Hanover Finance

Hanover Finance was a New Zealand non-bank finance company and part of the broader Hanover Group, a financial and property conglomerate associated with businessmen Mark Hotchin and Eric Watson. The group was formed after Hotchin and Watson acquired Elders Finance in 1999 and combined it with other finance interests. Hanover subsequently became one of New Zealand's largest finance companies, with reported assets of approximately NZ$650 million at one stage, while the wider group also pursued property development and investment activities in New Zealand and Australia. The company's business model concentrated on raising money from debenture holders and other investors and lending into property development and related projects. Its exposure to development finance made it particularly vulnerable when property values and liquidity deteriorated during the global financial crisis. Hanover's property interests included the Matarangi Beach Estates development and golf course, as well as completed lots at the Jacks Point subdivision near Queenstown. The broader group also held interests in Australian property and finance businesses. Hanover's prominence extended beyond conventional finance-company operations. In 2003, the group acquired a 10 percent interest in Tower, a major insurance and fund-management business. Hanover used that position to press Tower and its owner, Guinness Peat Group, to reconsider the terms of a proposed capital-raising and underwriting arrangement. The group was also financially successful before the crisis: Hanover Group reported an after-tax profit of NZ$105 million in 2007. However, the payment of NZ$45.5 million in dividends to Hotchin and Watson for the year ended 30 June 2008 attracted controversy, particularly because related-party transactions represented a significant portion of the loan book. In July 2008, Hanover Finance and United Finance suspended repayments on approximately NZ$554 million owed to about 36,500 investors. More than 85 percent of investors approved a five-year repayment arrangement based on the expectation that the New Zealand property market would recover. Hotchin and Watson supported the arrangement with a package of property, benefits and cash valued at up to NZ$96 million. The value of that package was later estimated by PwC at between NZ$36 million and NZ$56 million as property prices declined. Repayments during the first year amounted to only six cents per dollar, and the continuing weakness of the property market placed the companies under increasing pressure. In late 2009, Allied Farmers proposed acquiring the assets of Hanover Finance and United Finance. Investors were offered the choice between receivership and a restructuring under which their debentures, notes and bonds would be exchanged for shares in Allied Farmers Limited. Approximately 75 percent voted for the Allied Farmers transaction, which transferred the net asset position of the Hanover finance companies to Allied Farmers. The restructuring did not resolve the underlying financial problems. Allied Farmers placed its finance subsidiary Allied Nationwide into receivership on 20 August 2010, effectively marking the collapse of the rescue arrangement. Regulatory and legal consequences continued after the failure. In December 2011, New Zealand's Financial Markets Authority announced proposed civil proceedings concerning statements in Hanover's December 2007 prospectuses and subsequent advertising. Former chairman Greg Muir disputed the proposed action and said the directors had acted responsibly based on the information available to them. In December 2012, remaining Hanover and United Finance property assets, then carrying a reported book value of NZ$13.5 million, were transferred from Allied Farmers to Crown Asset Management, the government-backed vehicle established to manage assets from failed finance companies. Hanover Finance is therefore principally remembered as one of New Zealand's major finance-company collapses and as an example of the risks created by aggressive property lending, concentrated related-party exposure and dependence on continued property-market growth.

Hanover Finance emerged from the consolidation of New Zealand finance businesses acquired and assembled by Mark Hotchin and Eric Watson. In 1999, the pair bought Elders Finance and subsequently brought it together with other finance-company interests under the Hanover Group. The resulting business became one of New Zealand's largest non-bank finance companies, with reported assets of approximately NZ$650 million at one point. Hanover's core activity was raising funds from investors and lending into property and development projects. This strategy connected the finance business closely to the broader Hanover Group's property interests. The group was involved in the Matarangi Beach Estates development and golf course and acquired completed lots at the Jacks Point subdivision in Queenstown. It also maintained property and finance interests in Australia. The concentration on property-related assets gave Hanover strong growth during favorable market conditions but left it exposed to falling valuations and reduced liquidity. The group also pursued investments outside ordinary finance-company operations. In 2003, Hanover acquired a 10 percent holding in Tower, an insurance and fund-management company. Hanover used its stake to challenge the terms of a proposed capital raising and underwriting arrangement involving Tower and its owner, Guinness Peat Group. Before the financial crisis, Hanover Group reported an after-tax profit of NZ$105 million in 2007. The group nevertheless faced criticism over its financial relationships and distributions. For the year ended 30 June 2008, Hanover Finance paid NZ$45.5 million in dividends to Hotchin and Watson, while related-party transactions were reported to account for approximately 14 percent of the loan book. The global financial crisis and the simultaneous decline in New Zealand property markets exposed the weaknesses of the model. In July 2008, Hanover Finance and United Finance froze repayments on approximately NZ$554 million owed to 36,500 investors. Investors approved a five-year repayment plan by a majority exceeding 85 percent. The plan relied on property-market recovery and included a support package from Hotchin and Watson involving property, benefits and cash worth up to NZ$96 million. As prices declined, PwC later estimated the package's value at only NZ$36 million to NZ$56 million. During the first year of the plan, investors received repayments equivalent to six cents per dollar, and continued market deterioration made receivership increasingly likely. Allied Farmers approached Hanover in 2009 with a proposal to acquire the assets of Hanover Finance and United Finance. In December, holders of debentures, notes and bonds voted on whether to accept receivership or a restructuring involving Allied Farmers. About 75 percent supported exchanging their claims for shares in Allied Farmers Limited. The transaction transferred the net asset position of the Hanover finance companies to Allied Farmers, but the resulting structure was unable to withstand the continuing problems. Allied Farmers placed Allied Nationwide into receivership on 20 August 2010. The collapse generated continuing regulatory scrutiny. In December 2011, the Financial Markets Authority announced that it proposed civil proceedings against Hanover directors and promoters in relation to statements contained in the December 2007 prospectuses and subsequent advertisements. Former chairman Greg Muir publicly defended the directors' conduct, stating that they had acted responsibly and made decisions they believed were in investors' interests based on the information then available. In December 2012, remaining property assets of Hanover and United Finance, reported at a book value of NZ$13.5 million, were transferred from Allied Farmers to Crown Asset Management. Hanover Finance's history is consequently associated with New Zealand's finance-company collapse cycle, the risks of property-focused lending and the consequences for retail investors when highly leveraged finance businesses lose access to liquidity.

