ALF - Allied Farmers Limited

[Balance]

Yes - except that there wasn't that amount of debt in the Hanover Group Charging group accounts at June 2009 that were released prior to the transfer - not bank debt. May have been in the overall Hanover Finance Ltd accounts, at least in part (they are on the companies office - the charging accounts aren't, but I retrieved a cached copy from the Hanover site the day after the deal). So if the debt went with the assets to Allied, then I am wondering if it was actually individual loans against individual projects such as Matarangi, that were then re-financed across all of the Allied assets... which must surely have transferred risk from the banks to the Hanover investors?

Maybe there is more detail in the Grant Samuel report which I never got to get a copy of... but none of the docs I can find say anything about transferring liabilities with those assets, eh?

I recall reading somewhere that Eric & Hotchin transferred some heavily mortgaged properties across to Hanover (being their increased equity contribution) as part of the moratorium agreement. Very very smart boys, those two.

One has no choice but to wonder in amazement really. I remember being at the Hanover moratorium meeting where Bruce Sheppard tried to fight for the investors but was pretty much told to shut up by the majority of them. Then there's the comment that it was great that Hotchin turned up but where is that gutless Watson - a great double act playing good guy, bad guy and they lapped it all up.

[Lizard]

I recall reading somewhere that Eric & Hotchin transferred some heavily mortgaged properties across to Hanover (being their increased equity contribution) as part of the moratorium agreement.

Yes, have found the Hanover notes now, and you are right. These assets were part of the Axis Group which was contributed to Hanover Finance as part of the Shareholder Support package at the time of the debt restructure. So the debts came as part of the combined $34m in support package assets acquired in the ALF-Hanover deal.

various property owning subsidiaries (the Axis Companies) held by HFP Investments Limited (HFP), a company owned by HFL (87.77%) and United (12.23%).At the time of the Debt Restructure HFL and United both had several loans to the Axis Companies.It was intended that where possible the Axis Companies would provide guarantees and security to support the Debt Restructure.The Axis Companies were acquired by HFP for $40 million, funded by way of a subordinated, interest-free loan, which could only be repaid once all amounts under the Debt Restructure had been paid;

[Lizard]

Hey Winner, you might be interested in this comment from page 32 of the Grant Samuel report:

Grant Samuel understands that the performing loans in the HFL and United portfolios will be transferred from Allied Farmers to its subsidiary Allied Nationwide.These loans will serve to increase the robustness of the underperforming Allied Nationwide portfolio and assist it in obtaining a satisfactory credit rating.Approximately 20% of the overall HFL and United loan portfolio is considered to be performing.The remaining non-performing or impaired loans will remain with Allied Farmers to collect and administer.The effect of this transfer is to separate the good loans from the bad loans;

If so, then all the good "performing" assets effectively now taken off Hanover investors and presumably now end up being used to pay back Treasury for providing repayment to ANF debenture holders? Your (taxpayer) win; Hanover investors loss...

[Lizard]

Yes, have found the Hanover notes now, and you are right. These assets were part of the Axis Group which was contributed to Hanover Finance as part of the Shareholder Support package at the time of the debt restructure. So the debts came as part of the combined $34m in support package assets acquired in the ALF-Hanover deal.

Interestingly, going back to the ALF prospectus at the time of the offer, their pro-forma balance sheet on page 11 does not show any debt coming with these assets either... the only place I can find it is in the HFL consolidated accounts to June 2009 where there is some detail of debts held within various of the Axis Group companies (ref pg 43). However, these accounts were not publicly available until filed at the Companies Office on 5 January 2010 - i.e. a few days after the deal had been completed.

[Lizard]

Interestingly, going back to the ALF prospectus at the time of the offer, their pro-forma balance sheet on page 11 does not show any debt coming with these assets either... the only place I can find it is in the HFL consolidated accounts to June 2009 where there is some detail of debts held within various of the Axis Group companies (ref pg 43). However, these accounts were not publicly available until filed at the Companies Office on 5 January 2010 - i.e. a few days after the deal had been completed.

So further to this, it seems to me that the assessment of the value of the Axis Group assets provided from the Shareholder Support package was rather brushed over in the Hanover-ALF restructure. Probably the best assessment comes in the Nov 2008 Hanover Prospectus, on pages 59 & 60 of the PWC Advisors report which was produced for the earlier debt restructure.

