By Bernard Hickey Rural services and finance group Allied Farmers has released first half results showing it has written down the value of Hanover Finance and United Finance assets acquired just two months ago by NZ$220.7 million to NZ$175.5 million because of new accounting rules and the discovery of delays and problems with some projects and loans. Some of the details of the transactions arranged by previous Hanover Finance owners Mark Hotchin and Eric Watson had also been referred to authorities, Allied Farmers said. (Update 1 includes S&P giving Allied Nationwide Finance a BB minus credit rating, which Allied says is one notch below the BB rating needed to be in the government's deposit guarantee scheme (Corrected from earlier saying BB minus is just enough for scheme), Update 2 includes CEO's reaction to rating) Allied Farmers Chief Executive Rob Alloway told interest.co.nz most of the writedowns were required under international reporting requirements that use the net present values of assets rather than total cash returns, but that some loans were now worth less than Allied Farmers estimated when it bought them in December because of underlying problems with their performance. The NZ$210 million development of stage 1 of the Kawarau Falls hotel and residential project near Queenstown was now 4-5 months behind schedule and 'significantly' over budget, Alloway said. Hanover Finance had a second mortgage on the project, which is now in receivership and being managed by receivers Korda Mentha.

"There's still a huge amount of uncertainty. We still don't know when it's going to open and it will be a challenge to recover much of that loan," Alloway said, adding he could not also justify spending a further NZ$200 million to NZ$300 million on the second and third stages of the luxury residential development on the shores of Lake Wakatipu in the Alpine resort area. Allied Farmers successfully convinced Hanover Finance investors on December 8 it should buy the Hanover and United assets from debenture holders with new Allied Farmers shares. It valued those shares at NZ$396.2 million when the vote passed by a whisker on December 8, issuing 1.914 billion shares at 20.7 cents a share. The shares closed at 10 cents a share on Monday, minutes before the first half result was released. Fresh capital still needed Allied Farmers also announced its Allied Nationwide Finance company still needed to raise fresh capital from its parent and had yet to receive a credit rating, despite new Reserve Bank rules that it required a credit rating by today. Alloway said he was expecting Standard and Poor's to deliver a credit rating within the next 24 hours and that he would be "pleasantly surprised" if it received the BB rating necessary to participate in the government's extended deposit guarantee scheme beyond October. Standard and Poor's later granted Allied Nationwide a BB minus rating with a negative outlook. Alloway told interest.co.nz late on Monday that he believed the BB minus rating was unsufficient for Allied to enter the extended scheme, but that there was time for Allied to transfer over enough fresh capital to secure the one notch upgrade to enter the scheme by early October) The full statement from Standard and Poor's is below. He said the initial plan had been to transfer good loans from the Hanover/United book into Allied Nationwide Finance, but that he had held back from injecting them into the finance after discovering the true state of the Hanover/United loan book over the last two months. 'Some unusual things' Meanwhile, Alloway said Allied Farmers had discovered some items in documentation around loans made by Hanover Finance that it didn't understand and had referred to authorities. "We have found some unusual things in some of the loans and we've forwarded them to the authorities," Alloway said. Asked if those authorities included the Serious Fraud Office, he declined to give further details. "Let's just say there were certain transactions that were particularly unusual," he said. Allied Farmers had also found some loans for residential investment projects on the Gold Coast in Queensland that were likely to generate returns less than originally forecast. Standard and Poor's rating Later on Monday Standard and Poor's granted Allied Nationwide a BB minus credit rating with a negative outlook. Here is the full statement below:

Standard & Poor's Ratings Services said today that it has assigned its "˜BB-' long-term counterparty credit ratings on New Zealand finance company Allied Nationwide Finance Ltd. (ANFL). At the same time we assigned our "˜B' short-term rating. The outlook is negative. The counterparty credit ratings on ANFL reflect: the finance company's weak stand-alone capital, noting that improvement is anticipated during 2010; recent asset quality deterioration; and that it remains beholden to debenture-holder confidence as a material amount of debenture refinancing is expected between March and October 2010. These factors are offset by its status as a core operating entity within the recently recapitalized Allied Farmers Ltd. (AFL) group, and its business profile being more diverse relative to domestic peers'. "The negative outlook reflects our view that downside risks to the rating will likely prevail in 2010," Standard & Poor's credit analyst Gavin Gunning said. "We are unlikely to give full credit to AFL's recent recapitalization until valuations underpinning assets purchased from Hanover Finance Ltd. and United Finance Ltd. stand the test of time. Further, Standard & Poor's comfort regarding the current rating depends on AFL's ability to transfer capital from AFL into ANFL. This hasn't happened yet, but is expected in coming months. Negative ratings pressure is unlikely to ease until ANFL navigates debenture refinancing out to October 2010 and until we see meaningful and lasting signs that asset quality is recovering."

