Hotchin: 'Nothing in it for me'

BY TIM HUNTER

Mark Hotchin arrives 20 minutes late for our meeting and he's still signing papers as we walk in. He looks tense, keyed up.

"We've just sold stage one [of Five Mile]," he says. "It's selling as we speak."

The deal, concluded on Thursday afternoon, involved part of one of Hanover Finance's biggest troubled assets – Christchurch developer Dave Henderson's huge Queenstown property development, placed in receivership by Hanover last year.

By July this year, Hanover and its loan sharing partner NZ Castle were owed $91.5 million.

So how much will the sale realise? "I can't say how much, but it's in line with our expectations," says Hotchin.

Those expectations will be low. On November 10 Hanover told investors what many already feared – the property development market had collapsed and its loans were in such a bad way that there would be a significant shortfall in repayments. Instead of the 100c in the dollar over five years they had been led to expect, investors would get about 70c.

A few days later Hanover's financial statements revealed it had written off bad debts of $137m and was expecting more to come.

After its high-profile failure last year Hanover still owes its mainly elderly investors $438m and their anger has spilled over into media vilification of the company's multimillionaire owners – Hotchin and expatriate businessman Eric Watson. Now with an unusual debt for equity swap deal on the table from ambitious minnow Allied Farmers, Hotchin is in the spotlight again.

In the fourth floor meeting room of his dowdy FAI Finance offices at the cheap end of Queen St, Hotchin insists Allied's plan has no benefit to himself and Watson, but investors deserved a chance to vote on it.

"As the deal is at the moment there is nothing in it for shareholders," he says. "We have to forgive the $76m [shareholder support]. There's an amount to be left as part of the deal [Allied has indicated about $10m] to meet residual costs, trustee fees, tax, litigation... The company left will have potentially more liabilities than assets."

The $76m is a reference to the moratorium deal approved last December, in which he and Watson reinforced the finance company's assets with $10m in cash, property valued at $40m and a $26m related party loan. The real value of that reinforcement was a contentious issue at the time, but under the new proposal those assets, whatever they're worth, become property of Allied Farmers.

As such, it amounts to the end of the line for Hanover Finance and its sister company United, allowing Hotchin to walk away from the grief and out of the public eye.

Although he would no doubt be relieved at the prospect, it's a high price to pay, he says. "This was never a $76m and `see you later' – that would be a ridiculous amount of money [to pay to walk away]. We put in a substantial amount of money with a clear idea we'd see this through. We were expecting to get that money back."

Yet having agreed, subject to investor votes, to relinquish those assets, Hotchin insists he hasn't given up on the business.

"I've never really thought we're dead," he says. "The last month has made a big difference with finalising the audit. And the receivership of Kawarau Falls was a big issue for us. We knew it would be a very tough year for property and it proved to get harder and harder."

Hotchin stops short of recommending the deal to investors, saying he will give the board's official view after receiving an independent report from Grant Samuel due "in the next few days", but one of the factors on investors' minds will be the status of the repayments promised to them under the moratorium.

Hanover has paid back 6c in the dollar in three quarterly instalments so far and is due to pay a further 2c next month. Failure to make that payment – which totals about $11m for Hanover and United – would trigger a call on the $10m cash put up by Hotchin and Watson.

Failure to pay the 2c quarterly instalments next year would mean the pair were required to put in a further $10m.

For Hanover, desperately short of cash, making those payments is not a foregone conclusion. But Hotchin says he is "very confident" the December payment will be made. As for next year, "definitely's not a word I like to use", but "we have a contingent liability of $10m if there's a shortfall in the next four repayments, and we're pretty confident that wouldn't happen". He doesn't mention the further obligation for $10m support between 2011 and 2013.

Still, the difficulty for investors is that they've heard that sort of thing before. Hanover may, or may not, pay up on time – and now they are faced with a choice between the uncertain returns from Hanover and the unquantifiable returns from the same assets as Allied shareholders.

Hotchin acknowledges the value is unclear – "The assets are the assets," he says – but argues that Allied has opportunities not open to Hanover.

"They are not under the same pressure we're under to make payments and realise assets. The opportunity for them to deal with them differently is significant.

"People may compare this to Geneva and take a negative view because the shares went down.

"But the advantage of this deal is this is a separate listed entity going forward that will have a strong balance sheet. Apply any discount to $400m [the estimated value of Hanover and United assets] and it's still a big number."

As he points out the benefits of the deal to investors, it's hard to escape the conclusion that Hotchin now has nothing to lose and Allied's proposal offers a welcome escape from persecution. "The commentary since we made the announcement that we're not on track for 100c [repayment] has been disappointing," he says. "We are the only ones who have put up money and stuck with it and tried to do something for the mums and dads."

It's been a tough year, he says, but the important thing now is to ensure investors get a clear idea of what the Allied deal means. "The biggest risk to the debenture holders at the moment is disinformation. This deal needs to be assessed on its merits."

And if they reject it? "We carry on and we'll make the December payment and we'll keep at it."

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