Hanover Em Book Final

Explanatory Memorandum and Notices of Meeting F o r H a n ov e r F i n a n c e S e c u r e d D e p o s i to r s , U n i t e d F i n a n c e S e c u r e d S t o c k h o ld e r s , H a n o v e r F i n a n c e S u b o r d i n at e d N o t e h o ld e r s a n d H a n o v e r C a p i ta l B o n dh o ld e r s t o c o n s i d e r E x t r ao r d i n a ry R e s o l u t i o n s to a p p rov e a p r o p o s a l f r o m All i e d Fa r m e r s L i m i t e d .

The Directors unanimously recommend that investors VOT E IN FAVOUR of the Extraordinary Resolutions

Date:

Wednesday 16 December 2009

Time:

10.30am (New Zealand time)

Location: Newmarket Room, Ellerslie Event Centre 80 - 100 Ascot Avenue, Greenlane East Auckland, New Zealand This is an important document and requires your attention. You should read the whole document before you decide whether and how to vote on the Extraordinary Resolutions.

november 2009

TABLE OF CONTENTS

Chairman’s letter The New Zealand Guardian Trust Company Limited letter Hanover Finance Limited Depositors’ Notice of Meeting United Finance Limited Stockholders’ Notice of Meeting Hanover Finance Limited Subordinated Noteholders’ Notice of Meeting Hanover Capital Limited Bondholders’ Notice of Meeting Explanatory Memorandum 1. Introduction 2. Overview of the Allied Farmers Proposal 3. Extraordinary Resolutions 4. Outcomes for Investors 5. Taxation 6. Important Information for Overseas Investors 7. Disclosures 8. Glossary of Terms 9. Directory Grant Samuel independent expert report

Important Dates Last date for receipt of Proxy Forms for all investors

10.30am on 15 December 2009

Meetings of investors

10.30am on 16 December 2009

Additional Information To assist all investors in evaluating the Allied Farmers Proposal, the following documents accompany this Explanatory Memorandum: •

a copy of the Grant Samuel independent expert report prepared for investors on the merits of the Allied Farmers Proposal (later in this booklet);

•

Allied Farmers Simplified Disclosure Prospectus relating to the issue of shares (in a separate document).

In addition to the information contained in this Explanatory Memorandum, and the accompanying documents, investors can access additional information, including the companies’ audited financial statements as at 30 June 2009 and the trust deeds applying to each investment free of charge during normal business hours at the registered office of Hanover (Level 4, 520 Queen Street, Auckland) or on Hanover’s website www.hanover.co.nz. Further information about Allied Farmers may be accessed on its website, www.alliedfarmers.co.nz. Capitalised terms are either defined within the text or in the Glossary of Terms near the end of this document.

[Hanover logo]

23 November 2009 ALLIED FARMERS PROPOSAL Dear Investor The purpose of this Explanatory Memorandum and accompanying documents is to assist your review of the proposal put forward by Allied Farmers Limited. Allied Farmers seeks to acquire the finance assets of Hanover Finance Limited and United Finance Limited, and to this end wishes to acquire the secured deposits, secured stock, subordinated notes and capital bonds issued by Hanover, United and Hanover Capital in exchange for shares in Allied Farmers. What this means for investors is that they will, if they approve the Allied Farmers Proposal and it is implemented, exchange their investments in Hanover, United and Hanover Capital, including their scheduled payment entitlements and support under the Debt Restructure implemented in December 2008, for ordinary shares in Allied Farmers. This should provide greater liquidity and an equity return to investors. Allied Farmers is a rural services and finance group operating throughout New Zealand, with over 90 years experience providing livestock trading, rural merchandise, finance, and real estate services. Allied Farmers is listed on the NZSX and currently has approximately 5,200 shareholders. Allied Farmers’ 100% subsidiary Allied Nationwide Finance Limited has been providing diversified investment and finance solutions to New Zealanders for over 30 years. The enclosed Grant Samuel independent expert report (see later in this booklet) provides an independent expert’s views on the merits of the Allied Farmers Proposal. We recommend you read this independent report. We also suggest you consider the letters written by the Trustees, The New Zealand Guardian Trust Company Limited and Perpetual Trust Limited. The NZGT Letter is set out following this letter. Perpetual will send its letter to investors separately. We’ll be holding a formal meeting in Auckland for you to vote on the proposals. The date of this meeting will be 16 December 2009. The directors of Hanover, United and Hanover Capital unanimously recommend approval of the Allied Farmers Proposal. This recommendation follows a careful review of the companies’ forward cashflow projections, the content of the Allied Farmers Proposal and the Grant Samuel independent expert report. We are of the view that Allied Farmers has the potential to add real value enhancement to the Hanover and United loan and property assets that is not possible under the Debt Restructure because of the cash constraints imposed by the repayment schedule. These value enhancements potentially include: •

