Beleaguered Allied Farmers, which acquired the Hanover group's finance assets in a debt-for-equity swap in December 2009, says it has settled a dispute over a NZ$5 million payment it was supposed to make to Hanover without paying, but after acknowledging "adverse statements" it made about Hanover’s conduct and processes were "without merit and unproven."
Allied Farmers also announced a NZ$41 million audited annual operating loss with auditor PwC again flagging concerns about the firm on a "going concern" basis. And after failing to convince trustee Trustees Executors to "consider specific requests" in relation to capital notes with a face value of NZ$12.6 million that are due to mature on November 15, Allied Farmers says "the only feasible or commercial option" is to convert them into ordinary shares, as tipped by interest.co.nz last month.
The notes pay interest of 9.6% per annum. Allied Farmers says the notes will convert into ordinary shares at a 5% discount to the weighted average sale price of its ordinary shares over the 20 business day trading period prior to November 15. Today they were at 0.5 cents. Allied Farmers acknowledged being in breach of its Capital Notes Deed because its external secured debt exceeds 1.5 times Allied Farmers' equity. It has to pay penalty interest at an additional 2% to capital noteholders until the breach is remedied.
Allied Farmers was supposed to make a NZ$5 million payment to Hanover on June 30 last year as the final settlement in the December 2009 debt-for-equity swap. See more here. Hanover has been "willing to forego its entitlement" to the money.
"The settlement reached with Hanover Finance Limited, the terms of which are confidential, involves a contribution towards legal and settlement costs incurred by Hanover Finance Limited and no further obligations between the parties," Allied Farmers said.
In its audit report in Allied Farmers' annual report, auditor PwC flags concerns over the company's ability to continue on a "going concern" basis. Noting "inherent uncertainties", PwC cites Allied Farmers' obligations to its subsidiary Allied Nationwide Finance, which was tipped into receivership in August last year. After reaching agreement with receiver McGrathNicol over its debts to Allied Nationwide Finance, Allied Farmers has loans of NZ$12 million and NZ$6.9 million, plus a NZ$1 million working capital facility, each paying 12% annual interest, due to expire on July 1, 2012, March 31, 2012, and June 20, 2012, respectively.
Allied Farmers is in breach of covenants on the loans with McGrathNicol having reserved its position.
Last year PwC said it wasn't sure whether the company could survive because it hadn't been able to obtain sufficient audit evidence upon which to form an opinion on whether application of the "going concern" assumption remained appropriate.
Because of the tumbling value of the Hanover loan assets, Allied Farmers plans to issue 977.3 million shares to Allied Farmers shareholders who pre-date the Hanover deal. They were protected by a provision in case the Hanover assets value deteriorated, which they have done from an attributed value of NZ$396.2 million. The company already has about 2 billion shares on issue having issued 1.9 billion Allied Farmers shares, valued at 20.7c each in 2009, which they swapped for their Hanover Finance, United Finance and Hanover Capital secured deposits, secured stock, subordinated notes and capital bonds.
Read Allied Farmers' statement below:
Allied Farmers Limited (ALF) has today delivered its 2011 Annual Report to the NZX, which includes its audited financial statements for the year ended 30 June 2011. ALF advises that the operating loss after tax of $41.0 million is a reduced loss of $2 million from the unaudited operating loss after tax of $43.0 million disclosed in the unaudited preliminary financial statements issued on 29 August 2011.
This difference is the net result of a number of events that have occurred since 29 August 2011, but are required to be included in the 30 June 2011 financial statement. This includes updated assessments of the carrying value of some assets based on information available to the Board up to this time, and the settlement of the Hanover litigation referred to below.
Now that the 30 June 2011 audited financial statements have been completed, the holders of the Bonus Securities issued to ALF shareholders prior to the Hanover transaction will now be recognised as holding 118,097,900 additional ordinary shares, and there is an obligation to issue 977,342,847 additional shares pursuant to the terms of the price adjustment right (PAR) that was part of the share placement that was completed in August 2010.
The placement was part of a planned two-stage capital raising but the second stage of that was abandoned as a consequence of the appointment of receivers to Allied Nationwide Finance Limited. As the placement was made under the terms of NZX Listing Rule 7.3.5, the total number of shares that can be issued at this time is equivalent to 20 percent of the shares on issue and a result, only 390,578,972 of the additional shares required to be issued under the PAR terms can be issued at this time. Shareholders will be asked to approve the issue of the balance of these entitlements, being 586,763,875 shares, at the 29 November 2011 Annual Meeting. Full details of these calculations will be provided in the Notice of Meeting.
ALF is pleased to announce today that it has reached a settlement agreement with Hanover in relation to a dispute over whether ALF was entitled to cancel a contractual obligation to pay $5 million to Hanover. The obligation arose in relation to the sale of Hanover’s assets to ALF in December 2009. ALF wish to recognise the positive approach Hanover has taken in reaching this settlement and the benefit that such a resolution will have for the Company and its shareholders. In particular, ALF is pleased that Hanover has been willing to forego its entitlement to the $5 million payment that was originally provided for and to enter into these settlement arrangements prior to ALF finalising its audited 30 June 2011 Financial Statements.
Because of this, ALF has been able to increase the net value of the ex-Hanover assets for the benefit of ex-Hanover investors in calculating the rights attached to the Bonus Securities. The resulting increase in value of the Hanover transaction has reduced the number of ordinary shares that the holders of Bonus Securities are to be recognised as holding.
ALF acknowledges that it has made various adverse statements about Hanover’s conduct and processes, including some allegations that Hanover disposed of a number of its assets on uncommercial terms and inappropriately released personal guarantees. In arriving at its decision to withdraw its allegations and settle, ALF has accepted that these statements were without merit and unproven. In view of this decision ALF has agreed to take no further action in relation to these claims.
The settlement reached with Hanover involves a contribution towards legal and settlement costs incurred by Hanover and no further residual obligations between the parties. As these terms are confidential, neither Hanover nor ALF will be making further comment in relation to this matter. The Board is pleased that Hanover has been fully co-operative in the resolution of this matter so that ALF can now concentrate its efforts in rebuilding the financial performance of the Company for the benefit of all shareholders.
On 29 August 2011 ALF announced that, as a consequence of the asset write downs as at 30 June 2011, the Board had identified a short term breach of the Capital Notes debt to equity ratio covenant, and that this was remedied on 22 July 2011. Due to the further write down in asset values, the Board has identified that ALF remains in breach of the ratio. The only consequence of the breach is an additional 2 percent interest rate payable to the capital note holders for the period of the breach. The Board has been very aware of the position of holders of the Capital Notes that are due to mature on 15 November 2011.
As part of the consideration of the options available, the Company was obliged to enter into dialogue with the Trustee of the Capital Notes, and in addition the Company opted to ask the Trustee to consider specific requests. These requests would have, if agreed by the Trustee, provided choices to the holders of the Capital Notes.
Unfortunately agreement with the Trustee has not been able to be concluded, leaving the Board with conversion of the Capital Notes into ordinary shares as the only feasible or commercial option (pursuant to conditions 6.3 and 6.14 of the Capital Notes Trust Deed).
The conversion to shares, the number of which is to be calculated in accordance with the conversion formula contained in the Trust Deed, will therefore occur on 15 November 2011. The Company will be writing to all capital note holders prior to conversion in respect to this decision.
(Update adds further detail).