Hanover plans to repay capital over 5 years, but no interest (Updated)

Hanover Finance has announced the details of its capital restructure and delayed repayment proposal, including a previously foreshadowed NZ$96 million injection of property and cash by its owners Mark Hotchin and Eric Watson. (Updated with more details on interest payments, comments from Hotchin) The proposal to be voted on by debenture holders on December 9 involves Hanover continuing to operate as a going concern, including a resumption of lending within as early as 18 months and a drip feeding of capital repayments over the next 5 years. Hanover said it is assuming a recovery in the property market will allow it to recover loans to property developers over the next five years, which would return at least 18 cents in the dollar more than a receivership. Hotchin told a media briefing that the receiver's estimates of recovery are at least double what would actually be recovered, with receivership triggering forced sales and poor asset recoveries. He said some borrowers were actively seeking receivership so they could negotiate favourable debt restructurings and asset buy-backs from receivers. "Receivership would be an absolute disaster," Hotchin said. The receivership scenarios from advisers PricewaterhouseCoopers for Hanover are that 81.9 cents in the dollar could be recovered by 2013, while Hanover is forecasting it can recover 100 cents, although that includes 10 cents of earnings from new lending over the period. Hanover expects to restart capital repayments on March 15 next year, with 2 cents in the dollar every quarter returned in 2009, with a further 2.5 cents and 3 cents returned every quarter in the 2010 and 2011 years. The major capital returns are not due until 2012 and 2013, when the remaining 70% would be returned in two equal tranches of 35% in 2012 and 2013. However, it said it had no plans to repay interest over the next five years, although it would restart interest payments if loan recoveries were greater than expected. However, dividend payments to shareholders would also resume at the same time. However there is the potential that interest forgone over the 2008-2013 period could be repaid in full if the returns from recovered loans are significantly more than expected, with either half of the excess recoveries or the forgone interest at 8%, which ever is the smaller. Once that is paid then Hanover's shareholders would be repaid whatever capital contributed. The NZ$96 million capital injection includes NZ$10 million of cash for principal repayments, a NZ$26 million debt reduction in Axis Property Group and personal guarantees of NZ$20 million from 2010. It also includes NZ$40 million in property held by the major shareholders Eric Watson and Mark Hotchin. This property includes residential property at Matarangi Beach Estate in the Coromandel, Jacks Point in Queenstown and apartments in the Viaduct complex in Auckland. Hanover currently has NZ$18 million in cash and is spending NZ$5 million a year on operating expenses. Hanover and its subsidiary United Finance owe 17,630 investors NZ$553 million. What I think This plan assumes a recovery in the property market generally over the next five years next year or two. I think this is optimistic.  As it is the plan only returns 30 cents in the dollar by the end of 2011 and does not return any interest. I am surprised Hanover is planning to resume lending as soon as in 18 months and has said it may want to borrow more money from wholesale sources. It genuinely believes it can trade through. I think it should be running down its book. At first glance, receivership looks the cleanest, simplest option that is likely to return the most money quickly. To be fair to Hanover, it has pointed out that both KordaMentha and PriceWaterhouseCoopers have both agreed with Hanover that the restructure plan is better for investors, although PriceWaterhouseCoopers has said that Hanover is being overly optimistic. Hanover Finance is a failed property financier. This type of lending is dead. The best people to deal with failed companies are receivers, not the managers who got them into this trouble.