Fran O'Sullivan: It gets worse for Hanover investors

Has the cabinet asked why the market watchdogs have not recommended they put Allied Farmers into statutory management?

It is increasingly clear that the former Hanover investors who bought into last year's "rescue deal" are about to lose the last remaining threads in their shirts. In any sensible environment the regulators would have blown the whistle by now.

But the only player put in statutory management by the state is Allan Hubbard - a businessman who has not defaulted on his investors and in my opinion is not going to go down (I doubt if he will be charged with criminal fraud) as a result of the Serious Fraud Office's subsequent investigations.

The Securities Commission has been investigating various transactions relating to the Allied-Hanover tango for most of this year.

The commission used a gagging order to keep the lid on details of its investigation into a $5 million dispute between Allied Farmers and Hanover Finance over loan assets transferred to Allied last year.

The gagging order contains the usual bland words stating that "in relation to the investigation of Hanover Finance, Hanover Capital, United Finance and associated persons, that proceedings be held in private, prohibiting, with effect from the commencement of the inquiry to the end of the inquiry, publication or communication of any information, document or evidence that has been provided or obtained in connection with the inquiry except with consent of the commission, and the giving of evidence involving such information by any person subject to further orders by the commission".

Eight months on the commission has yet to issue even an interim report.

Meantime Allied Farmers has written down the value of the Hanover assets from $396 million to $124 million.

The Allied Farmers share price is now languishing around the 3 to 4 cents level. It has been forced to pull a three for one rights issue. Its finance arm is deeply troubled: credit rating slashed, reinvestment rates down and according to its investment statement it needs more cash from its parent and/or some of the former Hanover loans to help prop itself up.

Its standby banker - the BNZ - wants to exit.

At this point of the game a sensible Government - let alone the regulators - might ask whether it would be prudent to put Allied Farmers and Allied Nationwide Finance into statutory management. Not because of fraud - or even reckless behaviour - the two potential issues that the Government cited when it put Hubbard, Aorangi Securities and other Hubbard entities into a form of commercial in loco parentis.

But to find out if Allied can be rehabilitated by allowing a statutory manager to manage the companies to the exclusion of all others, to pay creditors and compromise claims, carry on the business of the corporation, or sell any business undertaking of the corporation.

But not a word out of the regulators.

Yesterday the Securities Commission's PR person Roger Marwick sent me a terse email: "We are investigating various matters relating to Hanover and our investigations are continuing. We have nothing further to add."

What a marked contrast to last December when commission chairman Jane Diplock issued an article for publication in the Herald titled "Thoughts for Hanover Investors".

Diplock opined that investors in Hanover Finance and United Finance were being asked to make a difficult decision to exchange their frozen investments for shares in Allied Farmers or stick with the status quo.

Diplock - who is understood to have had the help of a Wellington PR man in crafting the statement - went on to pose a number of questions the investors might want to think about. I've truncated the article - but the comments make interesting reading:

Question: Are shares the right type of investment for me?

Answer: Shares are investments best suited to long-term investors ... ("In general, the longer you keep your shares, the greater the chance that their value will increase'.).

What do my personal circumstances mean for my decision?

Investment in Allied offers a chance for the long-term investor, and a big risk for the investor who wants to cash out.

How much am I being offered?

Remember "value" is not the same as cash.

Are Allied Farmers shares a quick way to cash up?

If everyone tries to sell their shares at once, the price will drop.

What am I likely to get if the vote is "no" and Hanover goes into receivership?

Receivership is likely to deliver you some value in a reasonably short timeframe, but you should expect a loss if there are forced sales. Diplock went on to note: "However both Hanover's directors and investment advisory firm Grant Samuel regard the outlook as grim. The Grant Samuel report notes that 'the debt restructure approved by investors in December 2008 is foundering'."

Why would Allied Farmers do better than Hanover with the same assets?

Staying with the company is taking a chance that Allied Farmers can do better than Hanover at managing the same assets ...

She added: "However, if investors become shareholders they will be taking a chance on the ability of Allied Farmers to deliver this potential, and investors need to be willing to stay with Allied for a long time to achieve a good outcome and also be prepared that ultimately it may not work."

Hindsight is indeed a beautiful thing. Clearly the Allied Farmers-Hanover deal has not worked.

And surely Diplock must feel some personal embarrassment at putting her name to advice that was obviously lacking in real insight.

If the former Hanover investors are to realise anything from this affair it would be best to put the whole lot into statutory management tout de suite.