KEY POINTS:
Investors in the Hanover Group of finance companies today face an unenviable task in deciding whether to back a five-year moratorium proposal put forward by the company. If they reject the plan, they consign Hanover to receivership, and what many will see as greater uncertainty. Perhaps it is
little wonder, therefore, that, as late as yesterday, a group of investors was seeking an injunction so there would be more time before the vote. This is a situation in which people with a large financial and emotional investment must try to deliver a clear-sighted verdict on the highest-profile victim of the finance-company sector collapse.
Those unencumbered by that investment might well see receivership as the best option. They would point out that those who run a boat onto the rocks should not be entrusted with refloating it. In Hanover's case, the owners, Eric Watson and Mark Hotchin, must take much of the blame for the grounding. Even as deposits were stalling and the company's cash resources were draining, they were extracting large dividends. Many other questions have been asked about their practices, not least the bogey of related party transactions and the failure to inject their own money before a crisis point was reached.
The pair's financial wherewithal remains the only factor that will allow Hanover to survive the present economic circumstances. Other finance companies without such backing or another funding source have gone to the wall. Now, belatedly, Mr Watson and Mr Hotchin say they will put up cash and assets worth $96 million, although the complex restructuring plan sees them putting up just $10 million now. In return, they receive what amounts to an interest-free loan for five years. The 16,000 secured investors in Hanover Finance and United Finance are scheduled to be repaid all their principal in quarterly instalments beginning in March and ending in December 2013.
The owners' proposal has won the backing of accounting firm PricewaterhouseCoopers, although its report signifies this was a close-run thing. It would have preferred Mr Watson and Mr Hotchin to have contributed more, and labelled their view of expected loan recoveries "optimistic".
It also lamented the lack of fresh independent directors on the Hanover board from the outset of the debt restructuring exercise, and stressed that a 100c-in-the-dollar payout over five years, which it estimates is actually worth 55c in today's money, depended on a recovery in the moribund property development market. PricewaterhouseCoopers' conclusion that the Hanover proposal offers investors marginally better prospects than a receivership will probably be crucial to the outcome. It will cement the view of those who invested optimistically and, despite everything, still think that way.
They will be keen to look past the optimistic views that underpin the restructuring scheme and cling to a best-case scenario. The recommendation will also encourage them to overlook the crassness of Mr Hotchin's recent 50th birthday celebrations in Fiji. In that, they will be correct. Vindictiveness should not be part of the investor equation. But, before they vote, investors should also consider what a financial institution would do if it was dealing with a Hanover-like circumstance. Almost certainly, it would place the company in receivership. This would not only put new hands at the helm but introduce the possibility of court action if the receiver's scrutiny uncovered possible offences. That, in turn, would raise the possibility of a better return.
All that, however, involves time and uncertainty. What a detached financial institution might do might not be the same as an ever-optimistic finance-company investor.