Allied Farmers' Hanover assets now worth less than one third what it paid (Update 1)

Allied Farmers' Hanover assets now worth less than one third what it paid.

Allied Farmers says the Hanover Finance Group property and loan interests it acquired last December in a deal valued at NZ$396 million, are now worth less than a third of that, or just NZ$124 million.

(Update includes share price details).

Allied issued about 1.9 billion new shares at 20.7 cents each last December, swapping them for Hanover debentures. Allied shares closed at 5.9 cents on Friday, giving the company a market capitalisation of just NZ$112 million.

Read Allied Farmers full statement below:

Consistent with Allied Farmers’ objective to keep the market fully informed on progress toward finalization of the values of property assets and loan assets acquired from Hanover Finance and United Finance on 18 December 2009, we provide the following update.

On 1 March 2010 Allied Farmers released its interim financial statements for the period ended 31 December 2009. Included in these financial statements were the net assets acquired from Hanover Finance and United Finance on 18 December 2009. The provisional fair value assessment for these net assets was $175.5 million. On 7 May 2010 Allied Farmers announced a net decrease of $17.9 million from $105.4 million to $87.5 million in the value of its property assets acquired from Hanover Finance and United Finance.

The property assets are properties previously directly owned by Hanover and United and now directly owned by Allied Farmers. These include industrial development land in Queenstown, and various lifestyle sections and properties around New Zealand. In the 7 May 2010 announcement Allied Farmers also indicated that the value of the loan assets acquired from Hanover Finance and United Finance on 18 December 2009 is likely to be subject to an increase in impairment provisions, but at that stage it was too early to determine the extent of the impairment. The loan assets are loans made by Hanover Finance and United Finance (as lender) that have been transferred to Allied Farmers.

These loans are typically secured over properties that are in various stages of development, ranging from bare land to completed and tenanted projects. The loans were recorded in the 31 December 2009 Interim Financial Statements at their provisional fair value assessment of $106.6 million. As part of the process for the preparation of the 30 June 2010 financial statements Allied Farmers has now completed assessment work on $69.1m of the $106.6 million loans (being 65 percent) acquired from Hanover Finance and United Finance. As a result of that work, Allied Farmers advises that an increase in impairment provisioning of $33.6 million is required on the $69.1 million of loans assessed to date.

Assessment work is underway on the remaining $37.5m balance of the acquired loan assets not yet assessed. However, we are unable at this stage to determine the extent of the impairment on these loans until we have received further information, such as updated independent valuations on underlying property securities. Consistent with Allied Farmers previous statements, these loan asset impairment provisions, and the net decrease in the value of the property assets, reflect the challenges in realizing the assets acquired from Hanover Finance and United Finance at the value ascribed in Hanover Finance’s and United Finance’s audited 30 June 2009 financial statements.

These reflect the state of the market for both Allied Farmers’ property assets and loan assets secured by borrowers’ properties. In particular, in relation to the loan assets, the following factors during the 2010 calendar year have contributed to the impairment provision:

• Lower valuations for commercial development land, arising from: a tightening of funding for such developments; and  a lengthening of realisation periods due to longer rezoning processes and delays.

• Lower valuations of Auckland apartments arising from a lack of funding and general oversupply.

• The bankruptcy or liquidation of borrowers resulting in forced sales rather than managed sell downs.

The result of our assessment work to date is that the provisional fair value assessment of the net assets acquired from Hanover Finance and United Finance (disclosed in Allied Farmers 31 December 2009 Interim Financial Statements at $175.5 million) require a further impairment provision of $51.5 million. This results in a value of approximately $124 million for the net assets acquired from Hanover Finance and United Finance.

These impairment provisions are subject to further adjustments arising from completion of the work on the remaining $37.5m balance of the acquired loan assets, and audit verification. The final position will be reflected in Allied Farmers 30 June 2010 Financial Statements.