By Bernard Hickey Hanover Finance and United Finance debenture holders face a difficult choice on December 16. They can choose to swap their security over Hanover and United's loans for Allied Farmers shares that could become nearly worthless. Or they can choose to let the current moratorium play out to its conclusion in 2013 and hope that the current forecast of another 64 cents in the dollar is remotely accurate. Unlike the last one of a 100% payout. It's easy to go deep into the pros and cons of voting to hold on to the secured debentures or opt for shares in an NZX listed company. It's worth looking closely at the Grant Samuel report, which recommends debenture and (particularly) note holders are better off with the Allied Farmers bid. It's worth listening to the independent Hanover Directors David Henry and Des Hammond who are recommending the bid. But all this consideration and paperwork is worth little. No one really knows how much the Hanover Finance loans can be realised for, given the uncertainty about the assets themselves and how much the residential development market might recover in coming years. No one also knows what the Allied Farmers shares will trade at. This is a contest between Mark Hotchin, the co-owner of Hanover, and Rob Alloway, the major shareholder in Allied Farmers and the driving force behind this deal. Do Hanover and United Finance investors trust Mark Hotchin to carry through on his promise from a year ago to get their money back? Or do they trust Rob Alloway to knock the loan book into shape and extract the most cash?
Last year PriceWaterhouseCoopers' John Waller argued that Hotchin should be given another chance because he was committed to recovering the money and knew the assets better than anyone else. Debenture holders decided to trust Waller and (in effect) Hotchin. The announcement of massive losses and the lower payout forecast this year shows how much that trust was worth. Now they have a real choice. Rob Alloway is a straight shooter. He came to visit us at interest.co.nz last week to argue his case. He was refreshingly realistic about the performance of his own company, in particular the bad loans he found inside Prime Finance and Speirs Finance when he arrived in August after buying a major stake in Allied Farmers, which had just gone on an acquisition spree. He even chuckled at the comments on one of our stories last week about Allied Farmers' bid, one of which described the deal as 'two cripples leaning against each other to stand up'. He says he has no illusions about the quality of some of the Hanover loans and appears disinterested in trying to perpetuate the Watson/Hotchin empire. Alloway is no property developer and has a hard nosed approach to collecting debts. He told me about his initial efforts at Allied Farmers to examine the loan book. He says he jumped on his motorbike to hunt down the owner of a luxury car that Allied Farmers had lent money to. He found the car and organised for it to be repossessed, essentially showing his own loan managers how to be a bit ruthless. Alloway says he has no connections with Hotchin and it's clear he has little sympathy. If the bid is successful, he says he will take control of the loans and use the extra flexibility that comes with Allied Farmers' ownership to renegotiate arrangements with banks and others to get the most cash out of the loans. This could include buying out first mortgagees and using cash to finish off projects. The big concern for Hanover investors is the Geneva Finance scenario where they accept shares for their secured debentures and then the share price collapses. That concern is very real given 900 million new shares are likely to be issued at somewhere around 35 cents a share. Most are expecting a collapse in the share price almost immediately. The longer term future for the share price will depend on Rob Alloway's ability to extract cash from the Hanover loans, which would then be reflected in the share price, in theory. One thing is sure though. Rob Alloway's interests are utterly aligned with Hanover Investors. He has a 27% stake in Allied Farmers and is only interested in increasing the share price. The same can't be said for Mark Hotchin. Watson and Hotchin is reported by Chris Hutching at the NBR to have been one of the buyers of land sold by by Hanover Finance at 5 Mile.
A 25ha block that is part of the Five Mile property to the north of the airport has been sold into another Hanover/Hotchin/Watson company. Companies Office records reveal new Hanover subsidiaries have been registered in recent month companies "“ 5M NO1 and 5M NO2. They also reveal a new mortgage from FM Custodians recently registered over Five Mile Holdings. The property is in several titles so it is impossible to discern from the Companies Office records which have been sold and which remain mortgaged. The transfer of this block raises questions about why Hanover appointed a receiver to Five Mile in the first place, if not primarily to oust the original developer, Mr Henderson.
The number of related parties interwoven throughout the Hanover Finance loan book is unfathomable. The danger with Mark Hotchin remaining in control of the loans is that the related party deals will continue. Will Hanover Finance investors benefit when Hotchin is on the other side of the deals? The Grant Samuel report also notes that choosing the status quo is likely to lead to receivership. That would leave the trustees and receivers in control. My view is their control of Hotchin so far has been weak and that any receiver would work closely with Hotchin to get something out of the assets. That again opens up the risk of Hotchin doing more related party deals with himself. The decision is clear. Investors who trust Hotchin should choose the status quo. Investors who don't should choose Allied Farmers offer. One point those against the offer make is that it lets Hotchin and Watson off the hook for NZ$20 million of their contribution. That would only have been paid if there had not been a receivership, which even Grant Samuel says is now likely under the current moratorium. That means this needs to be excluded from the analysis. Investors will be very disappointed when Allied Farmers' share price inevitably fall, but it will give them some chance to extract some cash, particularly for those desperate for the cash now. The current plan says most of the money won't come for another three years, and even then is uncertain, particularly with Mark Hotchin doing the deals.