Here is the full statement below from Allied Farmers:

Allied Farmers Limited today announced an unaudited operating loss after tax of $15.68 million (2008: $3.91 million loss) for the six month period ended 31 December 2009. After accounting for non-operating and non-cash items, including the $3.84 million impairment of goodwill in its investment in subsidiary Allied Nationwide Finance, the Group result was a loss of $11.84 million (2008: $4.76 million loss). Corporate expenses for the period included acquisition costs of $5.12 million, directly related to the purchase of the Hanover Finance and United Finance assets. Chairman John Loughlin said "The Company has been through a challenging time, in which we have witnessed the failure of many businesses. This result is largely in line with expectations, and the acquisition of Hanover and United assets has clearly strengthened our position. This will allow us to take advantage of any opportunities which might arise short to medium term". Managing Director Rob Alloway said that while core business performance has started showing signs of improvement in 2010, the first half year had been extremely difficult for the company. Key rural and financial services sectors have not yet normalized following the global financial crisis, although there were positive signs in sectors such as dairy and asset finance. Finance subsidiary, Allied Nationwide Finance, contributed a group unaudited net loss after tax of $1.21 million for the period. The operating surplus before tax and loan provisioning was $2.91 million with the bottom line result impacted by impaired asset expenses of $4.62 million and the costs of holding surplus cash reserves. The result was also before the recognition of $1.54 million of after tax gains on the revaluation of interest rate derivatives for the period, resulting in an underlying group surplus attributable to the parent of $0.33 million. "Pleasingly arrears levels have remained steady signaling a strengthening position in the market and the number of participants in the segment has declined therefore we are starting to enjoy the benefits of less competition" said Alloway. Rural services subsidiary, Allied Farmers Rural continued to be effected by the significant reduction in farm income in the dairy sector in the prior period resulting in a net loss after tax of $0.90 million (2008: $2.70 million profit) for the period. Revenue in the rural business was down 32% on the same period last year, predominantly due to weak sales in the merchandising and livestock divisions. Third quarter trading conditions are however exceeding expectations with livestock trading particularly buoyant due to increasing export schedules, good rainfall in some regions, and an improved outlook for dairy commodity prices. Internet trading of livestock through the portal mylivestock.co.nz continues to grow with steady increases in membership numbers resulting in strong interest for listings. This month the company will launch an extension to the service allowing farmers to trade feed such as maize and hay, an industry first in New Zealand. As part of the half year process, the assets of Hanover Finance and United Finance, acquired by Allied Farmers in December 2009 through a share for debenture swap, have been consolidated into the balance sheet at an IFRS accounting fair value of $175.52 million. "The Allied Farmers board with guidance from external advisors has undertaken a provisional fair value assessment on what we still consider to be a challenging group of assets. Since settlement of the transaction, a number of positions have softened further than expected. We have taken the opportunity to review each position incorporating any new developments which have come to hand, when assessing fair value" Alloway said. While we are confident a number of realisations can be achieved in the medium term, there is uncertainty attached to some positions. For the purposes of 2010 year end financial statements, the company will complete further fair value assessments which may result in changes to the provisional fair values stated as at 31 December 2009. In the period leading up to settlement, the value of assets transferred was decreased by a net amount of $20.71 million. This decrease related to asset realisations, loan advances, asset restructures, provisioning, and bad debt write offs approved by the board and management of Hanover Finance and United Finance. The initial transaction value was calculated on a gross realisation basis; however the New Zealand International Financial Reporting Standards (IFRS) require acquired assets and liabilities to be recorded at acquisition date fair values. This is done with reference to net present value, after discounting the expected realisation cash flows at applicable interest rates. The IFRS interest adjustment to recognise the period of expected realisation of the loans transferred, results in a $55.95 million net decrease in the value of the acquired assets. Subsequent to these decreases, further fair value adjustments of $27.86 million have been attributed to property assets (held for resale), $16.83 million to investments, and $99.30 million to finance loans, the latter heavily impacted by uncertainties associated with stage 1 of the Kawerau Falls Station project in Queenstown. This in turn has affected prospects for further development on Kawerau Falls Station stages 2 & 3 where the company has major exposures.

AlliedFarmers 1st Half Result PDF