KEY POINTS:
Hanover Finance co-owner Mark Hotchin says that he and Eric Watson won't leave investors out of pocket.
They've got a restructuring plan and they'll pour in money to make it work, Hotchin says.
It's a promising start to one hell of a big fix-it job. On Wednesday, 16,500 investors owed $554 million learned their money had been frozen in the biggest finance company failure the already devastated sector has seen yet.
Hotchin yesterday told the Herald: "The bottom line is there will be additional money put in to ensure the investors get their money."
But despite that assurance, there are some very big questions.
Was freezing funds a timely and prudent move to preserve value for all? Or was it too little too late from a couple of slick high flyers who tapped naive investors to fund a string of risky, grandiose property projects?
And should the trustees of troubled Hanover Finance and sister companies United Finance and Hanover Capital get to decide whether Watson's and Hotchin's rescue plan for their business is worth a shot? These are among the questions the companies' investors will have to consider next month.
Investment industry figures who are sick of seeing retail investors duped have made up their minds.
They believe Watson and Hotchin should either put up - to the tune of $100 million or more - or shut up.
Most believe the pair, with their Hanover-funded property empire in tatters, don't have the cash and should make way for the receivers.
Since Wednesday, when Hanover announced it was suspending repayments of interest and principal to debenture investors owed $554 million, questions have resurfaced about the millions in dividends Watson and Hotchin paid themselves over the past two years, and their use of Hanover cash to fund their own property deals.
Critics ask: Why did they pay themselves a total of $85.6 million over the past two years, precisely when their finance company's balance sheet needed as much size and strength as possible to withstand the conditions?
Hanover's difficulties have been well known in the finance industry. It has, says one industry figure, "been like watching a slow motion car crash for the past 12 months".
Hanover relied almost exclusively on retail debenture funding, and invested heavily in big, risky property projects, including a number being developed by associated companies.
Moreover, Hanover has been heavily criticised for being one of the worst offenders in terms of the "mispricing of risk" to investors in recent years. Simply put, Hanover's investors, arguably never received an adequate return for the risk they were taking on.
A key factor in that phenomenon was Hanover's relatively high level of related-party lending. That meant its investors were wearing an undue amount of the potential downside for Hotchin's and Watson's property developments for an inordinately small proportion of the potential upside.
When, as expected, Bridgecorp crashed last year, debenture funding for most finance companies slowed to a trickle. That drying up of liquidity hit the property finance sector, precipitating a market slump which in turn forced an additional half a dozen or so sizeable finance companies out of business in the past two months alone.
As the market softened, a number of big, Hanover funded projects - the Kinloch golf resort, the Matarangi development in the Coromandel and the Five Mile and Jacks Point projects in Queenstown have all had well publicised problems.
It was the third wave of failures and a consequent further drying up of debenture funding, the property market meltdown, and the increasing inability and unwillingness of borrowers to repay their loans that Hotchin this week blamed for Hanover's difficulties.
He said the company was "still projecting a cash positive position" but it believed it was "prudent to act early to preserve value for all" by freezing repayments and putting together a restructuring plan that will see investors repaid over time - a moratorium in other words.
On Wednesday, Hotchin said he and Watson pledged their ongoing "support" for the company and that support would be of a "financial" nature. He would not say he and Watson would put more equity into the company. Market watchers say that is exactly what the company needs, and lots of it.
Kapiti Coast financial adviser Chris Lee estimates a $40 million capital injection should buy Hanover enough time for it to realise its assets and repay most of what it owes over time, although he concedes that assumes the property market slump does not last too long.
The Shareholders Association's Bruce Sheppard thinks Hanover probably needs $100 million, minimum. He reasons that in a liquidation, liquidators would be in a legal position to demand repayment of most of the dividends paid out over the past two years.
"So Watson and Hotchin have got to put a bit of a premium on what a liquidator could get or there's no incentive for debenture holders to consent to any arrangement."
If the pair can afford to kick in $100 million, that would demonstrate they may have the means to also repay various associated party loans.
However, he isn't optimistic.
Hotchin has defended the dividend payouts, saying $13.9 million was used to repay capital note holders in another of their vehicles, Hanover Capital, with just over $70 million used to repay related party loans to Hanover.
"Big deal," said Lee. "That's not injecting capital, that's simply paying back what you owe them. It would have been a much better thing for the investors if there had been no dividends paid and they still owed all that related party money."
Yesterday, Hotchin said the decision to pay the dividend and then repay the related party lending was a response to criticism the company was facing at the time.