An ability to provide ongoing funding support to complete property developments commenced by borrowers with Hanover/United and senior lender support. There are a number of impaired loans where the developer cannot finish the property development through lack of funding.

•

An ability to negotiate with prior ranked lenders over borrower’s assets in order to ensure an orderly realisation over time. There are a number of impaired loans where Hanover/United are not in a position to control an orderly realisation to obtain best value due to a prior ranking security holder.

2

•

An ability to pay down the first mortgages over the Axis property assets transferred under the Debt Restructure Shareholder Support Package, which otherwise cause increased 2 pressure on cash flow and the realisation programme for these assets.

• An ability to pay down the first over the Axis property transferred under We believe that Allied Farmers will mortgages be better placed to achieve higher assets realisation values for the Debt Restructure Shareholder Support Package, which otherwise cause increased investors over the long term as it will be able to arrange new funding, and use the proceeds pressure on cash flow the realisation programme these assets. from asset realisations, toand support the business instead offor using such proceeds to meet the short term repayments required under the Debt Restructure. We believe that Allied Farmers will be better placed to achieve higher realisation values for investors over the long term as be ablewhere to arrange new funding, andofuse proceeds We note our investor update on it9 will November we advised investors thethe directors from asset realisations, to support the business instead of using such proceeds to meet estimated repayments to investors of 70 cents per dollar for HFL Secured Depositors, 90the cents short term repayments required under the Debt Restructure. per dollar for UFL Secured Stockholders and no forecast repayment for HFL Subordinated Noteholders or HCL Bondholders. The conversion values reflected in the Allied Farmers We note our onthese 9 November investors that of the directors Proposal are investor equal to update or above values. where There we canadvised be no assurance shares issued to estimated repayments to investors of 70 cents per dollar for HFL Secured Depositors, investors under the Allied Farmers Proposal will be able to be sold at the issue price. 90 cents per dollar for UFL Secured Stockholders and no forecast repayment for HFL Subordinated Noteholders orrejection HCL Bondholders. The conversion values reflected ainmatter the Allied Farmers Acceptance or of the Allied Farmers Proposal is however for individual Proposal are equal to or above these values. There can be no assurance that shares issued to investors based on their own view as to value, future property and share market conditions, investors under the Allied Farmers Proposal will be able to be sold at the issue price. risk profile, liquidity preference, taxation position and other factors. Acceptance rejection of the Allied Farmers Proposal is however matter for individual On balanceorthe independent directors, David Henry and DesaHammond are of the investors based on their own view as to value, future property and share conditions, view that approval of the Allied Farmers Proposal is likely to be in market the best interests risk profile, liquidity preference, taxation position and other factors. of all classes of investors. On balance independent Henry andcast Desa Hammond If you are notthe able to attend thedirectors, meeting inDavid person, you can proxy vote, are and of wethe view that approval of the Allied Farmers Proposal is likely to be in the best interests strongly encourage you to do so. Details of how to do this are included on the enclosed proxy of all classes of investors. forms. If are not able to attend theon meeting person, can cast a proxy vote, and we If you you’d like further information any of in the above you matters, please call the contact centre on strongly encourage you to do so. Details of how to do this are included on the enclosed proxy 0800 353 377 or +64 9 357 2600 if calling from overseas. forms. Yours sincerely, If you’d like further information on any of the above matters, please call the contact centre on 0800 353 377 or +64 9 357 2600 if calling from overseas. Yours Davidsincerely, Henry Independent Chairman David Henry Independent Chairman

