Allied Farmers' shares dropped to an all-time low yesterday following a disappointing half-year result and a ratings downgrade by Standard and Poor's of Allied Nationwide Finance Ltd.
Shares traded as low as 8c yesterday after trading at 18c in December.
Also worrying investors was a substantial decrease in the value of assets Allied took over from Hanover Finance and United Finance.
S&P assigned its BB- long-term counterparty credit ratings on Allied Nationwide and its B short-term rating.
The outlook was negative.
The counterpart ratings reflected the finance company's weak stand-alone capital, noting that improvement is anticipated during 2010, recent asset quality deteriorating and that it remains beholden to debenture holder confidence, as a material amount of debenture refinancing is expected between now and October.
"The negative outlook reflects our view that down side risks to the rating will likely prevail in 2010," S&P analyst Gavin Gunning said.
"We are unlikely to give full credit to Allied Farmers' recent recapitalisation until valuations underpinning assets purchased from Hanover Finance and United Finance stand the test of time."
Earlier, Allied Farmers reported a loss of $15.7 million for the six months ended December.
It made a loss of $3.9 million in the previous corresponding period.
Chairman John Loughlin said the company had been through a challenging time in which it had witnessed the failure of many businesses.
The result was in line with expectations.
The acquisition of Hanover and United assets had strengthened Allied's position.
"This will allow us to take advantage of any opportunities which might arise short to medium-term."
However, a closer reading of the results showed the value of the assets formerly owned by Hanover and United Finance plummeted by more than half just months after investors agreed to allow Allied Farmers to buy them in a $400 million deal.
Before the assets were sold, investors were told they were worth $396.2 million but Allied revealed the value has shrunk to just $175.5 million.
The valuation drop includes a $20.7 million write-down made before the transaction went ahead, attributed to property sales and bad debt write-offs, and a further $55.9 million in interest adjustments made under the new IFRS accounting rules.
But it also shows $144 million has been written off the assets and loans since the deal went through.
Of that, $27 million has been wiped off the value of property assets which are up for sale, including sections at Jacks Point, Queenstown, and Matarangi in the Coromandel.
Investments have dropped $16.8 million.
But the biggest write-down has come in the form of a $99.3 million drop in its loan book.
Allied Farmers managing director Rob Alloway said that was substantially attributable to the troubled Queenstown hotel development project Kawarau Falls, which is in receivership.
Hanover loaned $88.7 million to the project and it was its biggest investment.
The project had been heavily affected by the uncertainties associated with stage one and both the second and third stages were now in doubt, he said.
The Hanover and United assets were now contained within a new subsidiary - Allied Farmers Investments - which had been staffed with an experienced legal and finance team.
"We have moved quickly to commence litigation against a number of borrowers and in some instances formally issued notice to call up guarantees," Mr Alloway said.
Craigs Investment Partners broker Chris Timms said Allied had moved from a rural servicing company with a finance arm to a finance company with a rural servicing arm.
That required a different set of skills.
Even though Allied had taken on legal and finance staff, the challenge of continuity remained when going from one business operation to another.
Staff needed to follow through on what had been originally worked on to recover funds while looking at new ways of generating returns.
The S&P rating would not have helped investor confidence, even though nothing S&P said was unexpected.
"Given some of the beatings S&P has taken on its ability to rate finance companies, I suspect they have taken a fairly conservative approach."
