Allied Farmers offers hand of welcome to Hanover investors

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Allied Farmers, with a market value of $12 million, agreed to buy Hanover Finance's financial assets for $400 million in stock, effectively giving Hanover's debenture holders 95% of the enlarged company.

Wednesday, November 18th 2009, 2:08PM 7 Comments

The deal needs approval from investors in Hanover and its associate United Finance and from Allied Farmers' shareholders, who will be diluted down to 5% of a vastly larger company. Allied chairman John Loughlin has to convince them that taking on a loan book that's 80% bad offers the best prospects for the company's economic growth and their wealth. Allied's stock rose 6.1% to 35 cents today, having shed two-thirds of its value in the past 12 months.

"We're acquiring challenging assets with uncertain value," Loughlin told reporters on a conference call. "We sense there is both challenge and opportunity in those assets."

Hanover's high-profile owners, Mark Hotchin and Eric Watson will exit under the deal, with some $10 million left in their company for mop up and closure costs. All other assets transfer across. Allied plans to follow a strategy employed by Pyne Gould Corp. of creating a new asset management arm to manage the bulk of the mortgages which have gone bad.

That leaves about $50 million of loans "that will be clean and have been reviewed by the trustee and independent directors" and are to be transferred directly into Allied Nationwide Finance, according to Loughlin.

Allied will take on 13,800 Hanover and 2,600 United investors who are reeling from the news they won't get their entire money back in Hanover's moratorium.

The finance firm that once ran prime-time advertisements touting its robustness this week disclosed a $102 million annual loss and confirmed investors would get 70 cents in the dollar at best.

Hanover and United had $296.8 million of debentures and term deposits and total securities of $317 million. A year ago, the same assets were valued at $516.6 million.

"All these moratoriums were based on the premise the commercial property market would recover, but you have completely ripped out the funding so how can it actually recover," said Craig Brown, who helps oversee $3.3 billion at ING New Zealand and doesn't hold Allied stock.

If the deal pays off, Allied will have taken advantage of a market that's in the dog box to pick up assets at a great price, he said. He said a proper assessment of the deal wasn't possible from the initial summary statements released today.

Allied gave few financial details of the deal, saying it is preparing a short-form prospectus for the issue of shares to Hanover debenture holders.

Under the proposal, Hanover's secured depositors would get 78 cents in the dollar of original principal owed and United's holders would get 90 cents., including 6 cents they already received under their Debt Restructuring Plan moratorium. Holders of Hanover's subordinated notes will get just 30 cents, as will its capital bond holders.

Loughlin says the transaction is "a transformational opportunity."

"We've got a small rural business and we've got a medium-sized finance company that has been growing as other people have vapourised in front of us - and quite a lot of debt," he said. "After this we will have an enormous amount of equity."

The strengthened balance sheet also will help the enlarged group get a "good" credit rating, Loughlin said, without being specific, while creating "a platform to take Allied forward."

Under the proposal, a new subsidiary of Allied Farmers will be created to hold and manage the bad loans, with managing director Rob Alloway initially leading the unit.

"Given the uncertain nature of these assets, Allied Farmers has been careful to ensure the fairness of the transaction to both our new and existing shareholders," Allied said. "For existing shareholders, the transaction includes an adjustment mechanism which will realign relative shareholding as at June 2011 if the expected recoveries from the acquired assets do not meet expectations."

Allied plans to hold a special meeting to vote on the proposal in early December.

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