Hanover Finance owners Mark Hotchin and Eric Watson have withdrawn more than $200 million in cash from the company since they acquired it, accounts show.
The bulk of the $204.6m in cash dividend payments and share redemptions occurred in the past two years, with $55.2m extracted in the year to June, and $41.5m the previous year. In those years the shareholders invested $800,000 in Hanover's preference shares.
Investor advocate Bruce Sheppard, of the Shareholders Association, said the withdrawals showed scant regard for the finance company's debenture investors.
"So, they've nearly pulled out half of what they owe to debenture holders. Aren't they generous," he said.
The payments also showed little regard for prudent cash management in a tightening property market, he said.
Hanover chief executive Peter Fredricson said the dividend payments were entirely appropriate at the time.
"When I joined [in April] the business had $80m in the bank," he said. "We had significant reinvestment rates and the business was operating quite properly with all the governance arrangements required."
Watson and Hotchin bought Hanover, then known as Elders Finance, in December 1999 for an undisclosed sum. The business they took over was much smaller than now, with net equity of about $4.3m and total assets of $104m. The Sunday Star-Times understands the purchase price was less than $10m.
The sellers were Eric Spencer, Mel Stewart and David Bryan, of rural services group Elders New Zealand.
Since then accounts show Watson and Hotchin have invested cash of $46.8m in the company.
In addition to the cash withdrawals, other companies owned by Watson and Hotchin borrowed huge sums from Hanover Finance to fund various property ventures. In the latest financial year, disclosed related party borrowings totalled $83m, down from $141m the previous year.
A great deal of that related party borrowing was by Axis Property Group, the Watson/Hotchin property development vehicle whose assets are to be transferred to Hanover Finance as part of a restructuring deal to repay investors owed $553m.
In return, Hotchin and Watson want $40m, but not until Hanover and United have repaid small investors the money they owe them.
Hanover claims to have spent $3.35m preparing its restructuring proposal, yet it gives very little detail about the properties involved in the Axis deal, in spite of its central role in the plan.
No independent valuation of the properties has been commissioned, nor is there an itemised list of the individual properties themselves nor a summary of the debt they carry.
In its review of the Axis deal, PricewaterhouseCoopers (PWC) said it "cannot endorse the $40m element of the proposed transfer value as necessarily indicative of the current fair market value".
If a "fire sale" of the assets was carried out, said PWC, it "would almost certainly mean there was no equity in the Axis Group".
In other words there would be no money left over once the mortgages were repaid.
The main properties are completed sections or bare land in subdivision developments at Jacks Point near Queenstown and Matarangi on the Coromandel Peninsula. There is also a half share in some sections and units at the Clearwater Resort near Christchurch and three units in the Sebel Hotel in Auckland.
The first mortgagees on these properties are the BNZ, HSBC, ANZ National and Fortress Credit Corp. Collectively, these financiers hold security for up to $179m on the properties.
On top of that, Hanover and United Finance hold second mortgages securing up to $81.8m.
So that could be up to $260.8m of debt.
Neither Hotchin or Muir responded to requests from the Star-Times to discuss the Axis proposal and there is nothing in the information sent to investors which details how much debt the properties carry.
The amount of debt is a critical issue because the underlying assets are mainly development properties, intended to be sold down over time. Most of them do not produce any income.
Sources close to Hanover say interest on the loans is being capitalised, which means the interest portion is to be repaid with the principal at the end of the loan term or when the underlying assets are sold.
In the meantime, the interest keeps accumulating.
The banks may have been happy with this arrangement during the boom, when property sales were brisk and prices kept going up.
But with the market now in a slump and prices going backward, reducing the value of the banks' security in the process, they are likely to be wanting to be paid at least the interest due on their loans.
There is also the possibility, especially with development properties in the current market, that the banks as first mortgagees could force a sale of any of the properties if interest payments or other terms were not met.
That is the fire sale scenario mentioned in the PWC report, suggesting the prices achieved may not cover the amounts owed on the mortgages.
Inquiries by the Star-Times suggest sales are slow in the areas where the Axis properties are located.
At Matarangi and Jacks Point, the Axis-owned properties are facing competition from people who have previously purchased sections but have changed their minds about building on them and have put the sections back on the market.
In both places, the number of sections being advertised for sale exceeds the number of sales being made in a year, suggesting a considerable oversupply.
Fredricson said despite the questionable value of the property assets, it was better than receivership. "So long as the package exists there is likely to be more available to debenture holders than not," he said.


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