• 2012

  Assets transferred to Crown Asset Management

  [1]Hanover Financeen.wikipedia.org

  Remaining Hanover and United Finance property assets were transferred from Allied Farmers to Crown Asset Management.

• 2011

  Proposed FMA civil proceedings announced

  [1]Hanover Financeen.wikipedia.org

  The Financial Markets Authority announced proposed civil proceedings concerning Hanover prospectuses and advertising.

• 2010

  Restructuring fails

  [1]Hanover Financeen.wikipedia.org

  Allied Farmers placed Allied Nationwide into receivership, ending the practical rescue structure for Hanover's transferred finance assets.

• 2009

  Allied Farmers restructuring approved

  [1]Hanover Financeen.wikipedia.org

  About 75 percent of relevant investors approved exchanging their debt claims for Allied Farmers shares.

• 2008

  Investor repayments frozen

  [1]Hanover Financeen.wikipedia.org

  Hanover Finance and United Finance suspended repayments on approximately NZ$554 million owed to 36,500 investors.

• 2007

  Hanover Group reports substantial profit

  [1]Hanover Financeen.wikipedia.org

  The group reported an after-tax profit of NZ$105 million.

• 2003

  Hanover acquires a stake in Tower

  [1]Hanover Financeen.wikipedia.org

  Hanover Group acquired a 10 percent interest in Tower and used the holding to press for changes to a proposed capital-raising arrangement.

• 1999

  Elders Finance acquired

  [1]Hanover Financeen.wikipedia.org

  Mark Hotchin and Eric Watson acquired Elders Finance, the foundation of the later Hanover Group.

A large New Zealand non-bank finance company positioned around investor funding and property-related lending, with a business model that became heavily exposed to higher-risk property development.

• Fixed-income investment

  Hanover Finance debentures

  Debenture investments were a principal way Hanover Finance raised money from retail and other investors. The company's failure left holders exposed to delayed and reduced repayment as property assets lost value and the company became unable to meet its obligations.

• Commercial finance

  Property-development loans

  Hanover focused heavily on lending connected with property development and other higher-risk real-estate projects. This lending supported the group's expansion but created substantial concentration risk when New Zealand property prices and market liquidity declined.

• Property development

  Hanover Group property developments

  The wider Hanover Group held property interests including Matarangi Beach Estates and its golf course, along with completed lots at the Jacks Point subdivision near Queenstown. These assets formed part of the property base connected to the group's finance activities.

• 2011

  Financial Markets Authority prospectus proceedings

  The FMA announced proposed civil proceedings against Hanover directors and promoters concerning statements in the December 2007 prospectuses and subsequent advertisements. Former chairman Greg Muir rejected the implication of irresponsible conduct.

  Source

• 2008

  Controversy over dividends and related-party exposure

  Hanover Finance paid NZ$45.5 million in dividends to Mark Hotchin and Eric Watson for the year ended 30 June 2008. The payments attracted controversy in the context of related-party transactions reportedly representing about 14 percent of the loan book.

  Source

Read more

• 2012

  Transfer remaining property assets to Crown Asset ManagementStrategy

  Background

  Following the collapse of the Allied Farmers structure, residual Hanover and United Finance property assets remained to be administered.

  Action taken

  The assets were transferred from Allied Farmers to Crown Asset Management.

  Aftermath

  The transfer placed the remaining assets under the government-established entity responsible for failed finance-company assets.

  Book value of transferred property assets. NZ$13.5 million (December 2012)

  Source

• 2009

  Accept Allied Farmers restructuringM&A

  Background

  Hanover Finance and United Finance remained constrained by the repayment plan while property-market conditions continued to weaken.

  Action taken

  Approximately 75 percent of debenture, note and bond holders voted to exchange their claims for shares in Allied Farmers Limited.

  Aftermath

  Allied Farmers assumed the net asset position of the Hanover finance companies, but Allied Nationwide entered receivership in August 2010.

  Source

• 2008

  Adopt a five-year investor repayment planStrategy

  Background

  After repayments were frozen, investors had to choose between a repayment arrangement and the prospect of receivership. The proposal assumed that New Zealand property values would recover.

  Action taken

  More than 85 percent of investors approved a five-year plan. Hotchin and Watson pledged a package of property, benefits and cash valued at up to NZ$96 million.

  Aftermath

  The package subsequently lost value as property prices fell, and only six cents per dollar was repaid during the first year of the plan.

  Investor obligations covered by the repayment freeze. NZ$554 million (July 2008)

  Source

1. 1Hanover Financeen.wikipedia.org