"Market commentary was the company had plenty of capital but nobody liked the level of related party loans so we chose to follow that logic and reduce the level of related party loans."
He said even now Hanover's level of capital adequacy at 17 per cent of assets was well in excess of the 8 per cent required by Hanover's trust deed. "We've never been close to a breach."
Hanover Finance trustee Brian Connor of Perpetual Trust yesterday confirmed he was comfortable with Hanover's capital levels.
Hotchin also said related party lending at present totalled about $60 million, down from the $120 million or so revealed in the company's December year accounts. Sheppard was sceptical saying the true figure may be up to $200-300 million - a figure Connor said was way off target.
Meanwhile, Hotchin yesterday reiterated the restructuring plan he and Watson were working on involved "financial support from the shareholders".
"What level that actually ends up being will be determined in conjunction with the trustee and their advisers. I can't comment exactly what that number will be at this point."
Would that be an injection of new equity?
"I actually can't say. There are a number of proposals that include additional equity or some form of guarantee or additional money, how that actually gets put in is still up for discussion, but the bottom line is there will be additional money put in to ensure the investors get their money."
Would that money come from Hotchin and Watson?
"Yes."
If they intend to stand behind the business with more of their own cash, asks one market commentator, "Why haven't they put in money to date?"
Lee says the outcome for investors is entirely dependent now on how much Hotchin and Watson put in.
"If it's just a token gesture investors could see about 50c in the dollar and over a long time, too."
THE NUMBERS
* Hanover Finance, United Finance and Hanover Capital owe a total of $554 million to 16,500 investors.
* Hanover Finance's $550 million loan book is funded by $465 million in debentures, $65 million in shareholders' funds, and $20 million worth of secured preferential bonds.
* It is owed $60 million by entities associated with owners Mark Hotchin and Eric Watson according to Hotchin.
* Market commentators fear the true level of related party lending may be up to five times as much.
* Hotchin and Watson were paid $85.6 million in dividends by Hanover over the past two years.
* $70 million of that was put back into Hanover Finance to repay related party lending.
* The Shareholders Associations' Bruce Sheppard believes Hotchin and Watson need to tip in a further $100 million of their own cash to save the company.
STRING OF PROBLEM LOANS
Here is a list of some of the biggest projects Hanover Finance provided money for:
Five Mile: $2 billion project at Frankton near Queenstown. This month, Hanover Finance took action against Christchurch developer Dave Henderson, seeking $70 million and saying the loan was in default. Hanover appointed a receiver to recover money.
Bayshore: A$150 million Melbourne shopping and apartment project developed by Australia's Westpoint Corp, which collapsed. Hanover and fellow financier Bridgecorp loaned money and Hanover made a $2 million provision to write off money, although Hanover chairman Greg Muir later said the financier had got all its money out of this deal.
Kinloch golf resort: 33ha property development project near Taupo where Hanover called for the mortgagee sale of an 18-hole golf course and clubhouse ($18 million) 68 residential sections ($535,000 each) and a lodge/hotel site, clubhouse and 50-unit villa complex ($3.52 million). Hanover sold much of its interest in the project a few weeks ago.
Te Pania Hotel: In Napier, Hanover's first mortgage was $11.5 million, Bridgecorp subsidiary Monice Properties issued the second mortgage of $10 million. Developer Robert Brown ran into problems. Ninety-two units were sold this year for about $10 million. Bridgecorp's receivers called for this sale.
Winsun Apartments: On Auckland's Vincent St, developed by Lily Zhong who borrowed $9 million from Hanover. But the downturn meant not all the units sold and $5 million of the loan remains outstanding. So Hanover called the country's largest residential mortgagee sale and sold 92 apartments in the 153-unit block to recover its loan.
Harbour Green: An apartment developed at 11 Union St in Auckland where Hanover also had payment problems, again with developer Lily Zhong. Hanover's money was not repaid fast enough, so in August last year, Hanover called for the mortgagee sale of the units in the block built by Kalmar Projects.
Palmerston's Novotel Hotel: 85-room property which Hanover only sold this year for about $16 million to National Roads and Motorists Association of Australia.
Jacks Point: Queenstown housing development in an area where sales have slowed considerably and the market is flat.
OTHER PROBLEMS
Hanover has had problems with other loans.
Property developer Andrew Krukziener: Court of Appeal ordered him to repay a $4 million loan. The loan relates to an agreement Krukziener reached with Hanover - then called Elders Finance - in 2002 over a debt his companies could not repay.
Troubled fund manager Octaviar: A$7 million loan was made for the Kingscliff property development and Hanover is one of the four loan guarantors to Octaviar.
