In a rare move, Securities Commission chairwoman Jane Diplock gives her views on the decision facing Hanover Finance debenture holders.
Investors in Hanover Finance and United Finance are being asked to make a difficult decision: to exchange their frozen investments for shares in Allied Farmers, or stick with the status quo.
Hanover Finance has provided a detailed information pack to help guide investors' decision making. All investors should read the information pack carefully before making their decision. It would also be wise to seek independent advice in addition to Hanover's information.
I've outlined a few of the questions that you should consider with your adviser before you make your decision:
Are shares the right type of investment for me?
Shares are investments best suited to long-term investors.
There is a big difference between being a deposit holder and being a shareholder. Most investment advisers will tell you that investments in the sharemarket are for long-term investors.
Shares can offer the chance of greater gains than more conservative investments such as a cash deposit with a major bank. But share prices can fluctuate greatly and carry the risk of falling in price. Shares also offer the opportunity for an investment return in the form of dividends, but this is not guaranteed as companies are under no obligation to pay a dividend.
In general, the longer you keep your shares, the greater the chance that their value will increase.
What do my personal circumstances mean for my decision?
Investment in Allied offers a chance for the long-term investor, and a big risk for the investor who wants to cash out.
Primary among your considerations should be your personal financial circumstances. The key things to consider are: how soon will you need your money? Are you willing to wait several years before you get any money back? Would you be willing to accept a small fraction of your initial investment now instead of a potentially larger portion later?
How much am I being offered?
Remember "value" is not the same as cash.
Depending on the type of Hanover investment you hold, you are being offered shares to the value of 30c, 72c, or 84c for every $1 of your investment. This is a "paper value" and is very different from being offered 30c, 72c, or 84c in cash.
When considering the potential return on your investment, remember that money today is worth more than money tomorrow, but a big loss today will take a long time to recover.
Are Allied Farmers shares a quick way to cash up?
If everyone tries to sell their shares at once, the price will drop.
Allied Farmers shares can be bought and sold on the NZX. So the proposal may provide a way to quickly "cash up" your investment. But there are big risks with this.
A company's share price depends on supply and demand. If a lot of Hanover investors rush to sell their shares, the price will drop, and investors will get less for their shares - maybe a lot less. It's not possible to predict where the share price will go - this depends on the buyers and sellers.
If the proposal goes ahead and you do want to sell your shares, you need a sharebroker who will tell you how much shares are trading for and how much demand there is to buy and sell. Most also offer advice, and can help you decide whether to sell. Sharebrokers charge brokerage fees for their service.
What am I likely to get if the vote is "no" and Hanover goes into receivership?
Receivership is likely to deliver you some value in a reasonably short timeframe, but you should expect a loss if there are forced sales.
Hanover going into receivership is not an automatic consequence of a "no" vote on the proposal, but it does seem likely. If investors vote "no", the debt restructure plan will continue, and Hanover's obligations under that proposal will remain in place for now.
However both Hanover's directors and accounting firm Grant Samuel regard the outlook as grim. The Grant Samuel report notes that "the debt restructure approved by investors in December 2008 is foundering".
Receivership would put Hanover's assets in the hands of insolvency professionals who would have the task of getting the best return they can. Receivers usually (but not always) look for quick sale of assets.
Over 50 per cent of Hanover's assets are loans to just five property developments. A forced sale of these developments would lead to a big loss, given the state of the property market.
Why would Allied Farmers do better than Hanover with the same assets?
Staying with the company is taking a chance that Allied Farmers can do better than Hanover at managing the same assets.
If the proposal goes ahead and you hold on to your shares then you are taking a risk on the ability of the Allied board and management to get more value out of Hanover's assets than Hanover managed to. The Allied board believes that it can do this.
Grant Samuel notes that Allied's management can take a longer-term approach to getting value out of the Hanover loans than is possible under the current terms of the debt restructure, or than is likely under receivership.
This is partly because there will be no obligation on Allied to make repayments to investors: a company has no obligation to pay dividends on its shares.
Grant Samuel thinks that the Allied Farmers proposal provides the potential for a better outcome than receivership. However, if investors become shareholders they will be taking a chance on the ability of Allied Farmers to deliver this potential, and investors need to be willing to stay with Allied for a long time to achieve a good outcome and also be prepared that ultimately it may not work.
