Hanover's lifeline ties Allied Farmers in knots

Of all the companies to put Allied Farmers out of its misery, it had to be Hanover Finance.

When Allied was clutching at straws in 2009, Hanover sold it a lifebelt of assets - and liabilities - that turned out to be as buoyant as a brick. Now, with the old farm services firm floundering, Hanover places a bespoke leather loafer upon its head and forces it beneath the surface.

The footwear in this case being a final demand for $500,000, plus interest, overdue since October. Liquidation is usually the next step, although Allied could yet negotiate a reprieve.

For investors in Hanover and United Finance, whose $554 million of stock was first frozen and then turned into 98 per cent ownership of Allied Farmers, there is a pathetic symmetry in Hanover's placing at the beginning and end of their misfortune.

But even as Hanover prepares the coup de grace, its multimillionaire owners Mark Hotchin and Eric Watson insist the eye-watering scale of losses was mainly the fault of Allied.

Only last week Chalkie received the following from a spokesman for Hanover:

"[Allied Farmers] did not have the skill or the financial resource to manage these finance assets - its own distressed financial position resulted in assets not being held or preserved as promised but taken to the market and sold at heavily discounted prices.

"If held and sold in today's market in an orderly manner [the assets] would deliver a significantly better result for debenture holders."

What's more, Allied "has realised in excess of $150m but no value or benefit have been delivered to the debenture holders - why aren't questions being asked of the board of [Allied]?"

Chalkie reckons the Allied board is as communicative as a clam with a hangover, so questions won't necessarily get anyone very far.

Having said that, Hanover's views surely come from a parallel universe where kittens eat candyfloss and dreams come true. In particular, it's hard to see where the $150m figure comes from.

When Hanover investors voted to swap their debentures for NZX-listed Allied shares in late 2009, they thought assets worth $396m were going with them. Instead, the millions melted away like an Antarctic ice shelf.

The deal went through on December 18 that year. At Allied's half-year balance date on December 31, those same assets were assessed at just $175.5m.

Voom, that's $220m gone right there.

A major non-performing asset for Allied was the Kawarau Falls development at Queenstown - Allied was owed $83m by development company Peninsula Road, which collapsed in early March 2010.

Peninsula Road also owed $43m to mezzanine lender Fortress Credit Corporation.

Chalkie wonders what sort of expert management would have recovered all the money from that particular pile of proverbial. Indeed, it's hard to see the original expertise in lending out such a huge sum when there is so little to show for it.

Peninsula Road was supposed to be developing stage two of the Kawarau Falls project, but nothing was built and the land was put up for sale by the company's receivers last month.

The last receiver's report for Peninsula Road in November showed just $3m paid to secured creditors to date.

Chalkie reckons another big problem was that the pro forma balance sheet describing the deal in the prospectus falsely showed zero liabilities being transferred from Hanover and United.

In fact, the assets came with bank debt of $30m and costly mezzanine debt of $15m, the latter bearing an interest cost of 16 per cent.

These loans required Allied to service them with interest payments, reducing the money available to shareholders. About $6m went on those interest costs in the first 18 months.

They also left Allied's ownership of various assets looking tenuous.

Matarangi Beach Estates, for example, was supposed to have had net assets - ie, assets in excess of debts - of $27m when Hanover went belly-up in mid-2008. The company was involved in developing a residential community on the eastern Coromandel coast, north of Whitianga, and was transferred to Allied as part of the package.

However, although Allied owned the company and was owed $20m by it, there was also $19m of prior-ranking debt to bank lender HSBC.

Unfortunately Matarangi's assets were slow to sell and HSBC pulled the plug in November 2010, less than a year after Allied took over.

Allied had already written the asset down to a mere $7m, but the receivership wiped it out completely. The properties owned by the company were sold by receivers in 2011 for just $15m, leaving even HSBC out of pocket.

According to the Hanover theory then, at least $25m was pissed away unnecessarily from the value of Matarangi in 11 months under Allied's ownership. Some may find this plausible. Chalkie doesn't.

But back to the $500,000.

This fee had its origins in an agreement Allied made to pay Hanover $10m to cover costs in the asset transfer - $5m for various professional fees and $5m to cover "residual obligations" remaining with Hanover companies.

The first $5m was paid. In June 2010 Allied told Hanover it wasn't paying the other $5m, arguing that Hanover's conduct relating to transactions it executed in the lead-up to the asset acquisition represented "serious breaches" of the agreement.

Allied's then managing director Rob Alloway said the issues included concerns that Hanover had released two borrowers from personal guarantees just days before the Allied deal was completed.

The arrangement smacked of Hanover "looking after your mates before you jump off the ship", he said.

"We called those two borrowers in, and they were smiling like cats."

With tit-for-tat $5m claims, Allied and Hanover eventually agreed a settlement but kept it confidential at the time.

We now know from Allied's accounts that the settlement involved Allied paying Hanover a reduced sum of $500,000, plus interest.

In a statement, Hanover told Chalkie this was "a further concession for the benefit of the Hanover debenture holders".

Perhaps it was, although surely some might doubt altruism's ability to trump a desire for several million dollars.

Still, any altruism has vanished and Hanover now wants its ounce of flesh. Allied probably doesn't have the money.

It's distressing for investors, but Chalkie doesn't buy the idea that Allied mismanagement was mainly responsible for the loss of so many millions.

For all their bluster and buck-passing, it was surely Hanover and Hanover's owners who sowed the seeds of disaster.

- Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.