to transfer property from AXIS to Hanover/United Finance

I am writing as I am very concerned about the risk investors in Hanover/United finance, are placing themselves in by voting in favour of the proposal.

Watson and Hotchin need to be asked:

1) Why are they wanting to transfer subdivision property to Hanover/United? Would it not make more sense for them to retain the properties in their own company, they are then responsible for meeting all liabilities relating to mortgages, interest payments, rates etc and thus not putting liability of shortfall from sale of properties onto the investors. Also interest payments on these properties would no longer be made on the loans by Hanover/United over the properties. A better scenario would be for the directors to undertake to pay any surplus from sales after all debt has been paid to the banks and Hanover/United
2) Are there other properties that Axis or any other companies associated with the director’s, that have mortgages advanced by Hanover/United Finance, that they haven’t offered as part of the deal
3) If investors vote in favour of the proposal are the directors prepared to personally guarantee any shortfall from sale of properties?
4) Why are they only offering bare land with no rental yield? I believe Axis owns commercial property, probably property with equity. (at one stage they owned ‘The Hub’ Hornby Mall and may still do)
5) If they transfer these properties to Hanover/United, are the banks releasing the directors from any personal guarantees they may have given over the debt?
6) If they transfer properties, are the banks requiring Hanover/United to guarantee the loans? Will the banks debt rank higher than the investors if there is a shortfall from sale of the properties?
7) What is the expected tax losses that are likely to be preserved if Hanover/United don’t go into receivership, which will enable directors to offset tax liabilities from other profit centers?

Regarding the properties they are proposing to transfer to Hanover/United, I believe there will be a very large shortfall from sale of such properties (this is only my opinion and I don’t believe the directors have supplied the investors with current valuations):-

Jacks Point. These sections were bought by Axis as part of the finance package for the development. Axis underwrote their funding by way of having to purchase x number of sections at x amount if the developer hadn’t achieved a certain number of sales by a certain date. The price was set as part of the financing package, not based on valuations.
Fletcher residential has a larger number of sections in this subdivision and have been asking $350000 per section. Feedback I have from agents is they would struggle to get $200000 for them. At $150000 you might achieve 10 sales over a period of time. The fact Axis hasn’t sold any in the last 12 months indicates they are perceived to be overpriced.
So been generous, 140 sections at $200000 is $28 mllion. Less holding costs, banks interest, rates, agents fees, say $20 million net. Current mortgage liability is $165 million. This leaves mortgage liability/shortfall after all sections are sold of probably a minimum of $145 million. Not a great deal for investors in Hanover/United

Clearwater Resort. There are 25 sections/units. To be generous lets average them at $1 million each, $25 million in total. Less holding costs, banks interest, rates, agents fees, say $22 million net. Current mortgage liability is $25.3 million. This leaves mortgage liability/shortfall after all 25 properties are sold of probably a minimum of $3.3 million. Not a great deal for investors in Hanover/United

Matarangi Beach Estates. This property has undergone ongoing development for many years. Beach sections it would be fair to say are discretionary purchases. In these economic times sales will be negligible. Not much information has been supplied about this property but one can probably make a reasonable estimate of likely value if the property was sold in its entirety now. 66 completed sections at $150000, 89 partially completed sections say $70000 and 250 ha of undeveloped land say $100000 per hectare
Total value (guessed) $40.33 million. . Less holding costs, banks interest, rates, agents fees, say $35 million net. Current mortgage liability is $96 million. This leaves mortgage liability/shortfall after all properties are sold of probably a minimum of $61 million. Not a great deal for investors in Hanover/United

In addition to the above scenario, by investors voting in favour of the proposal, they are forgoing the ability to take action against the directors for misleading advertising, breaches of the prospectus, breaches relating to inter company/shareholder loans, the ability to sue for dividends paid (if company was trading while insolvent). As the company will still be a private company by not going into receivership, receivers/liquidators will not get access to all the financials of the various entities and documentation relating to loans. Investors will lose the right to sue the directors personally for any shortfall from sale of properties, which given my estimate above, is likely to be substantial.

Without comprehensive details been provided regarding the loans to the banks and whether they will rank ahead of investors if the properties are transferred to Hanover/United, the risk for investors to vote a yes to the proposal is enormous. The investors could easily find they end up paying in the $100’s of millions to banks for shortfall of sales, thus significantly reducing the amount they would likely receive under a receivership.

The figures I have calculated above are my own estimates and may not reflect actual values or likely sale prices. Many scenarios can cause huge variance. Further financial distress in the world economies, banks calling in their loans and forcing fire sales etc.

In summary: Hanover/United Finance will own the properties and nothing has indicated they won’t also assume the debt and interest payments on such. Watson and Hotchin do not want to own these properties ‘They are not an asset but a liability’

The property market is in a downhill spiral, banks are tightening their lending criteria, section sales have stalled and building consents have plunged to a level not seen in decades. The sale of the properties they are proposing to transfer to Hanover/United finance, could easily take more than a decade to sell down, if not longer. If the banks foreclosed on the properties, the likely price achieved from sale of such would be minimal as any prospective purchaser would struggle funding such a purchase with most finance companies having gone bust and banks would be very cautious given the property market and the fact they are non income earning properties. Basically these properties could be rated toxic in this market. The banks would more than likely be very keen to see the proposed transfer proceed, especially if their mortgage debt ranks ahead of investors funds.
There is no benefit to be gained from Hanover/United finance taking possession of the properties!

A better proposal may be something along the lines of the following:- on the basis the investors agree to not putting the companies Hanover/United Finance into receivership:-

1) The directors put $30 million cash into the finance companies
2) Axis retains the properties but agrees to pay to Hanover/United any surplus from sales
3) Hanover/United will receive interest and principal on the mortgages over the properties. Payment is likely to be made given the loans should have the guarantee of Axis and personal guarantees of the two directors (both very wealthy individuals)
4) The directors agree to an independent person/organization to scrutinize all lending, intercompany and shareholder loans and any breaches of any statute or act. The directors would agree to a waiver of the 2 year statutory time limit to commence legal proceedings, agreeing to a time limit of 5 or 10 years

The proposal offers nothing to investors and everything to the directors/shareholders
Commenting is closed



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