Allied takes hit as credit rating comes up short

Allied chairman John Loughlin. Photo / Dean Purcell

Shares in Allied Farmers plummeted nearly 20 per cent yesterday in the wake of a major write-down in its former Hanover loan book and a poor credit rating for its finance company Allied Nationwide.

Shares in the rural service provider and finance company fell 1.9c to 8.1c - its lowest ever price - before bouncing back slightly to close on 8.5c.

The fall came after the company revealed a $220 million write-down in the fair value of the former Hanover and United Finance business and a credit rating of BB- - one step below that needed to meet the requirements for the Government's extended deposit guarantee scheme.

The write-down was revealed as part of the company's half-year report on Monday and was released to the market just 10 minutes before it closed.

Monday was also the last day for the company to gain a credit rating under new Reserve Bank legislation designed to help protect investors in the wake of the finance company sector collapse.

Standard & Poor's said the rating reflected Allied Nationwide's weak stand-alone capital position, a deterioration in the quality of its assets and its reliance on debenture holder confidence for its funding.

The rating company noted that while the Allied Farmers purchase of the Hanover business had the potential to improve the capital position of Nationwide that would depend on the robustness of the asset valuations.

But it warned that if more capital was not injected into Nationwide it could drop even further down the ratings scale.

"Allied Farmers expects to make a major capital injection into Allied Nationwide in coming months, if this does not occur the ratings may be lowered given Allied Nationwide's currently weak capital position."

Allied chairman John Loughlin said it had hoped to do better than the BB- rating.

"We always saw it as being in that BB to BB- range. I would have liked it to have been higher."

But he believed the company still had a chance to make the cut for the Government's extended deposit guarantee scheme.

"We are not able to apply at the moment. The new scheme starts from October 12. We can still apply if we get a higher credit rating and we are certainly working towards that."

Loughlin said it was a given that some investors would pull their money out but Allied had already had experience with that over the past three years and it was confident of surviving all scenarios.

Loughlin said it intended to shift some of the good Hanover loans onto the Allied Nationwide books to improve its capital position and expected to start doing that within the next month. Asked why the company had not done it sooner in order to get a better rating Loughlin said it had not wanted to rush the assessment of the assets.

He said the board had only signed off on the fair value figures that saw the Hanover business fall from $396.2 million to $175.5 million on Monday.

But Shareholders Association chairman Bruce Sheppard said he found it difficult to believe the assets had gone down by so much in the two months between Allied's October due diligence and the December 31 balance date. "I'm surprised at how quickly the assets have been written down."

Sheppard said the large fall either suggested the company had not done enough homework to begin with or the property market had plummeted.

Sheppard said if Allied knew the business was worth less it should have issued fewer shares which would have been less dilutionary to investors who owned the shares before the deal went ahead. "They should have written them down to begin with and been transparent with their shareholders."

The share price plunge means former Hanover investors would get back just 35.5c in the dollar if they cashed up now - less than half the 78c promoted by Allied when it signed the $400 million deal in December.