Little reward on horizon for beleaguered ex-Hanover debt holders

For a man who predicted Hanover Group secured deposit-holders could get back up to 83 cents in the dollar two years ago, John Waller has little to say about Hanover today.

Hired by trustee Guardian Trust in 2008 alongside then PricewaterhouseCoopers (PwC) colleague David Bridgman to provide independent advice for Hanover investors on the Mark Hotchin and Eric Watson owned group's debt restructure plan, Waller and Bridgeman told the Hanover Group’s 16,500 investors they could expect to get back between 60c and 83c in the dollar of their NZ$554 million over the five year plan.

Asked to comment on the situation now, Waller’s staying mum.

 “I just don’t think it’s appropriate I comment frankly. My involvement ceased back in 2008. So I’m not prepared to comment,” says Waller.

A year after approving the restructure, having got back just 6c in the dollar, Hanover investors again spurned the option of receivership and voted through Allied Farmers' debt for equity swap.Allied Farmers, led by managing director Rob Alloway and chairman John Loughlin, promised Hanover investors the opportunity for returns through future dividend payments and through an increase in the value of Allied Farmers shares.

The deal saw the Hanover investors issued 1.9 billion Allied Farmers shares valued at 20.7c each. Yesterday they were trading at just 2.4c. And the vast majority of Hanover investors are clearly still hanging in as Allied Farmers' shareholders given Allied Farmers' annual report shows a total of 20,819 shareholders.

NZ$44.3mln debt on Hanover's NZ$94.3 mln of properties and loans

Valued at NZ$396.2 million in last December 's deal, Allied Farmers had slashed the carrying value of the Hanover assets by more than NZ$300 million by June 30 to just NZ$94.3 million. And Allied Farmers is still carrying NZ$44.3 million of debt secured against the Hanover properties, held by three banks and two financial institutions, all of which was classified as current - meaning it's due for repayment within 12 months- in the latest annual report.

Allied Farmers’ auditor and Waller's old firm PwC, has now raised a red flag over Allied Farmers accounts, saying it could not give an opinion on Allied's ability to operate as a going concern, adding the company was only likely to survive if it could;

- Resurrect a capital raising, that was to be underwritten to the tune of NZ$9 million by McDouall Stuart, suspended in August when subsidiary Allied Nationwide Finance (ANF) collapsed,

- Secure an alternative financier to provide alternative debt factoring facilities for rural services subsidiary, Allied Farmers Rural,

- Collect NZ$5 million worth of Allied Farmers Rural revolving credit debtors that became due for payment on September 30,

- Continue realisation of Hanover group financial and property assets and the finalisation with ANF receiver McGrathNicol as to the repayment terms on millions of dollars Allied Farmers owes ANF.

The annual report paints a dire picture of the state of the Hanover book, in a moribund property market. It says the Hanover group assets contributed revenue of NZ$7.3 million in the period from their acquisition on December 18, 2009 to June 30 this year and a net loss before tax of NZ$21.7 million.

Bank breaches

And then there's the NZ$44.3 million worth of debt, separate to the senior Westpac debt facility Allied Farmers says it has now as good as cleared. Of this debt, NZ$29.7 million is held by three banks, secured by registered first mortgage over the properties. The banks are charging an average interest rate of 6.9% per annum.

Allied says there are breaches and events of default under the ex-Hanover loans held by two of the three banks. If these aren’t remedied, the banks can take enforcement action, including appointing a receiver to the properties.

“To date the bank lenders have not taken any specific action. The Group is in discussions with the banks regarding the remedying of these breaches,” says Allied Farmers.

 The breaches relate to:

a) Withholding the provision of a replacement guarantee to a bank lender.

b) A loan to asset value ratio with a bank lender.

c) Non payment of facility fees and other current due amounts with a bank lender.

d) Non payment of loan amortisation with a bank lender due after balance date, although an extension was obtained.

e) Loan facility term with a bank lender expired at time of Hanover Finance Limited and United Finance Limited acquisition and was not extended.

Allied Farmers also has NZ$14.5 million of Hanover-related borrowings, paying an average interest rate of 15.8%, to two other financial institutions. These loans are also secured by first mortgages over properties.

The annual report doesn't say who the bank and financial institution debt is held by and neither the country's major banks nor Allied Farmers itself want to talk about it. But we do know Hanover was in trouble with its banks well before Allied Farmers took over.

Hanover's annual report for the year to June 30, 2009 noted covenants on bank loans of NZ$4.4 million, NZ$21.2 million and NZ$11.4 million, respectively, had been breached. These loans were held by Hanover subsidiaries Clearwater Hotel 2004 Ltd, Matarangi Beach Estates Ltd, and Lifestyles of New Zealand Queenstown Ltd which passed over to Allied Farmers.

Hanover investors miss out

The cash Allied Farmers has generated from the Hanover book isn't finding its way to Hanover investors' pockets. Rather it has been used to cover Allied Farmers' operating costs and pay down debt. The bulk of Allied Farmers' share from the NZ$27 million recent sale of stage two of Queenstown's Five Mile to Auckland property developer Tony Gapes, for example, is being used to keep Westpac at bay. That was after a prior charge holder, Uno Finance, took its NZ$9.3 million.

When Allied Farmers acquired Hanover's property and loan assets, 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. This never materialised and in August ANF's trustee, Guardian Trust, pulled the plug on ANF. This has cost Allied Farmers shareholders - including the ex-Hanover debt holders - more than NZ$68 million through investment, goodwill and deferred tax write-offs.

So when Alloway writes in his company's annual report that the recovery process on Hanover loans and properties has been encouraging so far, and as speculation mounts of Securities Commission action over the Allied Farmers-Hanover deal, it's hard to imagine he's writing from the perspective of a former Hanover, now Allied Farmers', investor.

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