Crunch time has arrived this week for the debenture holders of Hanover Finance and United Finance investors who find themselves caught between the devil and the deep blue sea.
Last week, more than 50% of Allied Farmers shareholders approved the $400 million debt-for-equity purchase of the finance assets of Hanover Finance and United Finance, including a resolution to issue new Allied Farmers shares.
Hanover's 16,500 debenture holders are in an unenviable position of having to decide on Wednesday whether to knock back the Allied offer and continue with the moratorium, which is forecast to pay 70c in the dollar, or in the worst case scenario, see Hanover go into receivership and lose most or all of their remaining investments.
A year ago, under the moratorium plan, Hanover aimed to repay nearly 16,400 secured deposit investors their principal of more than $550 million within five years. Shareholders Mark Hotchin and Eric Watson would inject up to $96 million of cash and property assets.
At the end of June 2008, NZPA reported $485 million of those investments were deposited with Hanover Finance Ltd, while about $68 million were with subsidiary United Finance.
So far, debenture holders have received 6c in the dollar, and under Allied's offer would get the equivalent in shares of 72c in the dollar.
By taking up Allied's offer, Hanover debenture holders would end up with the lion's share of a total 1.5 billion shares on offer, more than 95% of Allied, which Craigs Investment Partners broker Chris Timms said could impact badly on the share price, because of the dilution in value.
"The greatest game of blind man's bluff is under way," Mr Timms said of Allied's cashless $400 million offer for Hanover and United.
Debenture holders would go overnight from having expectations of income and investment security to being shareholders.
He predicted many would sell and get out of Allied.
"Many will want to take the opportunity to bale out as soon as possible, to get their money back. The reality is they won't get 70c."
However, the Allied bid offered the most certainty.
"A receivership fire sale won't be in debenture holders' best interests," he said.
Under the proposal, Allied would benefit from the acquisition of Hanover and United assets, including property loans and real estate valued at $396 million, The New Zealand Herald reported.
The capital injection is timely for Allied, as its balance sheet had taken a battering during the past 12 months with substantial writedowns on its own finance subsidiary's property loan portfolio.
Although only a small proportion of Hanover's assets comprises well-performing loans, Allied's management said the capital injection would aid the company's efforts to gain a respectable credit rating and thereby qualify for the extended Crown Retail Deposit Guarantee, which takes effect next year.
Hanover founder and co-owner Mr Hotchin fronted up at several investor meetings last week, flanked by bodyguards.
Following the Allied decision, its shares plummeted on Thursday from 28c to 20c, as investors cashed out, in the face of "heavy dilution" and having a total 1.5 billion shares in the market, Mr Timms said.
On Friday, the New Zealand stock exchange referred Allied Farmers to the Securities Commission after the shares dropped almost 30%.
Allied has said it was unaware of what drove the decline or who bought and sold 179,000 shares from a total 350,000 which changed hands that day.