By Bernard Hickey Allied Farmers, which owns Allied Nationwide Finance, has announced a plan to buy the loans of Hanover Finance and United Finance for 900 million new shares in Allied Farmers, which it says may be worth NZ$400 million once Hanover's loans are valued. (Update 9 with Allied Farmers' documenting detail of debt for equity swap and updated Bernard Hickey view in text) The deal would mean Hanover and United debenture holders would be effectively swapping their investments over Hanover's loans for shares in Allied Farmers, which Allied Farmers says would be initially worth 78 cents in the dollar for Hanover investors (secured deposit holders) and 90 cents in the dollar for United Finance secured deposit holders. My View Hanover Finance and United Finance debenture holders are being asked to accept a Geneva Finance style debt for equity swap. Geneva Finance debenture holders swapped 15% of their investments for shares in Geneva which they were told were worth 36 cents. The current bid for them on the NZX is 1c and they haven't traded this week. They last traded at 9c.
This is the risk for Hanover Finance investors. They appear to be swapping something worth up to 70 cents over the next five years (according to Hanover's board) for shares potentially worth 78 cents if Allied's shares rise (!) to 44 cents from their 33 cents now. (Allied Farmers released a document below the following day saying that Hanover investors would receive 72 cents worth of shares, which would include around 2.06 shares if the shares were priced at 35 cents per share.) And that's after an extra 900 million shares are added to the existing 37.7 million. Do debt investors really want to be become stock market investors on the promise a company's stock market value will increase 34 times? I think it's time for Hanover's trustee to call in the receivers to have a proper look at that toxic loan book or for the government to appoint a statutory manager. (The Securities Commission has since ruled out the appointment of a statutory manager) If there was wrongdoing this the only way evidence will be found. The danger is that Hanover investors are about to lose again as a potentially savvy vulture investor picks the juicy bits off the bones of the Hanover carcass in return for worthless shares. The government has a role in considering the appointment of a statutory manager receiver to Hanover through the Treasury, which will have to approve any deal that Allied Farmers does because of the government guarantee for Allied Nationwide Finance. I also think it's time for Mark Hotchin to sell his Paritai Drive mansion (with the 12 car garage) and donate the proceeds to Hanover investors who trusted him. That may restore his reputation. Otherwise, I doubt he could survive as a public figure in New Zealand after this. He promised at the moratorium meeting to stick around to ensure investors got their 100% back. He also suggested he might sell his New Zealand properties to contribute to the recovery effort. If he doesn't, he should be run out of town in the way any social pariah would be. Remember, he and Eric Watson extracted over NZ$80 million in dividends in the years leading up to Hanover's collapse. Here was the exchange at the moratorium meeting about what Hotchin should do with Paritai Drive and his Waiheke properties.
Another questioner asks Hotchin about his Waiheke and Paratai Drive properties and whether he would sell them to help repayment investors. "They're your homes and your lifestyle. This is our money. If necessary, will you sell those properties to pay us back our money," the questioner asks. Hotchin replies saying it's a difficult question. "The Waiheke property has been pledged in the package. The Paratai Drive property. I wish to hell I'd never bought it. It's half finished and couldn't be sold. Our intention is to finish that house and to live in it as our home," Hotchin says. "If it's (the repayment plan) going to be close and we need to put up more, I guess we'll have to find it from somewhere, and that might have to go," he says of the Paratai Drive property. He is applauded.
Here is the video below with my summary and view. Your view? We welcome your comments below. About NZ$50 million worth of 'clean' Hanover loans will be bundled up with the existing Allied Nationwide Finance loan book, which Allied Farmers said would provide more equity and help it obtain a credit rating high enough to keep the government guarantee. Allied Farmers said only 20% of Hanover's loans were performing and that many of the projects could be sold or liquidated without being developed further. "The intention is that a large proportion of the performing assets will be transferred to Allied Nationwide Finance, increasing the size of the balance sheet and improving capital adequacy," Allied Farmers said. Allied Farmers Chairman John Loughlin (pictured left) told a second teleconference that NZ$10 million would be left inside Hanover to pay for legal fees, redundancy costs and transaction costs associated with the deal. Loughlin said Hanover's owners Mark Hotchin and Eric Watson would not receive any shares as their equity was being wiped out. Hanover debenture holders would essentially be swapping their debt investment in Hanover for an equity investment in Allied Farmers. Allied Farmers said this equated to 78 cents in the dollar for Hanover investors, assuming the NZ$400 million valuation is realised. That assumes Allied Farmers shares rise to 44 cents each after the number of shares has risen from 37.7 million to 937.7 million. These shares last traded on the NZX at 33 cents a share, implying a market capitalisation of NZ$12.4 million. Loughlin said a new subsidiary of Allied Farmers, to be called Allied Farmers Investments Limited, would be set up for holding and managing "difficult" assets, which amount to about 80% of Hanover and United's loan books. That would be run by Allied's principal shareholder Rob Alloway. Alloway (pictured left) denied any