Allied reports Hanover oddities

Allied Farmers' managing director has reported some irregularities in the books of Hanover and United Finance to authorities.

Group managing director Rob Alloway said since Allied bought the failed finance companies' assets in December, he found "a few unusual things in terms of loan documentation and files, which we've been particularly uncomfortable with".

He would not elaborate.

Shares in Allied Farmers slipped after the company announced its finance arm's first credit rating and shareholders digested a huge fall in asset value from the Hanover purchase. The shares were initially unmoved after the first-half results at 10c, but slipped 17 per cent yesterday to a new year low of 8.3c, before closing slightly higher at 8.5c.

Allied said on Monday that the new fair value of the assets had more than halved, falling from $396.2 million when they were bought in December to $175.5m.

Some of the write-down was known pre-purchase, or due to interest adjustments, but $99.3m stemmed from finance loans, mostly from the much-delayed Kawarau Falls hotel development near Queenstown.

Mr Alloway admitted the write-downs were disappointing, particularly from Kawarau Falls, where cost overruns had become evident after the deal.

However, he said investors should not be concerned as Allied's net equity was a still strong $171m.

"We think we've got a very, very strong balance sheet even after taking a very realistic approach to a number of these assets.

"These assets, valuing them at $175m doesn't mean they will be realised for that . . . That is a very discounted value."

Chairman John Loughlin added that pre-purchase Allied shareholders would get an element of compensation through bonus securities in 2011. "When we did the transaction, we were conscious that the value of some assets were very uncertain."

Accounting treatments of $60m would come back eventually through the profit and loss account, but Kawarau Falls costs were unexpected, which was why the bonus securities were added.

Allied's bottom-line result was a loss of $11.8m for its first half, compared with a $4.76m loss the year before. That included a $3.84m impairment of goodwill from finance arm Allied Nationwide.

Godfrey Boyce, head of financial services KPMG, said the write-downs were "a significant step down" and bigger than he anticipated. "You'd have to say it's at the top end of expectations, but having said that, we've seen significant writedowns in other property financiers, including Strategic Finance, so it's all in keeping with the general malaise that's affected the property financiers generally."

Mr Boyce said Allied's result reflected how first mortgage holders were squeezing out mezzanine and second mortgage lenders.

The result really came down to company strategy.

"If it saw an ability to hold these assets for a period until we come out of the cycle . . . then they may say 'that's all an accepted part of the strategy. The value's not there now, but we're going to hold it into the future'."

Meanwhile, Allied subsidiary Allied Nationwide Finance has been given a BB-minus long-term credit rating with a negative outlook from Standard & Poor's.

That is one notch below the rating needed to be in the Government's extended deposit guarantee scheme when it rolls over in October.

The parent company hopes to raise the rating by transferring more capital into the finance company, but Mr Loughlin said the company could operate outside the government guarantee scheme beyond that date.

He said only loans of a suitable quality would be offered to Allied Nationwide in exchange for additional capital.

S&P had also assigned a B short-term credit rating, noting the company's weak stand-alone capital, recent deterioration of asset quality and a material amount of debenture refinancing this year. However, it also noted the recapitalisation of Allied Nationwide's parent, and that its business profile was more diverse than other peers.

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