Level 4, 520 Queen Street, Private Bag 92-129, Victoria Street West, Auckland 1142, New Zealand | Ph: +64 9 362 7070 | Fax: +64 362 7071 | www.hanover.co.nz

23 November 2009

Dear Deposit Holder HANOVER FINANCE SECURED DEPOSITS Hanover Finance Limited (the “Company”) has called a meeting of Secured Depositors to consider a proposal it has received from Allied Farmers Limited (the “Proposal”) which comprises of: a. Cancelling Cancelling 22 22 cents cents of of each each $1 $1 Secured Secured Deposit Deposit owing owing to to the the Deposit Deposit Holders; Holders; b. Immediately following the cancellation, approving the exchange of 72 cents of each $1 Secured Deposit for ordinary shares of Allied Farmers Limited (“Allied”) (note the remaining 6 cents of each $1 Secured Deposit has already been paid to Secured Depositors); c. Approving the sale of substantially all of the assets of the Company to Allied and directing the Trustee to release its security over those assets; and d. Instructing the Trustee to release the Company, HFP Investments Limited and its subsidiaries and the ultimate shareholders of the Company from the security and other support provided by them in respect of the debt restructuring completed by the Company in December 2008. An independent expert’s report considering the merits of the Proposal has been prepared by Grant Samuel and is part of the package of meeting papers. We strongly encourage you to read this report. We note that the directors of the Company have previously estimated the recoverable value of the Secured Deposits at 70 cents (inclusive of the 6 cents already paid) per $1 Secured Deposit. There is uncertainty as to the values of the assets of the Company in the current property market and the Company has several loan exposures which each exceed approximately 10% of its assets and the performance of these loans will therefore have a significant impact on future cash availability. Prior to the Allied Proposal and the announcement of the Company’s audited results, management of the Company had provided financial projections for the duration of the moratorium which forecast net realisations from loans (adjusted for the inclusion of shareholder support assets) of 66 cents and an optimistic case assuming some market recovery of 82 cents. The offer by Allied at 72 cents needs to be considered with reference to this range of forecasted outcomes.

Auckland Vero Centre, 48 Shortland Street, Auckland 1010 PO Box 1934, Shortland Street, Auckland 1140, New Zealand Telephone: (09) 377 7295, Facsimile: (09) 377 7474 Email: [email protected] www.guardiantrust.co.nz

The move from holding Deposits to holding shares represents a significant change for Depositors and the main features of both types of securities are set out in Section 6.4 of the Independent Report, with some of the key differences summarised below:

Regular payments and returns

Ability to sell investment

Deposits

Shares

Depositors are entitled to repayments under a schedule approved by Depositors of: 8 cents in total in 2009, 10 cents in 2010, 12 cents in 2011, 35 cents in 2012, and 35 cents in 2013.

No requirement for a regular payment but shareholders receive a payment if the directors of Allied declare a dividend on the shares or if the shareholders choose to sell some or all of their shares (see below).

Notwithstanding this, it is generally acknowledged that it is unlikely that the Company will be in a position to meet all repayments as initially scheduled. There is currently no secondary market in which to sell Deposits.

Absent dividends, the ability of shareholders to recover their investment is dependent on the price they can receive in selling some or all of their shares. Shareholders may sell all or a proportion of their shares as the shares are listed on the NZSX. Shares can move up in value but can also move down – see Section 6.4 of the Independent Report for further commentary on market movements. Shares can be sold on the share market via a share broker for the market value of the day.

