Brian Gaynor Blog

Allied Farmers’ shareholders face a boom or bust scenario under the Hanover Finance proposal. Hanover Finance investors face a similar outlook.

Under the proposal all of Hanover Finance’s assets will be transferred to Allied Farmers plus the $10 million deposited in a solicitor’s trust account by Mark Hotchin and Eric Watson. This $10 million, plus interest, was deposited to meet any shortfall in repayments to secured depositors.

In return Hanover Finance investors will participate in an equity for debt swap whereby these investors will receive 78 cents worth of Allied Farmers shares for every 100 cents of investments. This compares with the latest predicted payout of 70 cents per 100 cents.

All other liabilities will remain in Hanover Finance, including legal costs, litigation liabilities, redundancy costs etc. Allied Farmers will pay Hanover Finance a minimum of $5 million and a maximum of $10 million to hold all these liabilities.

Allied Farmers says it will aggressively pursue any personal guarantees granted by Hotchin or Watson over Hanover Finance loans.

The agreement has to be approved by each of the following five groups; 

Allied Farmers requires 50% shareholder approval whereas the other four groups require 75% approval.

The big winners under the Allied Farmers’ proposal are Hanover Finance subordinated note holders and Hanover Capital bond holders. These will have an indicated 30% return, compared with nothing previously, through a combination of Allied Farmers’ shares and cash payments from Hotchin and Watson. This is required to entice them to vote in favour of the proposal.

The success or failure of the proposal, if it is approved, will be the performance of Allied Farmers’ share price. Based on today’s share price existing shareholders will hold 38 million shares, or 4% of the company, while Hanover Finance investors will have 890 million shares or 96%.

The new investors will be net sellers and Allied Farmers will have to convince other investors that this is a good deal for the rural group.

The Geneva Finance equity for debt swap is not a good precedent as Geneva Finance shares, which were issued to debenture holders at 36.492 cents each, are now trading at just 9 cents.