The secretive rise of the House of Hanover

Deborah Hill Cone

Friday 26th March 2004 1 Comment

SPECIAL REPORT

For a company that frequently likes to boast it is worth $1 billion and is "the biggest privately owned finance company in New Zealand" Hanover Group doesn't like getting written about.

No, that's not fair. The Hanover guys would love you to write about how they're saving the carnivorous kauri snail in the Maungataniwha Forest. I'm not making this up they put out a press release about it.

They'd be delighted if you'd give their new charity Stand Tall some column centimetres.

They're not averse to stories that make them look like big swinging dicks, such as when they were trying to put the kybosh on GPG's plans for Tower.

They don't even mind smiling for the camera, or gossip columnist Bridget Saunders, at some property developer's sweaty cocktail party. Hell, they'll even take to you to lunch.

But if you want to write anything about Hanover Group itself why it has more than $100 million tied up in related party loans, say, or why it lent money to the sad sacks signing up for conman Henry Kaye's seminars or even the seemingly simple question of why it doesn't file consolidated accounts that's not considered quite so charming.

Maybe it's because, unlike trading banks, no regulatory body particularly watches over non-bank finance companies, making it seem a rude affront when anyone asks questions about Hanover's balance sheet or fails to take at face value its PR speak "we combine operational excellence with a relationship-centric business model and a vision for maximised earnings potential."

A lot of companies don't like scrutiny but Hanover seems to find it genuinely mystifying, even unseemly, in a Princess Di "why are you picking on me?" kind of way.

After all, if you can carry on business without any official watchdog looking over your shoulder and it does you can't help feeling it is presumptuous when a financial adviser, or even worse a journalist, asks to see your accounts that is, all of them, not just the bits they have to show you.

Of course, there is a good reason Hanover's owners, Mark Hotchin and Eric Watson, resist media probing any kind of publicity risks stemming the flow of depositors dollars, which are the lifeblood of the company.

For finance companies, it is vital to keep the cash coming in. Most deposits are short term but some lending, such as to property borrowers which is where 64% of Hanover subsidiary Elders' book goes, is longer term. That means the dollars need to keep being raised from the public, through fixed interest debenture stock and subordinated notes, just to keep the show on the road.

Elders' accounts show at June last year, $175 million of $536 million was either "contractually on demand" or needed to be paid back within the next six months.

Some finance companies get regular deposits only from their own network of friendly financial planners, but Hanover Group also relies heavily on mainstream advertising, on television and in the newspapers particularly the New Zealand Herald to attract deposits from Joe Public, attracted by the higher interest rates.

Like most finance companies it pays an annual "brokerage" fee for financial planners that put their clients' money with Hanover companies across the industry the fee can be anything from 0.25% to 1.5%, paid on an annual basis.

Financial planning company, Northplan, which has about $500 million under management, said it did not use any of the Hanover Group companies because it had looked at them and found the percentage of intercompany loans was too high.

Northplan managing director Kelvin Symes said he sought out smaller finance companies with meticulous financial statements and no intercompany borrowing.

Another, New Zealand Financial Planning, said it "looked for quality products" and would not invest in anything that was not investment grade with a Standard & Poor's rating of BBB and above.

Geoff Matthews of Spicers said Hanover did not meet his firm's criteria from a security or a credit rating viewpoint.

Another financial adviser, who asked not to be named, said he was courted by Hanover but as soon as he asked hard questions "they disappeared."

The National Business Review tried to get some answers to those hard questions:

Consolidated accounts

Why aren't accounts filed for Hanover that would show the consolidated picture for the whole group?

Karen Toner, one of the authors of KPMG's Financial Institution survey laughs when I say I'd like to see the consolidated figures for Hanover Group.

"Wouldn't we all? I think everyone in the industry would like to know that."

The group has a complex structure, with Hanover Group Holdings as the overall holding company and Elders Finance and Nationwide Finance subsidiaries of Hanover Financial Services. Elders is the parent company of subsidiaries United Finance, Leasing Solutions and FAI Finance.

