Stock takes: Market operator always keen to get in on the action

Hanover Finance investors weigh up the options in Wellington. Photo / Mark Mitchell

NZX's stock made some hefty gains this week on its announcement of a share split and plans to ramp up dividend payments.

It has been a good year for NZX. The company made close to twice as much money trading market infrastructure assets in the first six months of the financial year than it had from its entire business over the preceding six years.

It has also enjoyed a bumper year for capital raisings, albeit largely due to stress among existing listed companies rather than an influx of fresh blood.

While the health of the sharemarket is so parlous that last year the Government appointed a task force to look for ways to prop it up, chief executive Mark Weldon and his colleagues have successfully identified alternate markets and opportunities.

While NZX's new clearing and settlement system will provide the functionality to underpin the proposed dairy futures market, given it has been developed in consultation with politicians and officials working on our proposed emissions trading scheme, we'd be surprised if NZX wasn't clipping the ticket on carbon credit trading eventually.

The new infrastructure, with NZX's purchase of electricity spot market operator M-Co, looks exceptionally timely given this week's announcement of electricity industry reform including a determined push to establish a truly functional futures market in that sector.

NZX may face competition if it has designs there. Meridian has previously said the ASX's New Zealand Electricity Futures contract, launched in July, would be the best available tool for attempting to develop a liquid forward market for electricity.

But given how closely Weldon and the NZX have been working with the Government, Stock Takes reckons they must have the inside track.

TOUGH CHOICE

As United Finance's trustee Louise Edwards of Perpetual Trust helpfully pointed out last week, whichever way United and Hanover Finance investors vote on the Allied deal next week, they face considerable uncertainty.

As she put it, the three scenarios investors are looking at are; the proposed transaction going ahead, the proposal failing and Hanover subsequently going into receivership, and finally the proposal failing and Hanover's moratorium continuing as it is.

The Grant Samuel report and Hanover's independent directors suggest the choice is essentially between Allied and receivership under which Hanover's assets "would not respond well", Mark Hotchin told investors this week. Similarly Grant Samuel summarily dismissed receivership as likely to result in a fire sale of assets.

But let's take a look at what is perhaps the most detailed publicly available analysis of Hanover and its investors' prospects for returns under receivership - PricewaterhouseCoopers' independent report on the moratorium proposal issued a year ago.

Hanover's original assumptions, as PwC pointed out, were optimistic. PwC's analysis appeared at the time, and especially now in hindsight, far more realistic.

"Hindsight is a wonderful thing," is a phrase Stock Takes has heard from Hotchin a number of times of late, but foresight such as displayed in PwC's report is much better.

TOO MUCH INFO

While Hanover forecast full repayment of principal to debenture holders based on the assumption the property market would recover, PwC - which didn't make the same mistake - forecast a range of 63c and 80c in the dollar. Hanover's revised forecast now falls within that range.

Okay, PwC's report is a year old now and, as Hotchin is at pains to point out, the market has moved since then, but while Hanover gave no indication of having entertained the possibility of that happening, PwC did and prepared three "sensitivity scenarios".

Scenario 3, the least favourable one which assumed poor recoveries on a range of exposures as well as "a general 10 per cent downward adjustment on all other loans", projected recoveries of 64.3c in the dollar. The middle scenario projects 73.4c.

That's less than the 78c and 90c being dangled before Hanover and United Finance investors with the Allied deal, but Stock Takes suspects that if PwC's assumptions remain realistic at this point, its number would prove to be a lot more solid than the highly conditional Allied figure.

It would have been nice if Hanover investors were provided with up to date, detailed and truly independent analysis of the likely returns under receivership but Stock Takes suspects that is something Allied and Hanover's management prefer not to trouble them with.

GREY POWER

Allied Farmers chairman John Loughlin was, Stock Takes thought, being somewhat disingenuous this week when addressing Hanover investors, who may soon form 95 per cent of his company's shareholder base.

"We haven't thought ahead to board composition," was his response to a question from one investor in Wellington.

"It's not something we've considered.

"At the end of the day directors of any company are the representatives of the shareholders."

Yes, but which particular shareholders?

Allied has given some thought to board composition in recent weeks. It announced that big Australian securitisation firm Resimac, which has invested just $7 million, and none of that in actual equity, would have at least one director appointed and possibly more in future.

Despite the fact that Hanover investors and their capital are providing Allied with the means to move forward, Allied's present management, its vastly outnumbered pre-Hanover deal shareholders, and Resimac will remain in the front seats while Hanover investors will ride coach.

"If you shareholders are not happy then you'll make your decisions at AGMs going forward," Loughlin told them.

The truth is Hanover investors, given their dominance of Allied's share register, and if they were able to organise themselves sufficiently, could act before then and appoint whoever they pleased.

All it would take, according to the Companies Act, is "the written request of shareholders holding shares carrying together not less than 5 per cent of the voting rights entitled to be exercised" to call a meeting to vote on the appointment of a new director.

EASIER SAID THAN DONE

While Hanover investors will be in a powerful position to influence the company's direction and protect their interests immediately following the Allied transaction should it go ahead, it is likely that position will weaken rapidly.

Many will want to realise at least some of their original investment quickly by selling their new shares and Stock Takes believes it is likely there will be buyers - at the right price.

The bloc of Hanover and United investors on Allied's register - and their voting power - may shrink quickly.

To exercise their power would take timely and considerable organisation on the part of Hanover investors, not to mention the identification of capable individuals to take a leading role. The work Gerard Prinsen and his colleagues at the Frozen Funds Group have done on behalf of ING/ANZ investors suggests this is not impossible.

Given the reluctance of anyone else to help Hanover's investors ensure their interests are being looked after, Stock Takes hopes there are folks among their 12,000 strong ranks willing and able to lead efforts to help them help themselves.

ZIMMERING RESENTMENT

Those who underestimate the inclination and ability of aged investors to take strong action against those who have cost them their savings would be advised to bear in mind events in Germany.

It has been reported that charges were laid against a gang of pensioners who kidnapped and tortured their financial adviser when their fortunes dipped due to the global financial crisis.

American-born James Amburn, 56, was ambushed outside his home in Speyer, western Germany, bound with masking tape and bundled into a car boot after being bashed in the head with the walking frame of an elderly client.

"It took them quite a while because they ran out of breath," said Amburn, who was driven to the Bavarian lakeside home of one of the gang.

Another couple, retired doctors, joined the kidnappers in the cellar where Amburn was chained and tortured for four days.

Amburn claims he was burned with cigarettes, beaten, had two of his ribs broken when he was hit with a chair leg and chained up "like an animal" by his clients who between them had lost $4.5 million.

In faxing his Swiss bank to release funds to placate his captors, Amburn was able to raise the alarm. The Swiss bank telephoned police in Germany and an armed team of commandos stormed the house. The kidnappers are looking at a minimum five years' jail if convicted next year.