Hanover investors will vote on the company's fate next week. Here the firm responds to a column by Brian Gaynor in the Weekend Herald.
KEY POINTS:
This column seeks to reply to the main propositions in Brian Gaynor's article.
"Why were Hotchin and Watson allowed to obtain huge related party loans from Hanover?"
Under Hanover's trust deed and its internal credit policies, related party lending is permissible where the terms are commercial and not more favourable than they would be to third parties. These requirements have always been met (including the taking of appropriate security), and the lending has always been fully disclosed in the company's audited annual and half-year accounts and prospectuses. Under the revised governance structure to be put in place under the debt restructure proposals (DRP), future related party lending will be permitted only with trustee consent.
As Mr Gaynor himself notes, related party lending totalled 14.9 per cent of total assets at June 30, 2008. This would be regarded as a reasonable level given commercial terms and the overall size of the loan book.
"How could the board ... justify these huge dividends when it was patently clear that Hanover Finance was experiencing major liquidity problems?"
All dividends paid by the group have been declared (a) after consideration by the board and management of a detailed 12-months rolling liquidity forecast incorporating loan realisation timetables, alternative funding initiatives and corporate benefit to Hanover of transactions to which dividends were to be applied, and (b) in accordance with the Trust Deed and the Companies Act.
Mr Gaynor notes that dividends totalled $86.5 million in the two years to June 30, 2008. Of that amount (as reported in the June 30, 2008, audited accounts), $31.5 million was combined with resources provided by entities associated with the shareholders to reduce related party loans by $66.6 million during the 07/08 financial year.
Hanover has never breached the capital adequacy requirements set out in its trust deed. The company had $37 million of cash on June 30, 2008, and actual cash flows continued to reflect forecasted expectations. The decision to suspend payments to investors came in late July after expectations regarding future cash flows were becoming more uncertain due principally to worsening conditions in the local and global credit and property markets, and the flow-on effect on borrowers' abilities to repay loans.
Surely even Mr Gaynor would acknowledge the impact on the group of global and local credit market events, negative sentiment in the New Zealand debenture market due to prior finance company failures or payments suspensions, and the difficulties created by market conditions in respect of securing alternative debt or equity funding.
"The Explanatory Memorandum for the December 9 meeting to approve the debt restructuring proposal is like all of Hanover's documents - it is complex, difficult to understand and omits some of the more important information. For example, it includes only a summary of the PWC analysis, whereas the full report contains much clearer details of the huge dividend payments and related party loans."
The Explanatory Memorandum (EM) focuses (necessarily) on what is relevant to the DRP. The full reports from PwC and KM are on Hanover's website and this is referenced prominently in the EM. The summaries that appear in the EM were prepared by PwC and KM and contain the information they determined was most important to investors. The full reports do not contain any different conclusions from the summaries provided. All information on dividends and related party loans has been fully disclosed in audited financial statements, which are also publicly available and form part of Hanover's prospectuses.
The complexity of the information in the EM is driven by the legal requirements of the Securities Act. The feedback we have had from investors is that they have welcomed receiving the 118-page EM rather than something that could have comprised 500 pages with each of the main reports and the audited accounts included.
"Hanover's prospectuses were notable for the important information they failed to disclose." ... and later in the article "The full PWC report also contained the following information that should have been included in prospectuses..." (Reference follows to the proportion of loans on a capitalised interest basis, the proportion of lending on land banks and the percentage of loans that were first mortgages.)
All these matters were disclosed in detail in Hanover's latest prospectus of December 7, 2007 (with comparable references in earlier years).
"The company paid dividends of $45.5 million in the June 2008 year, yet the two shareholders are only willing to contribute $10 million to stave off receivership."
The financial support package is real. It comprises:
* $10 million in cash on December 7, 2008 (to ensure that Hanover has funds available to start making quarterly payments to investors in March 2009).
* Property valued by the directors at $50 million, but being put into Hanover at a value of $40 million (to be held to provide funding support in the latter part of the repayment schedule and at a time when the property market has recovered).
* Further cash of $26 million on December 9, 2008 (applied immediately to the property portfolio to reduce debt outstanding and therefore increase the equity in that investment).
* Commitments from the shareholders' private holding companies (supported by personal guarantees) for $20 million (becoming available in years two and three of the DRPs should they be required to support payments to investors).
By any reckoning, the support package is worth several times more than Mr Gaynor attributes to it. It underlies a robust set of proposals that has the support of the Hanover board and management, the independent advisers to the trustees and, in our experience, the majority of investors.
Full details of the payback plan are available at:Hanover Finance
