By Gareth Vaughan
Allied Farmers still needs to reduce its debt by about NZ$30 million to be a viable ongoing business, says managing director Rob Alloway.
Alloway told interest.co.nz that the beleaguered firm currently had total debt in the "mid-to late NZ$30 millions" down from a peak of NZ$102 million at December 31, 2009 just after it took on the finance book of the failed Hanover Group. Allied Farmers owes about NZ$19.2 million to its government guaranteed finance company subsidiary, Allied Nationwide Finance (ANF) which was tipped into receivership last August, has NZ$12.6 million worth of capital notes due to mature on November 15 this year, and Alloway says, owes about NZ$3 million to the BNZ, about NZ$2.5 million to Fortress Credit Corp and just under NZ$2 million to the ANZ.
Allied Farmers' rural services business, which Alloway described as the group's core operations, had delivered a long-term average of between NZ$2.5 million and NZ$5 million in annual earnings before interest, tax, depreciation and amortisation (ebitda).
"We know the level of gearing that you can apply to that sort of business and that's the target, - to get the gearing down to something that's manageable and reasonable and clearly in the $30 millions is not," Alloway said.
"It's a business I believe that could carry something in the range of $7 million to $10 million worth of debt, but you wouldn't want to carry much more that that over an ebitda of $2.5 million to $5 million."
Hanover froze NZ$554 million owed to 16,500 investors in July 2008. Investors' subsequently approved a moratorium proposal in December 2008 that pledged to pay them back all their capital over five years. Then a year later after getting back just 6 cents in the dollar, Hanover investors agreed to swap their Hanover debentures for shares in Allied Farmers valued at 20.7 cents each which are now worth just 1.4 cents each.
Valued at NZ$396.2 million in the December 2009 debt-for-equity swap, the fair value of the net assets acquired from Hanover was placed at NZ$109.9 million in Allied Farmers' unaudited half-year financial statements. Funds raised through the sale of some assets in the Hanover stable have been used by Allied Farmers for debt reduction rather than finding their way into the hands of beleaguered former Hanover investors.
Minefield of problems
Alloway's comments came after Allied Farmers yesterday revealed it might default on a loan with a current outstanding balance of NZ$7.5 million that's due for repayment to ANF by July 1. This is in addition to a potential guarantee on a NZ$7 million agreement to sell an ex-Hanover receivable that could constitute a default under Allied Farmers' secured loan arrangements with ANF, and another NZ$11.7 million due to ANF by July next year as part of debt factoring, credit enhancement and related party loan arrangements first reported by interest.co.nz last August.
Allied Farmers also had a NZ$19 million loan to HSBC from its subsidiary Matarangi Beach Estates Limited canceled with the bank requiring it, plus outstanding interest and fees, to be repaid. Matarangi's receiver's report also notes that Matarangi owes Allied Farmers NZ$20 million.
On top of this Allied Farmers also faces a write-down on a NZ$23 million loan Hanover made to Honk 2 Limited on 59 hectares of un- zoned development land at Silverdale north of Auckland and wants to bankrupt property developer Nigel McKenna over a NZ$110 million Kawerau Falls guarantee.
The firm is also due in court on May 30 and June 1 to defend a summary judgment hearing against Hanover over NZ$5 million Hanover wants as the balance of its December 2009 finance book sale to Allied Farmers, whose unaudited loss for the six months to December was NZ$20.5 million and which had cash of just NZ$543,000 at December 31. Hanover is under investigation by both the Securities Commission and the Serious Fraud Office.
With last year's Allied Farmers annual results, its auditor PricewaterhouseCoopers said it wasn't sure whether the company could survive because it was unable to obtain sufficient audit evidence upon which to form an opinion on whether application of the "going concern" assumption remained appropriate.
ANF receiver stays mum on plans to recover money from Allied Farmers
Meanwhile, Allied Farmers says ANF's receiver, McGrathNicol, has reserved its position in relation to the possible default on debts owed to ANF by Allied Farmers, and is considering its options. McGrathNicol declined to comment on what these options - potentially including receivership for Allied Farmers - might entail and nor would Alloway comment on them.
The NZX-listed capital notes, meanwhile, bear interest of 9.6% per annum and are due to mature on November 15. Asked whether he expected Allied Farmers to still be up and running in November when the notes are due to mature Alloway said: "My attention is firmly focused on making sure that we've got a strong operating business."
"Clearly we're riding some pretty good times at the moment in the livestock area and even to a degree in merchandising on the back of very, very strong commodity prices and a good outlook for the whole rural segment," said Alloway. "So it's a matter of continuing to push on that. Because you can sell assets to repay debt and continue to do so but you've got to have something that is left at the end of it."
Allied Farmers recently closed three of its rural stores.
Capital noteholders could be issued shares
Upon maturity Allied Farmers can choose to renew the capital notes for another five years, redeem or purchase for cash all or a portion of the notes, or convert them into Allied Farmers shares. Alloway said it was too early to comment on what Allied Farmers might decide to do in November.
Sean Roberts, a corporate trust business manager at Trustees Executors which is the capital noteholders trustee, told interest.co.nz Allied Farmers had met its interest obligations to noteholders to date. The interest payments are quarterly with the next due on May 15. Roberts said Trustees Executors was "unable to comment" on what Allied Farmers may or may not elect to do when the capital notes mature, including what interest rate may be offered if they are renewed.
Trustees Executors wrote to the Companies Office last year raising concerns about Allied Farmers' financial plight. At that point there were 521 holders of the capital notes.
Roberts declined to comment on whether Trustees Executors was comfortable that Allied Farmers will be able to meet its future obligations to its capital noteholders or on whether the issues raised in its letter to the Companies Office last year were resolved satisfactorily.
All he would say was: "Trustees Executors has monitoring obligations with respect to Trust Deed compliance and we continue to fulfill those obligations. We also have reporting obligations to the Registrar of Companies under the Corporations (Investigations and Management) Act in certain circumstances; and we confirm that we have continued to meet those obligations."
Alloway says Allied Farmers has retired debt worth just under NZ$3 million owed to lenders on Jacks' Point and Clearwater properties, who rank ahead of ANF, since December 31. He also says sales contracts due to settle before June 30 should see further debt reduction of about NZ$4.7 million.
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