Another finance company, Onesource Finance, is owned by Hanover Group, a separate subsidiary of Hanover Group Holdings.

Asked why accounts are not available for Hanover Group, chairman Mark Hotchin harrumphs: "Hanover is a private company and is not required to publicly report its financial results."

That is certainly correct, but the way Hanover is operated is not so private for example, the company puts all its press releases out in the Hanover name and at the bottom of each one publicly boasts it has assets of $1 billion, although accounts are not provided to back this up.

What information is available shows the Hanover finance companies that do file accounts here Elders, United, FAI and Nationwide had total assets of $848 million at June last year. Other finance subsidiaries, Leasing Solutions and Onesource Finance, which don't solicit deposits from the public, do not file accounts neither do other parts of the Hanover Group such as its property arm, Axis Property Group, or Onesource, which owns technology companies including U-Bix.

This week Hanover put out a statement trumpeting the results of Elders' Australian subsidiary, Australian Finance Direct, the company that lent up to $A15,000 for people to attend conman Henry Kaye's property seminars.

Typically, while Hanover was happy to volunteer that Australian Finance Direct's assets grew from $36 million to $41.3 million in six months, there were no financial statements released. AFD did not take deposits from the public in New Zealand so does not have to, Hanover said.

Intercompany transactions

Why does Hanover have so many transactions between its finance companies?

Consolidation of the related party information available in the accounts filed for Elders, United Finance, FAI Finance and Nationwide Finance shows millions of dollars are being circulated through the companies, including transactions in which one finance company "sells" loans to another.

NBR found 10 separate transactions between the subsidiaries, each of more than $1 million.

Hanover explains there are different reasons this is done. One is that loan agreements or "paper" originated by Onesource or U-Bix to fund customers to buy Xerox machines or whatever is generated by a separate company from the finance company, such as United Finance.

Another is that surplus cash in one company can be moved to another, or placed on deposit with a bank, as part of the management of the finance company's liquidity profile. Hanover had $70 million in cash across all its companies, Hanover chief executive Kerry Finnigan said.

The company's legal counsel, Karen Dwyer, said deals like this did not even require the consent of the trustee because they were in the normal course of business.

But as any accountant will tell you, intercompany loans can obscure the state of a company's true financial situation. Certainly, investors who might like to assure themselves there isn't any "stringing" or "hydraulicking" going on, would find consolidated accounts useful.

Stringing or hydraulicking is industry slang used to describe the way a finance company might use one loan book as equity to raise another. The result is a complex structure that is more highly leveraged than it is possible to see from the available information. There is no suggestion Hanover is doing this, but a full set of accounts would help to put investors' minds at rest.

Asked about the intercompany loans, Mr Hotchin pointed to each finance company's trust deed as well as the signoff from auditors KPMG as reasons investors should be reassured.

Although the auditors were able to sign off the audit report for Elders Finance accounts for the year to June 30 only a month later on July 31, it took four months to complete the audits of the other companies.

"Was there some dispute?" University of Canterbury accountancy lecturer Alan Robb wondered. KPMG managing partner Jan Dawson said nothing sinister should be read into the timing "it's a scheduling issue, different companies have different time schedules and different priorities." Elders accounts were signed off earlier than had been scheduled and it was not necessary to see the other accounts first, Ms Dawson said.

Related party transactions

Why is there such a high ratio of related party transactions?

NBR has drawn attention to this in the past (NBR, Feb 1, 2002), when Hanover defended its level of related party lending, but since then the amount going to related parties has ramped up significantly.

The extent of related party transactions is important because it shows how much exposure the company has to interests linked to its owners, including millions of dollars lent to Hanover's property arm, Axis Property Group.

"A prudent financier has no related party lending," one banking source said.

The most recent publicly available Elders accounts, for the year to June 2003, show related party transactions of $93.5 million, up from $83.6 million in 2002, and $67.7 million in 2001.

