KEY POINTS:
Like the car company bosses who arrived by private jet to beg the US Government for a bailout, Hanover's Mark Hotchin has learned that perception is everything.
With the ailing finance company preparing to plead with its investors not to put it into receivership, the news that Hotchin
celebrated his 50th birthday with a lavish party on Fiji's exclusive Vomo Island Resort last weekend did not go down well.
Hanover's executive director and shareholder concedes the timing of the party was "appalling". Despite saying his 80 guests paid for their own flights and accommodation, Hotchin says he "gets it" that it was a very bad look.
Hanover suffers from a range of bad looks. As Hotchin - the major shareholder along with Eric Watson - ran a nationwide roadshow to persuade investors into accepting the pair's $96 million rescue package, the more unappealing aspects of Hanover's operations made headlines.
Hanover had large numbers of related party loans - $85.4 million worth or 14.9 per cent of assets as at June 2008. More than 90 per cent of Hanover's loans were written on a capitalised interest basis, meaning interest is added to the loan principal rather than being paid. Hanover paid $192 million in dividends since 1999, including $17.5 million in the first half of this year as the finance company market crumbled around it.
In a rare sitdown interview on Friday, Hotchin was keen to set the record straight.
If debenture holders hadn't pulled their money out of Hanover, and if its property developer borrowers had been able to pay their bills, the company would not be at this point, he says.
"Everybody loses sight of how a company gets to where we've got to. The simple fact of it is, if everybody who owed us money repaid it we'd repay everybody."
It was tough times out there and its property developer clients were not doing well, he said.
"We've got some very, very good loans. It doesn't mean that people can repay them."
Hotchin is adamant Hanover's problems do not result from the way it conducted its business. "We're very confident this company has been run prudently, correctly. There's no activity that we need to be concerned about." The fact 93 per cent of its loans were capitalised was "the nature of the type of lending".
What about the fact that this reduced cash flow to a mere trickle? "Yes, if every loan on our book was paying interest on the way through then clearly it would have a positive effect on cash flow."
Hanover kept a buffer, though, to allow for variances in cash flow. "However, when the money coming in slowed dramatically from both ends that buffer wasn't sustainable. "
The $192 million in cash dividends paid over eight years went largely towards growing a diversified business, such as the FAI consumer lending business and the Leasing Solutions office leasing operation, Hotchin said.
"This money didn't all go out to the shareholders for them to spend on their lifestyle. The vast majority stayed in the group."
But was it wise? "Perhaps looking back if we hadn't done that ... and left [the money] in the business perhaps it would have been better for it."
And the much-criticised high level of lending to parties associated with Hotchin and Watson's interests? It was "just not true" that this was to personal assets of his and his fellow shareholders, he said. Each loan was fully assessed, and approved by the board with himself excluded.
The restructuring proposal has been as controversial as Hanover's operations, particularly the so-called Axis deal whereby Hotchin and Watson are contributing properties owned by their Axis Group to the pot. The Axis properties - the Matarangi Beach Estate, Jacks Point and Clearwater projects - carry substantial debt which would be Hanover's problem under the deal. Hotchin stands by a $40 million valuation of the properties, but in its evaluation of the proposal
PricewaterhouseCoopers said it couldn't endorse that as being indicative of the fair market value and a "fire sale" would almost certainly wipe out this equity.
Hotchin said it had been important to him to front up to investors at the 11-meeting roadshow.
He had had a "very good run" out of Hanover. "I feel a moral obligation to help."
So can he and Watson be trusted? "The short answer's yes. We have never, and never would, do anything to deliberately try and mislead or take advantage of the mums and dads."
Full details of the payback plan are available at:Hanover Finance