$102m loss bad news for Hanover investors

Cash-strapped lender Hanover Finance could be tipped into receivership by its trustee if the gap between the amount still owed to investors and value of the company's physical assets shrinks much further.

Auditors KPMG yesterday ended months of anxious waiting for the struggling finance company's 17,000 investors by laying bare Hanover's accounts, and the news was not good, with a $102 million loss for the year to June 2009.

The accounts revealed Hanover, which has been operating under the terms of an investor-backed moratorium since December, experienced an operating loss of $283m compared to a $10m profit for the previous year.

In a statement chairman David Henry and directors Des Hammond and Mark Hotchin said the challenging economic environment, combined with the requirements of the international financial reporting standards (IFRS), had hurt the company's financial results.

The accounts showed bad debts written off of $137.1m and provisions for credit impairments of $136.9m.

Buried deeper was the company's capital management position, which showed Hanover had total tangible assets worth $286m while outstanding principal due under the company's five year debt restructuring plan was $445m.

The ratio of 64 per cent was perilously close to the 60 per cent figure that would trigger a review of Hanover's compliance with the approved debt restructuring plan by trustee Guardian Trust, as noted by KPMG.

The ratio was increased, however, by a $62.7m provision adjustment under IFRS that represented the difference between estimated future cashflows and the same estimated future cashflows discounted to their net present value.

"Under IFRS and impaired accounts, receivable loans are discounted back from their projected future cashflow recoveries at the rate originally applicable to each loan even where interest charges have been adjusted or written off resulting in a large apparent cost being debited to the income statement of $62.7 million," said Hanover's directors.

KPMG pointed out that Hanover's trustee could take enforcement action and appoint a receiver in the event the company failed to pay all or part of two consecutive principal payments, or if the company was unable to pay its debts as they fell due.

Should Guardian Trust move to appoint a receiver then Hanover must be mindful that adjustments could be made to reflect the fact that assets, including loans and advances, may need to be realised at amounts other than those at which they were recorded in the balance sheet of the company and the group, said KPMG.

Hanover last week told investors it was highly unlikely they would receive full repayment.

Secured depositors were more likely to get 70 cents in the dollar, and those invested in subsidiary United Finance 90c.

Hanover revealed it was in serious trouble in 2008 and then froze repayments on some $554m of investors' cash. The firm has so far returned 6c under the repayment plan.

Future repayment depends heavily on future loan provisioning and realising good values from Hanover's exposures to the Kawarau Falls and Five Mile developments in Queenstown.

- © Fairfax NZ News