The largest single related party transaction disclosed on the Elders books was $22.4 million, which was paid by Elders to Hanover Financial Services, its parent. As Hanover Financial Services does not have to file accounts, it is impossible to know where this money ultimately went.

United Finance's accounts reveal a further $33.9 million in related party transactions and Nationwide Finance's reveal a further $13.8 million.

KPMG's Ms Dawson said it was naïve to say a finance company should have no related party lending. "On that basis they wouldn't bank with BNZ or deal with UDC."

Mr Hotchin said he had not heard any concerns raised about the level of related party lending, other than in articles published in NBR. "It's the first I've heard of it."

Mr Finnigan said Hanover got about $300 million from financial advisers. "I don't think we would have that level of support from them [if they had concerns]."

Liquidity

The most important thing to a finance company is its liquidity. That's why it is hard to understand why Hanover last year chose to tie up $47 million buying a stake in listed insurer Tower.

A subsidiary, United Healthcare, also paid $17.4 million to buy a stake in listed retirement home operator Metlifecare from Mr Watson.

Shares are not generally considered a liquid investment and if investors wanted to take a punt on Tower, they are quite free to do it themselves by buying shares on the market. But Mr Hotchin said Tower was a strategic investment and Hanover would achieve a capital gain of $15 million if the investment were realised now.

"Hanover Group cannot foresee the need to dispose of these shares in a hurry, however. Tower shares could not be called illiquid, with more than 50 million shares traded in Tower last month alone."

Last year Hanover's shareholders took $17.7 million in dividends $14.7 million in cash and three million of in shares from Elders alone.

That seemed curious, given that in November 2001 Mr Hotchin had told me: "Eric [Watson] never wants to take money out of this company. He's not a big believer in dividends and/or the removal of money from companies."

Mr Hotchin said dividends were paid from after-tax profits and were "used within the group as required." Presumably the next set of accounts will show how much of the $14.7 million cash was ploughed back into the business and how much went into Mr Hotchin's and Mr Watson's pockets.

Independent directors

Why doesn't Hanover or any of its finance subsidiaries have any independent directors? The finance companies have identical boards made up of Mr Hotchin, Hanover chief executive Kerry Finnigan and Eric Watson's longtime lieutenant Maurice Kidd. Accountants Leslie Archer, Dwayne McGorman and Michael Ross sit in as alternatives for the trio.

Given Hanover's professed concern about corporate governance, why doesn't it have any independent directors to give investors confidence that someone is looking out for their interests rather than solely the owner's?

Mr Hotchin's initial answer was that "Hanover is a private company." He added the board had advisers who attended board meetings and actively assisted in areas such as governance, treasury management, audit committees, planning and compliance.

But when pressed, he said within a week the directors would be able to announce that "one of New Zealand's most respected businessmen," with a particular reputation in corporate governance, would be joining the board.

On another front, Elders is fighting a High Court case taken by the former owners of the Elders brand, represented by QC Robert Fardell, seeking to stop it using the name.

The Elders name represents all that is steady and solid about heartland, farming New Zealand but this is certainly not an accurate representation of Elders any longer.

Its most recent annual accounts reinforce the old impression, saying Elders' business is to accept deposits and lend them to "rural and commercial businesses." In fact only 5% of Elders' loan book goes to rural borrowers.

In contrast, 64% is lent to property developers and investors and a further $112 million or 24% is lent to the amorphous-sounding category of "financial, insurance and professional" borrowers.

Hanover's next set of accounts for the six month to December 31 are being prepared now. Unless Mr Watson and Mr Hotchin have decided to amalgamate their companies into one easy to understand package, they may have to steel themselves for that annoying scrutiny for some time to come.

Comments from our readers

On 16 December 2010 at 9:45 am James said:

Very interesting to read this article, written in early 2004, with respect to what has happened to Hanover Finance since, and the behaviour of the criminals Mark Hotchin and Eric Watson.