Cash strapped Allied Farmers will probably have to cough up something north of NZ$10 million owed to Allied Nationwide Finance (ANF) despite receivers being appointed to its subsidiary last Friday.
Bryan Connor, general manager for corporate trusts at ANF trustee Guardian Trust, told interest.co.nz that Allied Farmers was expected to honour NZ$10 million owed to ANF through a credit enhancement facility. This facility provides for ANF to be reimbursed by Allied Farmers for current or future losses on nominated loans.
Connor also revealed the trustee had been concerned about how ANF would've coped with NZ$70 million worth of debenture repayments due by October 31 and that prior to the receivership Guardian Trust had decided not to approve the sale of some loans at discounted values.
“We would expect them to honour that (the credit enhancement facility) and the receiver would be pursuing that I am sure,” Connor says.
There’s also long standing debt factoring arrangements between the two. According to ANF’s latest investment statement, Allied Farmers owed ANF NZ$20.8 million as of June under these arrangements, plus a further unspecified NZ$3 million. That made a total of NZ$33.8 million owed by Allied Famers to ANF in June. However, Connor says the sum today would be lower than this given much of the debt factoring facility covered seasonal factoring including merchandising and stock related to Allied Farmers’ rural services operations.
“The receiver is certainly talking to the parent company about how to move forward with that (the debt factoring facility),” Connor says. “There are already discussions going on about how to make it work.”
Allied Farmers itself put on hold plans for a capital raising of up to NZ$19.3 million earlier this month until the ANF situation was resolved. It is striving to payout Westpac loan facilities valued at about NZ$19 million by calander year's end and, according to its last interim report, also had NZ$30.8 million of bank borrowings secured over property assets acquired from the Hanover Group last December that was classifed as current.
NZ$70 million of debenture repayments due by October 31
McGrathNicol's Kerryn Downey and Andrew Grenfell were appointed ANF receivers last Friday. Their appointment came as a 14 day period Guardian Trust had given ANF to rectify what it deemed to be a breach in the company’s Trust Deed expired. The Trust Deed ratio under question set out that ANF must not let its total liabilities exceed 90% of the value of its total tangible assets.
ANF, which is covered by the Crown retail deposit guarantee scheme up to October 11, ANF has about NZ$130 million worth of debentures on issue held by 4,500 depositors.
Guardian Trust recruited McGrath Nicol to compile an independent report on ANF prior to the receivership. Connor says this was because the trustee had “received some information that we thought we needed to investigate further.” He won’t say what the information was or who it came from. But he will say the trustee had asked McGrathNicol to look at what it called the “toxic” loans, impaired assets and ANF’s top 10 assets by value that were still performing. The latter was “just to get a feel if there was anymore risk,” Connor says.
“They looked at all the impaired assets, they looked at all the reposessed assets and they looked at the top 10 assets that were performing, but we wanted to get a bit of a feel if there was anything else in the pipeline.”
He says the big issue for the trustee was liquidity given ANF had about NZ$70 million worth of debenture stock to repay before October 31. ANF’s debenture reinvestment rate was just 29.3% in May, down from an average of 48.2% in the six months to April.
“We could see clearly that they were going to struggle to get through to October 31, which was after the guarantee,” Connor says.
“They had about NZ$70 million of debenture stock to repay between now and October 31. That’s a huge, huge commitment and how were they going to do that?”
ANF was “really struggling” to give Guardian Trust a clear understanding of how it was going to get there without “decimating” its good assets and good loans.
“All we were going to do then was end up with a book that had a substantial proportion of toxic loans in it compared to the good loans which could only be to the detriment of debenture holders at the time,” Connor says.
Asked how big the proportion of “toxic” loans might have got he replied: “Very high in my view. We showed the company the number. They didn’t agree or disagree.”
Connor says Guardian Trust could have solved the Trust Deed issues temporarily by approving the sale of some loans at discounted values.
“But that’s not going to get anybody anywhere,” says Connor.
“We thought it was prejudicial to sell loans like that so we couldn’t agree to it. So that’s really want caused things to tip in the end.”
NZ$130 million loan book
He says ANF’s loan book was latterly worth about NZ$130 million. Including Speirs Securities, its biggest exposures as of December 31, 2009 were 23% to the rural sector, 22% to the transport, storage and aviation industries and 13% to property development and investment.
When Allied Farmers acquired the Hanover Group's property and loan assets in a deal valued at NZ$396.2 million last December, it said it hoped this would enable it to strengthen ANF's balance sheet through the contribution of “quality loan assets as an injection of capital.” It anticipated this would pump at least NZ$50 million of new equity into ANF. However, Allied Farmers now says the assets it acquired from Hanover have collapsed in value to be worth just NZ$94.3 million at June 30.
The demise of Allied Nationwide Finance brings to 60 the number of finance companies and other entities to collapse or freeze investors' money over the past four years. About NZ$6.9 billion held in 203,932 accounts is now frozen or lost. See interest.co.nz's Deep Freeze list of finance industry failures here.
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