Correspondence

 

So far only one Hanover investor has joined the NZSA.

 

He writes… “We’re taking up your challenge to Hanover investors, but if you don’t get the 400 you’re looking for, we’d still like to join the NZSA. Obviously we need you”

 

Or do you?

 

On the 3^rd of December 2009, I and the Board of the NZSA received a letter from Chapman Tripp acting for Hanover to put me on notice that Hanover was aware that “a number of investors intend to act or have acted on the basis of statements made by you – statements you knew to be incorrect, and / or have failed to correct”.  They also say that “you have recently, knowingly, made statements and disseminated information including those referred to below that are materially false and misleading, contrary to Sections 11 and 13 of the Securities Markets Act 1988.”

 

They then reserve Hanover’s rights to initiate proceedings and / or refer the matter to the regulatory authorities. I have already forwarded their letter to the Securities Commission.

 

 

 

 

 

In reliance on these statements it appears some investors are making decisions on the current transaction. The first three should be irrelevant to the transaction. What the shareholders did or did not do, whether true or false, should not guide you one way or the other on the Allied deal; to do so is to cloud judgement with emotion.  

 

Hanover also stated that “it considers it most inappropriate that you feel empowered to insult Hanover investors, simply because (it would seem) they do not agree with you”.  So no more on your thought process.

 

 

In December last year investors voted in favour of the current moratorium. They were required to read digest and remember all key issues in a document that numbered 109 pages (although only 22 pages dealt specifically with Hanover secured deposits – by far the largest class - and the other pages covered other investment classes).  

 

The then CEO, Fredricson, addressed the meeting and outlined the key factors of the plan; in his address he stated that the initial support funds ($10m) were already on deposit in a solicitors trust account in the name of the shareholders to be drawn against as and when required to support the instalments payable under the plan.  Although I accept it was set out in the meeting documents, I do not recall him saying that following the meeting the funds would be transferred to Hanover’s name, albeit still in the solicitors trust account and on the same terms...  I made a mental note at the time of his speech to add further questions to my list on this point.

 

You will recall that each attendee was only entitled to ask one question and one supplementary question.  I asked the meeting to allow me further questioning rights and was declined; I thus instead choose to question Waller on his report, as that was more important.

 

I then remained to pursue my one entitlement to comment and left.  As a result, I had the impression that Hotchin and Watson had put up $10m it was in their names and was available to be drawn down to support payments to debenture holders under the plan during the first 2 or 3 years.  In my opinion the first two or three year payments were so low that they would most likely be met, and thus it was my view that they would not likely be called on to fund any of the payments.

 

So between then and the 11 November I was of the view that the funds were in a trust account in the name of the shareholders, i.e. that no money had been paid to Hanover.

 

On the morning of the 11^th I met David Henry while he was out walking; he and I are neighbours.  I said to him that now it was obvious that the debenture holders would be losing out he should do all he can to extract the first $10m from the solicitors trust account.  He said he couldn’t do that as the moratorium plan tied his hands, and it could only be drawn down to meet shortfalls when the trustee demanded it.  He confirmed that no drawdown’s had needed to be made to date.  This unfortunately reinforced my view that no money had been transferred, and thus I consider the comments on the 11^th were honestly made, and not at that time knowingly false.

 

 

Chapman Tripp have confirmed that, as required by the moratorium, the funds were changed into Hanover’s name on the day the plan became effective.  So the shareholders of Hanover have paid $10m to Hanover, and I was wrong with my understanding.  This said none of it has yet been needed to be applied to meet payments to debenture holders under the repayment plan investors approved.

 

So what happens to this money if the debenture holders vote yes to the Allied deal? This money is paid to Allied, so in effect the Hanover shareholders have applied the $10m to the support of payments to debenture holders albeit that those payments to debenture holders will be in the form of Allied shares.  This said Allied are paying $10m back to Hanover to meet Hanover other debts to third parties including transactions costs for the Allied deal, the costs of the winding down the trust deed, liquidation, continuing litigation with Mark Cooper and others.  

 

If the Allied deal is not approved, the funds will stay in the name of Hanover and be drawn against to support the payments to debenture holders during the guarantee period, if they are required.  If it is not required the funds because investors are repaid 100 cents in the dollar (which David Henry thinks is unlikely), they will be paid to Hanover, i.e. in effect the shareholders of Hanover.

 

So to recap on the first issue, the shareholders have provided Hanover with $10m but, due to a misunderstanding on my part, I got that wrong. In any event it should be irrelevant to the decision you have to now make on the Allied deal.

 

 

 

I do not recall making such a direct statement as it is clearly false, but I do accept my “not paid a dime” comment could have been construed that way in relation to the other support assets.  The Axis transactions were completed and I knew that.  If my comments were made in a pre recorded Radio interview that was edited then I must correct that.  The assets were transferred.  This said I did say in December last year that the $66m consideration for the Axis assets was nonsense, and I did say that the “assets” were in my view worthless.  In many instances it represented the equity behind 2nd mortgages already owned by Hanover, so all that was being achieved was better control no actual value. I still hold that view.

 

 

I think this is true in part, to the extent that they have not already been performed. Most notably it will be the further obligation to contribute another $10m if required in 2011 to 2013.  So to recap under the Allied transaction the shareholders have stumped up $10m, but are relieved of their contingent obligation to contribute a further $10m.

 

 

Hanover is what it is, in my view a pile of junk, honest opinion, it will be worth what it is worth and we will only know with hindsight.  In the words of Tony Gibbs this transaction is about moving a pile of custard from one plate to another, although Hanover tell me that GPG made no approach to the company and so far as it knows did not consider any detailed information about the loan book value.   

 

Since I made my comments, the audited accounts for Hanover have been published, and Grant Samuel’s evaluation has been published, so others might have a different view.

 

So Hanover investors, I will now give you a bit of advice, despite having said I won’t.

 

·        Do not make your decision how to vote until the last minute, this is relevant to all shareholders; information has a habit of coming out over time, and if you vote early you may well make the wrong decision. However, to have your say, don’t leave it too late because proxies need to be received by 10.30 on Tuesday 15 December – fax your proxy to be sure it won’t be caught in the Christmas post.

 

·        In my view you voted emotionally last year; fear of receivership and hope that you would get all your money back over time.  Neither rational, but markets are a trade in emotion.  Do not vote emotionally this time.

 

 

 

 

 

9 December 2009