KEY POINTS:
Worried investors in finance company Hanover are looking to shareholders Mark Hotchin and Eric Watson to reach into their own deep pockets and provide a cash cushion, says a financial commentator.
"Most people would love it if Hotchin and Watson would invest significant amounts of their own money in Hanover Finance," says Bernard Hickey, managing editor of interest. co.nz. "They want a lot more shareholder equity - an injection of cash."
He adds the pair have taken tens of millions out of the company in dividends over the past two years.
Hotchin has suggested to the Herald on Sunday he and Watson may provide the cash injection investors are clamouring for. He says they are working with the trustee to formulate a plan they think will be in the investors' best interests "and the likelihood that will require shareholder support is quite high".
The total dividends taken from Hanover in the past two years amount to $86 million. Hotchin says $13m of that went to repay Hanover Capital bondholders. The balance was distributed around the group of companies - and $17.7m of it was put back into Hanover Finance.
As principal shareholders, Hotchin and Watson personally retained $1.9m, he says.
Kapiti-based investment adviser and 30-year veteran in the industry Chris Lee queries whether the $71.1m Hotchin says was distributed around the Hanover Group means he and Watson had borrowed money from the company and are repaying this.
"I feel Watson and Hotchin have had a benefit from the company for many years," says Lee. "They have largely funded the company with other people's money, and now when they've made decisions that, added to bad market conditions, have made things difficult for the company, they should see it through."
Watson is in Britain, says Hotchin, and has increasingly become a "more passive" investor in the company, having lived in England for the past five years, but he "wouldn't be surprised" if Watson comes back to New Zealand "through this process".
Watson would not comment to the Herald on Sunday, saying through his personal assistant that "Mark Hotchin is representing the shareholders' views in this matter".
Hotchin controls the majority shareholding in parent company Hanover Group Holdings, with 77,279,174 of its total 87,871,057 shares, while Watson controls the other 10,591,883.
Hotchin and Watson are two of New Zealand's most high-profile - some would say flamboyant - businessmen, with personal wealth estimated in the hundreds of millions.
Watson, who is 48, retains his lavish Westbury Estate in Karaka and his art collection.
This year's NBR Rich List values Watson at $450m and Hotchin, 48, at $200m. He is building a $30m mansion on Auckland's Paritai Drive. They are also majority owners of Matarangi Beach Estates and the Warriors rugby league team.
Their company, Hanover Group, or rather its flagship, Hanover Finance, is a household name, not least because of its sponsorship, until recently, of TV One's nightly weather update. Its comforting refrain was voiced by Richard Long: "Hanover, a New Zealand business with the size and strength to withstand any conditions."
Hanover recently lost an appeal against a decision by the Advertising Standards Authority that its claim was misleading and had to omit the word "any", but continued its sponsorship message in this altered form until only days before announcing it was freezing repayments to 16,500 investors owed more than half a billion dollars. The freeze also applies to investments with Hanover Finance subsidiary United Finance and sister company Hanover Capital.
The Hanover Finance book comprises about 13,000 investors with $465m in debentures. United Finance has about 2400 investors with $65m in debentures. And Hanover Capital, offering secured preferential bonds, has about 1100 investors with $24m worth of bonds.
Bryan Connor of New Zealand Guardian Trust, Hanover Finance's trustee, says it is too soon to know what payments investors will receive or the timing of such payments.
The Commerce Commission has launched an investigation into whether Hanover has breached the Fair Trading Act by making misleading representations to prospective investors, but will make no further comment until the inquiry concludes.
Lee says the morality of the company's decision to continue to advertise for money depends on whether, in the directors' opinion, it was solvent and would continue to be successful. "If the directors knew it was just whistling in the wind, you'd have to say it was imprudent not to call a moratorium immediately."
His opinion is that Hanover investors would have been better off if this had happened six months ago.
There have been signs for a while that Hanover has been in trouble. "There have been a lot - it's been a struggle for some time," Hotchin acknowledges.
In January it reported a 40 per cent fall in half-year pre-tax profits. Hanover chairman Greg Muir, named Business Leader of the Year in 2006, is also chairman of Pumpkin Patch, which has been under stress and has taken a sharemarket pounding.
Hanover has been involved in the country's largest mortgagee apartment sale - described by some as a "fire sale" - of 92 apartments in Auckland's Winsun Heights development. It was also involved in the mortgagee sale of Kinloch golf resort in Taupo, which it had financially backed.
This year the company moved its Hanover Group staff from Auckland's Vero Centre into the more modest headquarters of Hanover Finance in Kitchener St.
There have been staff lay-offs and in December Hanover Group chief executive Sam Stubbs stepped down after just seven months in the job. Hotchin says more lay-offs are likely "in the event that we end up with some form of moratorium".
In its accounts to the end of December, Hanover disclosed a loan-sharing agreement in which it borrowed $30m. It has confirmed the lender was Fortress Credit Corporation, based in New York.
Hickey says Fortress is seen as a lender of last resort and the only other New Zealand companies that have used Fortress are Capital+Merchant and MFS.
Hanover has said it structured a "special purpose vehicle" with Fortress so the security of the underlying assets that mums and dads have as first-ranking status over is unaffected, and that it is virtually paid back.
The concern for investors, Hickey says, is Hanover has had to resort to using Fortress again, albeit indirectly. Hotchin confirms Hanover entered into a loan-sharing agreement with NZ Castle - a New Zealand-based nominee company run by Martyn Reesby, a local broker funded by Fortress - secured against land underneath the 5 Mile property development in Queenstown.
That development is in receivership and Hotchin says Hanover is trying to find a buyer for the land.
It is "surprising" Hanover resorted to using Fortress to effectively boost its cash, says Hickey. "One would have expected if Hanover needed more capital backing, it would have called on its main shareholders to put up their own money to boost the equity of Hanover Finance."
Hanover is New Zealand's fourth-biggest finance company, behind UDC, South Canterbury and Marac. Hickey says Hanover has inherent weaknesses when compared with the other three big companies, as it lacks vital "survivability factors" - diversified lending, having diversified funding, a large local bank funding facility, a strong corporate, individual or family shareholder, and an investment-grade credit rating.
UDC, South Canterbury and Marac have all five of these factors, Hickey says. PG Wrightson Finance, Fisher & Paykel Finance, Speirs Finance, NZF Money and Equitable have three of the five factors, Allied Nationwide has two factors and Strategic Finance and Mascot Finance have one. Hanover has none.
Hickey says Hanover's lack of diversification - having more than 80 per cent of its loans in the real estate sector - was a danger sign.
"The big point with Hanover is it's exposed to the property market, which has been the case with so many others, including St Laurence, Lombard, Capital and Merchant and Bridgecorp."
But Hotchin says that Hanover Finance is a real estate lending business.
"That's what we do, that's what we've done for a very long period and we think we're very good at it.
"However, the market has softened a long way, so it's becoming increasingly difficult for our borrowers to repay their loans."
Lee is more upbeat, expecting "more good news than bad news" over the next three months in terms of finance companies' recovery plans. "There are really no more significant finance companies at risk," he says.
THE WAY FORWARD
Bryan Connor of New Zealand Guardian Trust, Hanover Finance's trustee, says the process for the company to present a plan to investors for approval will include:
* Hanover finalising its plan.
* Review of plan by the trustee and its independent adviser.
* Distribution of the plan and all relevant reports to investors for consideration, together with notice of a meeting of security holders.
* Investors vote at security holders meeting.
