Allied's $220 million write-down may understate recoverable loans

Tuesday 9th March 2010

A $220 million writedown by Allied Farmers of its recently acquired Hanover/United investments portfolio may not necessarily result in zero value being extracted from those positions, McDouall Stuart said in its market weekly update.

The brokerage points out that the rules required under International Financial Reporting Standards may significantly understate what value Allied could extract from its new loan assets in gross loan realisations.

“What is clear, and what was already known, is that the loan realisation process will be a long and potentially litigious one,” it said. “The early resolve and conviction Allied has shown towards pursuing recoveries is, however, very encouraging.”

Shares of Allied have tumbled to a record low this month, dropping 2.5% to 7 cents today. McDouall Stuart has a ’buy’ recommendation on the stock, noting the decline in the price since the finance company posted a $15.7 million first-half loss.

One of the major advantages of Allied’s proposal to buy the ailing finance company’s book four months ago “was that its post-completion balance sheet strength (relative to Hanover/United) would give it options to negotiate with higher-ranked mortgage holders of distressed assets to extract value,” the brokerage said. “This remains the case.”

Allied gave a “strong sense” that it wasn’t saying all it could regarding some of the more ‘unusual’ loans and terms it had uncovered during its post-completion review of Hanover/United documentation, McDouall Stuart said of a recent meeting with the company.

Allied “is on record as saying that it has already directed some cases to authorities, and press over the weekend provides some worrying signs of potentially ugly behaviour by Hanover/United principals just prior to handing the books over to ALF,” the brokerage said.

Ex-Hanover/United security holders would have likely been in a far worse position if an almost-certain receivership scenario had resulted from a ‘no’ vote to the Allied proposal, it said. Under receivership, realisations and recoveries would have been far weaker.

“In our view, events at ALF since the deal was completed serve only to demonstrate that it is only once control of dubious finance companies is finally wrested away from their previous masters that ‘what lies beneath’ can be uncovered and brought to account,” the update said.

McDouall Stuart said it questioned the apparent lack of oversight of Hanover, United and many other finance companies.

“Those that are by law charged to protect investors’ interests have been invisible when it really mattered,” it said. “There are many culpable parties to the malaise of the past few years, and Trustees, auditors, property valuers and regulators must all take their share of blame.”

The brokerage said that disturbingly, some principals of companies that have been exposed for poor management and governance of public money are able to continue to seek money from the public under a different guise.

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