Security

The Deposits are secured over the assets of the Company which must comply with the covenants set out in the trust deed. Any breach of those covenants enables the trustee to take enforcement action.

Shares rank behind all liabilities of Allied.

On enforcement against the Company’s assets, the claims of Depositors rank ahead of all other liabilities of the Company (other than prior charges).

On the whole, after considering all the relevant factors, Grant Samuel have concluded in their report that the Proposal is superior to the status quo and the outcome from a receivership, were that to occur. Grant Samuel also note that in their view an alternative superior offer for the Company’s assets is unlikely. You should also note that, if the Proposal is approved and you decide to immediately sell your shares, Grant Samuel consider that it is likely that the shares will sell at a materially lower price than the price at which they were issued in the short term and that this lower price may persist for a lengthy period. If this were to occur, this would mean that Secured Depositors will possibly receive less than 72 cents per $1 Secured Deposit from the sale of their new shares. Secured Depositors who hold their shares for the long term will participate in any potential increase in the values of those shares over time.

The directors of the Company consider that the Proposal has potential to add real value enhancement to the loan and property assets being transferred, as Allied is expected to have a greater access to cash than is currently available to the Company. This is expected to enable Allied to take a longer term view in managing those assets and to have a broader range of options in restructuring those assets to improve recovery values. Depositors should also note that the Proposal includes part of the original Support Package as follows: Shareholder Support

$10m cash injection Axis Property Group properties and subordinated interest free advance to HFP Investments Commitments from entities associated with the Shareholders – uncalled and not required to be paid in certain circumstances TOTAL

Directors Assessed Value – December 2008 $10m

PwC Assessed Value – December 2008 $10m

Total Attributed by Allied for the Shareholder Support Package $10.5m (includes interest) $34m

$66m

$26m

$20m

$0 -$20m

Is not part of the Proposal

$96m

$36m $56m

$44.5m

Should the Proposal not be approved then the Company will continue under the current arrangement and the next quarterly payment of 2 cents per $1 Secured Deposit is due to be paid on 31 December 2009. The Grant Samuel report states that, should the status quo remain, there is every likelihood that the Company will end in receivership. Based on the information we have received and our review of the Company, we consider the Company is currently complying with the terms of the Debt Restructuring Plan but, based on the latest audited financial statements, there is little likelihood that Secured Depositors will be repaid in full and if there is further deterioration in the asset values then receivership is a real possibility. In considering this Proposal you will need to consider your own circumstances and in particular you will need to weigh up the prospect of a regular payment under the current arrangements, and the opportunity provided by this Proposal for an investment in Allied which may be traded on the stock market at the prevailing market price. If you are an overseas holder who is unable to prove by 31 January 2010 that you can legally hold the shares issued by Allied, you are likely to be disadvantaged by the Proposal as these shares will be sold on your behalf promptly after 31 January 2010. Grant Samuel considers that it is likely that the shares will sell at a materially lower price than the price at which they were issued in the short term. We believe this is a very important transaction for the Company and for Secured Depositors. It is important to consider carefully the position of retaining the status quo and the Proposal offered by Allied and further the consequences of holding secured deposits as against holding shares. You should also consider carefully the Notice of Meeting, the Explanatory Memorandum and the Independent Report and we would urge you to take independent advice. If the Proposal is approved by extraordinary resolution at the meeting and its conditions are satisfied, you will become a shareholder of Allied and will cease to have any claim against the Company, its residual assets or rights, or any shareholder support regardless of whether you voted in favour of the resolution or not.

