Allied offers equity for Hanover debt
The anticipated consolidation in New Zealand's finance sector took the first major step as the small, unprofitable but listed Allied Farmers announced a debt for equity swap over the finance assets of Hanover Finance and United Finance.
The company plans to transfer the "performing" assets of Hanover and United to its subsidiary Allied Nationwide Finance so it can boost its ratings and thus get funding at cheaper costs.
Allied Nationwide does not currently have a credit rating but has a guarantee under the New Zealand deposit guarantee scheme. For this guarantee to be extended to December 31, 2011, the company must meet certain criteria including obtaining a credit rating of at least BB from an international rating agency.
In its investment statement, the company stated that it intends to be in a position to meet the Reserve Bank of New Zealand requirements to qualify for guarantee extension on or before October 12, 2010.
The deal, which is a debt for equity swap, will see investors in Hanover Finance's secured deposits and subordinated notes, and United Finance's secured deposits and Hanover Capital bonds, exchange their holdings for shares in Allied Farmers.
For Allied Farmers, the deal will achieve a significant increase in the size of its balance sheet, the company calling it a "quantum leap".
The deal, when approved, would see Hanover Finance Secured Depositors receive 78 cents in value for every NZ$1 of original principal owed. This is higher than the 70 cents that the company indicated such investors would receive under the debt restructure proposal (DRP) agreed in December last year.
On November 10, the company said rapid deterioration in the commercial property development market has impacted its financial results, and it might not be able to achieve the full repayment to investors under the DRP, as originally promised. According to Hanover, when it entered into the DRP last year, it had anticipated the property market stabilising and potentially showing signs of recovery in late 2009, or early 2010, which hasn't happened.
United Finance Secured Deposit holders would receive 90 cents in value for every dollar of deposit held. Hanover Finance Subordinated Note holders and Hanover Capital Bond holders will receive only 30 cents in value.
Allied Farmers will acquire loans and property, finance assets, operating assets and the escrowed cash and property assets of companies.
Allied Farmers managing director Rob Alloway had flagged the possibility of such a deal a few days ago when he indicated that debt for equity swaps involving stressed finance companies was something his firm was looking at.
Only 20 per cent of the total assets of Hanover and United are performing, according to Allied Farmers. The company plans to transfer a large proportion of these performing assets to Allied Nationwide Finance, which will increase the size of its balance sheet and improve gearing ratios and capital adequacy.
In July 2008, when Hanover announced plans to restructure, its finance book comprised approximately 13,000 investors with NZ$465 million in debentures. United Finance had around 2,400 investors with NZ$65 million in debentures. And Hanover Capital, offering secured preferential bonds, had around 1100 investors with $24 million worth of bonds.