Anyway, I may be a little confused here, but getting back to the value of the assets remaining in ALF, the bank debts against the Hanover assets may still be quarantined to individual assets acquired as part of the Axis group, which may have therefore now have negative equity?

(Could ALF perhaps put the Axis group companies into receivership and stop them being a drain on equity? If so, what does that do to their relationship with Westpac, who, if I read it correctly, is the bank lender both as primary mortgage holder within the Axis Group assets and lender to ALF themselves?)

[Lizard]

Hey Winner, you might be interested in this comment from page 32 of the Grant Samuel report:

Grant Samuel understands that the performing loans in the HFL and United portfolios will be transferred from Allied Farmers to its subsidiary Allied Nationwide.These loans will serve to increase the robustness of the underperforming Allied Nationwide portfolio and assist it in obtaining a satisfactory credit rating.Approximately 20% of the overall HFL and United loan portfolio is considered to be performing.The remaining non-performing or impaired loans will remain with Allied Farmers to collect and administer.The effect of this transfer is to separate the good loans from the bad loans;

If so, then all the good "performing" assets effectively now taken off Hanover investors and presumably now end up being used to pay back Treasury for providing repayment to ANF debenture holders? Your (taxpayer) win; Hanover investors loss...

Not sure if this is correct to analyse in this way, but comparing ALF HY10 and ANF HY10, the ANF report shows Net Loans and Advances of $163,845k,000 , whereas the ALF report shows Net Loans and Advances allocated to the Financial Services business (ie ANF) of $139,285,000. So am wondering if the difference ($24.5m) is Hanover performing loans transferred to ANF? Could be a different explanation though.

[Stranger_Danger]

It's all too complicated.

Far better to buy something with low or no debt on a single figure P/E.

The market offers up many of these opportunities.

i spend zero time analysing the ALF's of this world in any serious way these days - I see them as relics of history (the credit boom), there pretty much to laugh at.

[minimoke]

It's all too complicated.

i totally agree. I recall doing an analysis at the time and seeing way too many red flags to make the hanover into ALF deal a goer. Watson and hotchin had so many deals going that there was no way there was going to be anything of benefit to the Hanover investors I knew at the time. Unfortunately they believed that it was a good deal and thought the idea of getting 70 cents in the dollar via ALF a much better proposition than putting hanover into receivership. Thats why I'm now supporting several of these investors. Theres little to be gained from any analysis now. Its a gone burger for all concerned and the potential gains by bottom picking ALF (and a risk the bottom hasn't yet been reached) just don't make the effort worthwhile.

But thanks Lizard - always useful to recap on some of the deals elements so future punters can learn to look for the yellow and red flags of warning that fly when these sort of deals get done.

[Alan3285]

Not sure if this is correct to analyse in this way, but comparing ALF HY10 and ANF HY10, the ANF report shows Net Loans and Advances of $163,845k,000 , whereas the ALF report shows Net Loans and Advances allocated to the Financial Services business (ie ANF) of $139,285,000. So am wondering if the difference ($24.5m) is Hanover performing loans transferred to ANF? Could be a different explanation though.

Excellent work Lizard - I tip my hat to you for doing some proper analysis.

It is so easy to sit on the sidelines sniping, but it takes real nous to uncover what is actually there.

Good on ya mate!

Alan.

[Lizard]

I agree that this is too hard to value and probably too risky to buy. ANF receivership might also have some impact on getting out the ALF FY accounts on time? If so, could just see a suspension on 1 September?

On some real stab-in-the-dark figures, I think even a punt would have to be at below 1.2 cps to give a chance of decent return - and then probably only works after recapitalisation, since any low share price before then would just transfer more value to a "white-knight" investor.

So overall, valuation is a bit pointless for now. But I am still a bit fascinated to see how the Hanover-ALF deal worked out in hindsight. In the end, Tony Gibbs was probably right with his plate of custard remarks. If value has been transferred, it seems most likely to have been from Hanover Investors to banks (as first lenders on some Axis group assets and lenders to ALF) and possibly Treasury?