related party transactions with Hotchin or Hanover in the past. Loughlin wouldn't be drawn out to say exactly which assets were considered difficult, but said the ratio was that there were "more challenging ones than good ones". When asked whether it was generally smaller assets or large ones such as the Kawarau Falls and Five Mile developments in Queenstown, he ventured to say the "general market impression" was that the bigger assets were more difficult. Loughlin said that the "logical action" would be for Allied Farmers to sell the Five Mile Development and that there were "logical buyers". Hanover Finance announced earlier this week that the second site at Five Mile had received town planning approval from the local council, which had "improved its strategic value," Hanover said. Loughlin said that the Kawarau Falls project would be "much harder" than Five Mile. but that it was proceeding. Hanover said earlier in the week that the stage 2 hotel development of the Kawarau Falls project may now proceed, given that the stage 1, which is in receivership, was likely to be completed. Loughlin said that Allied Farmers "certainly aren't working on an assumption it will proceed". On the size of the Five Mile and Kararau Falls projects compared to Allied Nationwide's assets, Loughlin noted that they had not been involved in "those big ones before". Later, Allied Farmers released a statement which included comments from Hanover chairman David Henry relating to the different initial values to be received by Hanover secured deposit holders, United Finance secured deposit holders and Hanover subordinated note holders and capital bond holders. Henry also commented on the proportion of votes both Hanover, United and Allied need for the proposal to go through:
"If approved, the Allied Farmers' Proposal would see Hanover Finance Secured Depositors receive 78 cents in value for every $1.00 of original principal owed, while United Finance Secured Deposit holders would receive 90 cents in value for every $1.00 of original principal owed (these amounts are inclusive of payments of six cents already made under the Debt Restructuring Plan (DRP) in place since December last year). Hanover Finance Subordinated Note holders and Hanover Capital Bond holders would receive 30 cents in value. Mr Henry said Allied Farmers would acquire loans and property, finance assets, operating assets and the escrowed cash and property assets as described in the shareholder support package of the DRP. "Directors have commissioned independent experts Grant Samuel to provide a report for investorson the merits of the Allied Farmers' Proposal. This would include an assessment of the Allied Farmers Proposal compared to the existing DRP." "Following receipt of Grant Samuel's independent expert report and consideration of this report, the independent directors will make recommendations to investors regarding the Allied Farmers' Proposal. At that time we will communicate fully to investors prior to the vote required from them for the Allied Farmers' Proposal to be approved." "The Allied Farmers' Proposal is dependent on 75% of Hanover and United Finance investors voting in favour of the proposal, 50% of Allied Farmers' shareholders also voting to approve the proposal and other usual conditions." Mr Henry noted that Hanover had recently released its latest financial result confirming that a worsening property development market meant that it no longer expected to achieve full repayment of investors' capital has originally intended under the DRP.
Here is the full press statement below from Allied Farmers.
Allied Farmers advises that it has signed an agreement with Hanover Finance and United Finance, which subject to satisfaction of conditions, will result in Allied Farmers buying the finance assets of those companies in a deal worth approximately $400 million. This significant transaction is part of a new strategy, which will see Allied Farmers dramatically increase the size of its rural services and finance businesses. The agreement is conditional upon both Allied Farmers shareholder approval and the approval of Hanover and United investors. The two-step process will result in Hanover and United investors receiving Allied Farmers ordinary shares, and Allied Farmers acquiring the finance assets of Hanover and United. Allied Farmers, assisted by its external advisors, have carried out detailed due diligence on the Hanover and United assets and have built up an understanding of the risk and return profile associated with them. The intention is that a large proportion of the performing assets will be transferred to Allied Nationwide Finance, increasing the size of the balance sheet and improving capital adequacy. A new subsidiary of Allied Farmers will be established for holding and managing difficult assets. In the interim this subsidiary will be lead by Allied Farmers Managing Director, Mr Rob Alloway, until a permanent appointment is made. Given the uncertain nature of these assets, Allied Farmers has been careful to ensure the fairness of the transaction to both our new and existing shareholders. Forexisting shareholders, the transaction includes an adjustment mechanism which will realign relative shareholding as at June 2011 if the expected recoveries from the acquired assets do not meet expectations. Asset realisations post transaction have the potential to flow significant cash into Allied Farmers. This will strengthen the company's position medium term, and should provide the company many opportunities for growth in the rural and finance sectors. A Notice of Meeting for a Special Meeting of Allied Farmers shareholders will be sent to all shareholders next week, with the meeting intended to be held early December and prior to the meeting of Hanover and United investors which is intended to be held in mid-December.
Here is the full Allied Farmers information document on the deal released the following day. Allied Farmers Announcement on Additional Info About Bonus Shares