On March 5 Brian Gaynor said Hanover investors were not told that most loans were second mortgages and interest on the loans was capitalised.
Mark Hotchin has pointed out that relevant disclosures were to be found in prospectus No36 on pages 55-61. We regret the oversight.
The basic problem with Hotchin is that he promised too much and failed to deliver. Mark Hotchin's media blitz cannot be allowed to pass without some comment and analysis.
The former Hanover Finance boss, who now lives in Australia, appeared on television and radio programmes two weeks ago presenting his side of the finance company debacle.
His performance was underwhelming, and he would be best advised to stay away from the media until he is prepared to give an accurate description of his "shareholders' support package" and take responsibility for the huge losses suffered by his investors.
The basic problem with Hotchin is that he promised too much and failed to deliver. But he blames everyone else for Hanover's problems and continues to paint himself as a white knight.
His December 2008 moratorium proposal indicated that Hanover's secured depositors would get 100 per cent of their principal back by December 2013.
At the same time, most property-oriented finance company receivers were revealing that secured depositors would be fortunate to get 50 per cent of their money back.
Nearly a year later, on November 9, 2009, Hanover told its secured depositors they could now expect to receive 70 per cent of their money back. Two weeks later the company's directors, including Hotchin, unanimously recommended that investors accept a proposal from Allied Farmers.
Chairman David Henry wrote to investors: "We are of the view that Allied Farmers has the potential to add real value enhancement to the Hanover loan and property assets that is not possible under the debt restructure (moratorium) because of the cash constraints imposed by the repayment schedule."
Why didn't Hanover anticipate its cash constraints when it presented the moratorium proposal 12 months earlier, and what due diligence did it undertake of Allied Farmers that enabled Henry to write that the rural services group had the potential to "add real value enhancement"?
Hanover and United Finance transferred assets worth $398.2 million to Allied Farmers. These are now worth only $110 million.
Hotchin blames Allied Farmers for Hanover's problems and refuses to accept responsibility himself.
His interview with Mark Sainsbury on Close Up had these exchanges on the Allied Farmers' transaction;
Sainsbury: "But you were out there at those meetings telling the Hanover investors take this deal ... this is gonna be good for you. It hasn't been good for them."
Hotchin: "No clearly, and that's why I'm here. The whole point is we were sold a concept and an idea and they [Allied Farmers] haven't delivered, and they haven't even come close, it's so far away."
Sainsbury: "So are you saying you were hoodwinked?"
In other words Hotchin has come out of hiding to tell us that Allied Farmers created the mess while accepting no responsibility for the debacle himself.
Hotchin told Sainsbury five times that he and Eric Watson had put $78 million into Hanover, and he told the presenter three times that they had also put in twice as much as they had taken out in dividends.
The main item in the $76 million was the transfer of property companies from Hotchin and Watson to Hanover for $40 million as part of the December 2008 moratorium proposal.
This was purported to be an injection of $40 million because Hanover did not have to pay Watson and Hotchin the $40 million until all of principal repayments to secured depositors were repaid.
Two of the property companies transferred from Watson and Hotchin had outstanding loans to Hanover of $34.8 million a few months before the transaction. These were second mortgages over 159 lots at the Jacks Point development in Queenstown.
These loans to a Watson and Hotchin company were capitalised, with the largest loan of $26.2 million comprising principal of $19.5 million and $6.7 million of capitalised interest.
As the value of these loans is probably far greater than the amount that can be realised from the sale of the Jacks Point lots, then the transaction probably represented the transfer of a liability of $34.8 million from Watson and Hotchin to Hanover rather than them putting $40 million into the company.
Yet the exchange between Sainsbury and Hotchin on this was:
Sainsbury: "But the deal with Allied got you off the hook?"
Hotchin: "No, no. We said we'd put in $76 million and we put in $76 million, so that happened, despite rumours or people suggesting to the contrary, that happened."
Hotchin also strayed from financial reality when he talked about the dividends paid by Hanover Finance:
Sainsbury: "How could you take dividends out?"
Hotchin: "Because they went back in, it was liquidity, every dollar that went out two dollars was going back in, so it was actually creating liquidity."
Sainsbury: "So you are paying off the money you owe to the company?"
Hotchin: "Yes although in part it's about liquidity as well, so if we hadn't paid that money, those debts would have stayed higher."
According to a diagram in PricewaterhouseCoopers' November 2008 independent report, Hanover Finance paid dividends of $45.5 million in the year to June 30, 2008. Just 23 days after the year end, on July 23, 2008, Hanover suspended all payments of principal and interest.
In the same 12 month period, related party loans were reduced from $117.8 million to $49.3 million.
It appears that $31.5 million of the dividends was used to repay loans, and the other $37 million of related loan repayments came from other sources.
The huge dividend payments should not have been made because the finance company sector was in trouble and Hanover's profits were essentially illusory because most of its interest income was capitalised interest, which is a non-cash item.
It is also illusory for Hotchin to claim that for every $1 that went out $2 went in.
The reality of the situation up to June 2008 was:
Watson and Hotchin companies took $117.8 million out of Hanover Finance in related party loans.
They then received dividends of $45.5 million.
They paid back related party loans of $68.5 million.
Thus Watson, Hotchin and their associated companies took out $163.3 million and put in $68.5 million during this period, a far cry from Hotchin's claim that they put in $2 for every $1 they took out.
It is wrong to claim that paying dividends and depleting shareholder funds has no impact on a company if this money is used to repay existing loans.
The problem with Hotchin and Hanover Finance is that investors have never been given a full and accurate account of the company's activities. They were not told that most of Hanover's loans were second mortgages and that interest on these loans was capitalised.
They were not given a clear and simple description of the "shareholders' support package" of $76 million, and they were encouraged to accept the moratorium proposal at the end of 2008 and the Allied Farmers deal a year later, neither of which have turned out as indicated.
Hotchin's media spin has done nothing to placate Hanover's investors. The more he spins the more suspicious investors become that the Hanover directors were placing a greater reliance on spin, rather than financial reality, when they recommended the 2008 moratorium and Allied Farmers' deal a year later.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.