KEY POINTS:
Investors owed more than $550 million by Hanover Finance and United Finance have little choice but to accept a restructuring proposal which independent advisers warn has a high chance of falling short of its target of full repayment of principal over five years.
The Mark Hotchin and Eric Watson-owned companies, which ceased making payments to investors on July 23 after being squeezed between plummeting debenture reinvestment rates and a property market meltdown, released details of the plan yesterday after months of delays.
Under the proposal debenture investors in Hanover and sister company United, between them owed $527.2 million, will begin receiving quarterly repayments from May next year with full repayment by the end of 2013.
However the payments are slow to get going, initially beginning at the rate of 2c in the dollar per quarter rising to 8.75c per quarter in the final two years.
The increasing pace of repayments reflects the company's hopes that the property market slump which helped tip it over will reverse over the next few years.
Unsecured note holders owed $26.3 million, who would receive nothing in a receivership which is the only real alternative to the plan, are being offered 50 per cent of their principal to be paid by December 2013 in order to secure their support at a December 9 vote.
The plan will see Hotchin and Watson support the company to the tune of up to $96 million including a $10 million fund held in escrow to meet debenture repayments if collections on loans fall short. A further $20 million in guarantees will be provided during the last two years of the restructuring period.
The balance of the support was made up of $26 million that would be used to pay down debt on Hotchin and Watson's property company, Axis Group, whose subsequent $40 million in net assets, including high profile but troubled developments such as Matarangi Beach in the Coromandel and Jack's Point in Queenstown, would then be transferred to Hanover Finance.
Those assets would be repaid to Hotchin and Watson at the end of the restructuring proposal.
Net of impairments, Hanover and United have a loan book of $482 million but again much of this is exposed to the badly hit property development sector.
Nevertheless, Peter Fredricson, who recently replaced Bruce Gordon as Hanover's chief executive, said despite the market conditions the company believed its asset book was sufficiently sound to achieve its objective of paying 100c in the dollar to all secured investors over five years.
In fact, as part of the plan, Hanover will begin lending again assuming it has a cash buffer sufficient to take care of two quarters of repayments to investors. It hopes to make about $40 million from new loans over the five-year period to help meet its obligations to investors.
PricewaterhouseCoopers, which was engaged to evaluate the proposal on behalf of Hanover debenture holders, wasn't so sure the company would collect what it expected on its existing loan book.
Management's view of expected loan recoveries was "optimistic" and PWC's own view was that they would be lower than those forecast.
In turn, returns to Hanover debenture holders during the restructuring period "may be somewhere between 60c and 83c in the dollar".
PWC's analysis indicated "a real prospect that investors may not achieve full repayment" under the proposal.
"However, virtually the same analysis and conclusions apply in the event of a receivership," it said.
Market commentators Chris Lee and Arthur Lim said PWC's point was a good one. "A receivership and the desire for retribution for some of the dumb things the company's done would possibly cause losses of a couple of hundred million dollars," said Lee, who added the additional contribution from Watson and Hotchin would partly offset those losses.
Lim said he would prefer the company not to go into receivership if he was an investor, "just because the way the environment is currently you're much better off holding on and waiting for the cycle to turn".
THE PROPOSITION
* Hanover Finance and United Finance say they will repay debenture investors all of their $527 million principal over the next five years.
* Payments start out at 2c in the dollar per quarter next year, rising to 2.5c in 2010, 3c in 2011 and 8.75c a quarter over 2012 and 2013.
* The payments are part of a restructuring plan that will see Eric Watson and Mark Hotchin tip up to a further $96 million into the company and continue to operate it as a going concern, including making new loans further down the track.
* Independent adviser PricewaterhouseCoopers says the management plan is "optimistic" but looks better for investors than a receivership.
* PWC also estimates that full repayment over five years is actually only worth about 46c to 55c in "net present value".
* There is some prospect that investors will receive some interest after their principal is repaid but Hanover is downplaying that possibility.
