Allied Farmers may issue yet more shares to replace its soon to mature capital notes

By Gareth Vaughan

Allied Farmers, which swamped its then shareholders' 37.7 million shares by issuing 1.91 billion to Hanover Finance debtholders in December 2009, may issue yet more shares to replace NZX-listed capital notes with a face value of NZ$12.6 million that are due to mature in November.

Included in the company's unaudited annual results release, dumped at 5.30pm on Monday evening, was a paragraph on the future of Allied Farmers' capital notes. The company said its directors would soon determine the "proposed course of action" for the capital notes which mature on November 15 this year.

Based on the capital notes trust deed, overseen by trustee Trustees Executors, the options open to the directors are renewing the capital notes for another five years, redeeming or purchasing all or a portion of the notes for cash, or converting them into Allied Farmers shares.

Given Allied Farmers' financially challenged position - it posted a NZ$43 million unaudited annual loss with its accounts showing an equity deficit of NZ$6.4 million - it doesn't appear to be in a position to redeem or buy the notes. That leaves the options of rolling the notes over, possibly at a lower interest rate than the current 9.6% per annum, or converting them into shares.

Ross O’Neill, Allied Farmers' now part time general counsel and company secretary, told interest.co.nz that everything the company currently wanted to say regarding the capital notes was included in Monday's results announcement.

According to the NZX website, none of the notes have traded for at least 30 days and their current price per NZ$100 is NZ$59.2.Priced at NZ$1 each, the notes were sold in minimum parcels of NZ$5,000 in 2007.

22 day covenant breach

Monday's announcement also noted there was a "short-term" breach of the capital note debt to equity ratio covenant (which is that Allied Farmers' external secured debt doesn't exceed 1.5 times equity) from June 30, which was remedied by a debt reduction almost a month later, on July 22.

"The only consequence is an additional 2% interest rate payable to the capital note holders for this 22 day period," Allied Farmers said.

Asked about the trust deed breach and when any decision on the notes' future might be revealed, Sean Roberts of Trustees Executors said Allied Farmers' NZX announcement had stated the breach had been rectified by a reduction in debt.

"If interest had not been paid we would have been in communication with the noteholders affected amongst other disclosures," Roberts said.

He added that the next interest payment is due on the maturity date of November 15.

"The Board has various options from this point, but noting that the Trust Deed requires various actions in the days prior to 15 November depending on the option they take," Roberts added, without elaborating.

Trustees Executors wrote to the Companies Office last year raising concerns about Allied Farmers' financial plight. At that point there were 521 capital noteholders.

Massive value destruction

The Allied Farmers-Hanover deal saw about 16,400 Hanover group investors issued 1.91 billion Allied Farmers shares valued at 20.7 cents each in exchange for their Hanover Finance, United Finance and Hanover Capital secured deposits, secured stock, subordinated notes and capital bonds in a deal with an attributed value of NZ$396.2 million. Allied Farmers shares yesterday closed at just 0.5c each leaving the  ompany with a market capitalisation of just NZ$10.2 million.

Allied Farmers says as of June 30, the total value of the Hanover group assets both realised since 2009 and still held is just NZ$93.6 million, that's NZ$302.6 million less than when Allied Farmers took them off Hanover owners Mark Hotchin and Eric Watson's hands.

Meanwhile, Allied Farmers also said on Monday that the completion of its audit in the next few weeks will confirm the number of additional shares that need to be issued under its bonus share mechanism approved by shareholders at the time of the December 2009 Hanover deal and an August 2010 share placement. This bonus share issue will dilute ex-Hanover debtholders' stakes.

"The cost of these additional shares has been fully provided in the accounts. In anticipation of the issue of the new shares, this provision has been capitalised and accordingly shareholders' funds have increased by the value of the shares to be issued, calculated at June 30," Allied Farmers said.

"This increase in shareholders' funds is intended to preserve the net tangible assets per share on issue."

Allied Farmers' unaudited annual accounts show a share allocation adjustment expense of NZ$2.5 million and provisions of NZ$1.4 million. They also record share capital of about NZ$135.6 million, up about NZ$4.5 million year-on-year.

A going concern?

Allied Farmers issued 3.7 million bonus shares on a one-for-10 ratio to its existing shareholders before the Hanover deal. It said if its audited results for the year to 30 June 2011 show Allied Farmers made a shortfall, whether realised or unrealised, on the NZ$396.2 million attributed value for the Hanover assets, then the bonus shares will convert to ordinary shares. The conversion will be calculated to enable Allied Farmers' shareholders aggregate shareholding to be increased to what it would have been immediately after the proposal as if the assets had been transferred at the ascribed value as at June 30 this year.

In Allied Farmers' audited accounts last year 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.

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