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Lombard and Lehman Bros were targeting Hanover, court hears

Wednesday 7th December 2011

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Lombard Finance & Investments and Lehman Brothers were working together to buy the loan books of distressed New Zealand finance companies before they both collapsed in 2008.

The High Court in Wellington heard today that Lombard and former US investment bank Lehmans had entered into a confidentiality agreement with Hanover Finance, which also collapsed before becoming a millstone around the neck of Allied Farmers, which attempted a rescue deal.

Former chief executive Michael Reeves told the court he had engaged with Lehmans in the lead-up to the failure of his own firm as one way to diversify its business as the finance sector entered troubled times through the tail-end of 2007 and start of 2008.

The New Zealand economy was heading into recession at the time, with finance companies bearing the brunt of over-leveraged borrowers. Lombard went into receivership in April 2008, while Lehmans’ failure sparked the global financial crisis in September that year.

In February 2008, Lehmans and Lombard entered into a confidentially agreement with Hanover owners Eric Watson and Mark Hotchin to look at a sale of some or all of their loan book.

“They needed a confidentiality agreement and wanted confirmation Lehmans had the money and interest,” Reeves told the court. “Hanover wanted to sell $50 million worth or $500 million of debenture stock and receivables.”

In 2007, whiteware manufacturer Fisher & Paykel Appliances had engaged Deutsche Bank to sell its finance unit, and that was to be the foundation for a partnership that saw Lombard’s Reeves look at potential acquisitions from Bridgecorp, Capital + Merchant, and Prudential Finance. Reeves said Lehmans wouldn’t look at anything less than $200 million, and was happy for Lombard to lead the partnership.

“Lehmans had the money and wanted to do it – they were pushing us to do this, but in effect we ran out of time,” he said.

Reeves said after securing access to begin due diligence on distressed loan books, the assets of some of the firms weren’t ideal acquisitions. Lombard’s Reeves and directors Doug Graham, Bill Jeffries and Lawrence Bryant pleaded not guilty to five counts relating to claims they made untrue statements in a 2007 prospectus, investment statement and advertising material.

Reeves said he was satisfied with his efforts to ensure the prospectus contained all of the appropriate information for investors, and pressed solicitors Phillips Fox to ensure the deteriorating market in financial services was adequately covered as a potential risk in the amended offer document.

He also engaged Minter Ellison to write up the amendments to make sure it eased his concerns.

He said he was happy with the independent advice Lombard received from Ferrier Hodgson, now KordaMentha, and its milestone targets made up part of the firm’s weekly reports to trustee Perpetual Trust, auditor KPMG and also went to the Ministry of Economic Development and the Securities Commission.

Lombard also looked at taking on a loan from National Bank or Fortress Investment that would have ranked ahead of debenture investors, though Reeves decided against that option.

Last year, the then-Securities Commission laid civil and criminal proceedings against the directors.

Lombard went into receivership on April 10, 2008, owing approximately $127 million to about 4,400 investors, and it is unlikely that secured debenture holders will receive more than 24 percent of their investment back. Unsecured creditors are likely to receive nothing. The case is continuing.

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