Allied Farmers again slashes value of Hanover assets

Allied Farmers again slashes value of Hanover assets

Standard & Poor's has cut its long-term credit rating on Allied Nationwide Finance to CC from B, which it says reflects a material weakening of the struggling finance company’s liquidity and cash position.

(Update adds Allied Farmers again slicing the valuation on the assets it acquired from Hanover Finance).

Meanwhile Allied Nationwide's parent, Allied Farmers, says the latest unaudited fair value assessment of the assets it acquired from Hanover Finance and sister company United Finance -  in a deal valued at NZ$396.2 million last December - was just NZ$94.3 million at June 30. That's a fall of more than NZ$300 million, or 76%, in just six months.

The acquired Hanover property assets were valued at NZ$24.5 million at June 30, Allied Farmers said, and loan assets at NZ$57.8 million.

"These amounts are subject to any adjustments that may arise from the completion of Allied Farmers’ June 30, 2010 year-end audit," Allied Farmers said. (See Allied Farmers' full statement below).

Meanwhile, S&P's downgrade of Allied Nationwide follows last Friday's announcement that trustee Guardian Trust had given Allied Nationwide 14 days to remedy a trust deed financial ratio breach which Allied Nationwide disputes. The relevant ratio is that Allied Nationwide must not let its total liabilities exceed 90% of the value of its total tangible assets.

S&P credit analyst Peter Sikora said the news that Guardian Trust believes Allied Nationwide is in breach of its trust deed, which saw the company’s prospectus withdrawn from the market, added significantly to liquidity pressures and raised the risk Allied Nationwide may face a cash shortfall while it's forced to repay all debentures that mature.

Sikora said Allied Nationwide’s lower cash balance reflected slower-than-anticipated success in asset sales and new capital injection, and some loan repayment delays. The rating remains on CreditWatch Negative.

“In Standard & Poor's opinion, even if Allied Nationwide were able to remedy the trust deed breach with the small capital injection it is currently negotiating with its parent, notwithstanding that Allied Nationwide is of the view that it has not breached the trust deed's covenant, and meet liquidity needs though August 2010, the risk of Allied Nationwide falling short of sufficient cash to meet its liquidity needs is not expected to sufficiently abate to support a higher rating without the successful and timely execution of asset sales and recapitalization plans and the successful renegotiation of external liquidity facilities,” said Sikora.

“Allied Nationwide’s ability to recapitalize also depends on the parent, Allied Farmers successfully accessing new capital that could be passed through to Allied Nationwide, or securing additional capital from a new investor, ” he added.

Allied Nationwide’s latest investment statement shows the BNZ doesn’t want to continue as the funding standby bank to facilities allowing Allied Nationwide to borrow up to NZ$120 million on the wholesale money market. The amount of commercial paper on issue under the securitisation programme at May 31 was NZ$86.2 million. It also shows Allied Nationwide’s debenture reinvestment rate in May was just 29.3%, down from an average of 48.2% in the six months to April.

Allied Farmers earlier this week suspended plans to seek up to NZ$19.3 million through a capital raising until the Allied Nationwide dispute with its trustee is resolved.

Sikora said Allied Nationwide's liquidity and credit issues could undermine its ability to generate sufficient debenture investor support to meet liquidity needs over the medium-to-long term.

Allied Nationwide’s investment statement also notes that it doesn’t have enough capital to meet the minimum capital level requirements under the Reserve Bank’s new non-bank deposit taker regulations, which are due for introduction in December this year.

The regulations set out that the minimum capital ratio must be at least 8% for non-bank deposit takers with a credit rating from an approved rating agency. For those without a credit rating from an approved rating agency, the minimum capital ratio must be at least 10%.

The investment statement also outlines that Allied Nationwide is owed NZ$33.8 million from Allied Farmers including through a credit enhancement agreement and a debt factoring arrangement. 

S&P said a CreditWatch Negative listing implies a one-in-two likelihood that the rating may be lowered within the next three months.

“The rating will be lowered to 'D' if Allied Nationwide does not meet any of its repayment obligations in full and on time.”

 The CC rating recognizes a “strong prospect” that Allied Nationwide could default on its obligations within six months. S&P said Allied Nationwide’s rating could stabilize and the CreditWatch be reviewed if the company successfully manages its liquidity position during the next few months.

“Its ability to do so would, in our view, require the company to remedy its trust deed breach, successfully re-establish its ability to raise and retain debenture investor support, and successfully execute a range of asset sale and recapitalization initiatives,” said Sikora.

Read Allied Farmers statement below:

Allied Farmers advised on 28 May 2010 that it had, based on information known at that time, assessed the net value of the property and loan assets acquired from Hanover Finance and United Finance in December 2009 at $124 million, and that the remaining work required to complete this assessment would result in further impairments. This assessment has now been completed.

The unaudited fair value assessment of the net assets acquired from Hanover Finance and United Finance has been determined at $94.3 million, compared to $175.5 million disclosed in the interim financial statements for the period ended 31 December 2009.

The unaudited additional impairment provisions and fair value adjustments to be reflected in the 30 June 2010 year-end financial statements are as follows:

Property assets $24.5 million
Loan assets $57.8 million

These amounts are subject to any adjustments that may arise from the completion of Allied Farmers’ 30 June 2010 year-end audit.

Property Assets: On 7 May 2010 Allied Famers announced an aggregate net decrease in value of $17.9 million. In addition to this amount there have been realised losses, restructuring expenses and IFRS interest adjustments recognised on properties of $6.6 million, taking the total additional impairments and fair value adjustments since 31 December 2009 to $24.5 million.

Loan Assets: The total loan impairment provisions of $57.8 million includes the impairment provisioning of $33.6 million (on approximately 65% of the loan assets) as detailed in our 28 May 2010 announcement. The impairment provisioning on the remaining portfolio has been determined at $23.0 million. In addition to these amounts there have been loan recovery expenses and IFRS interest adjustments totaling $1.2 million which take the total additional impairments and fair value adjustments recorded on the loan assets since 31 December 2009 to $57.8 million.

The aggregate of all the impairment provisions and fair value adjustments, together with interest earned on loans and the holding costs of properties, values the net assets acquired from Hanover Finance and United Finance at $94.3 million.

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