We would therefore encourage you to attend the meeting on 16 December 2009 but if you are unable to do so personally, we recommend that you complete the proxy form. You may elect the Chairman to act as your proxy however if you do not tick the box to record which way you would like the Chairman to vote, the Chairman will vote in favour of the resolution. Yours faithfully

B D Connor General Manager Corporate Trusts

HANOVER FINANCE LIMITED DEPOSITORS’ NOTICE OF MEETING

NOTICE OF MEETING OF HANOVER FINANCE LIMITED SECURED DEPOSITORS NOTICE IS GIVEN that a meeting of holders of Secured Deposits (the Depositors) of Hanover Finance Limited (the Company) issued pursuant to a trust deed (the Trust Deed) dated 18 July 1985 (as amended) between the Company and The New Zealand Guardian Trust Company Limited (the Trustee), will be held at Auckland on 16 December 2009, at 10.30am at the Newmarket Room, Ellerslie Event Centre, 80-100 Ascot Avenue, Greenlane East, Auckland, New Zealand, to consider and, if thought fit, pass as an Extraordinary Resolution, the resolution set out below. EXTRAORDINARY RESOLUTION: ALLIED FARMERS PROPOSAL It is hereby resolved, by way of Extraordinary Resolution (subject to the conditions set out below) to, among other things: (a) cancel part of the amount owing to the Depositors; (b) immediately following that cancellation, approve the exchange of their Deposits for ordinary issued shares of Allied Farmers Limited (Allied Farmers); (c) approve the sale of substantially all of the assets of the Company to a subsidiary of Allied Farmers and direct the Trustee to release its security over those assets; and (d) instruct the Trustee to release the Company, HFP Investments Limited and its subsidiaries and the ultimate shareholders of the Company (Hotchin Investments Limited, Forefront Investments Limited, Mark Hotchin and Eric Watson) from the security and other support provided by them in support of the debt restructuring completed by the Company in December 2008. Specifically, it is resolved by way of Extraordinary Resolution, subject to the conditions set out below: 1.

That the Allied Farmers Proposal (as described in the Explanatory Memorandum dated 23 November 2009 sent to Depositors with the notice of meeting in relation to this Extraordinary Resolution) be ratified, confirmed and approved.

2.

That, without limiting paragraph 1: a.

The Company is released from the payment of 22 cents of each $1.00 of principal amount of the Deposits outstanding as at 31 December 2008;

b.

The Deposits (following the above release) be exchanged for an issue of fully paid ordinary shares in Allied Farmers Limited (the “Allied Farmers Shares”) at a price per share of the volume weighted average price of price setting trades through the NZSX market in the five trading days prior to 16 December 2009 (to be issued pro rata between Depositors by reference to the outstanding principal amount due to them by the Company on their Secured Deposits (following the above release) with entitlements to Allied Farmers Shares of more than 0.25 being rounded up and entitlements to Allied Shares of 0.25 or less being rounded down) as more particularly described in the Explanatory Memorandum;

c.

The Trustee is directed and authorised to consent to the sale (directly or indirectly) by the Charging Group to a subsidiary of Allied Farmers of substantially all of the Charged Assets in the manner contemplated by the Allied Farmers Proposal (“Sale Assets”) and in respect of that sale to: i.

subject to being indemnified to its satisfaction, release the security constituted by the Trust Deed over the Sale Assets;

ii.

accept the endorsement by the Company of a promissory note issued by the Allied Farmers subsidiary as satisfaction of the Company’s obligations to repay the Secured Liabilities;

iii.

subject to being indemnified to its satisfaction, grant releases of and provide any instructions necessary to terminate the Support Arrangements (as defined in clause 8.13 of the Trust Deed) and/or permit the transfer of those assets in the manner contemplated by the Allied Farmers Proposal,

in each case as contemplated by the Allied Farmers Proposal and as more particularly described in the Explanatory Memorandum;

1374822.3

2

d.

The Trustee is directed and authorised to accept the benefit of a deed poll in relation to

the delivery of the Allied Farmers Shares to Depositors. 3.

That, subject to the completion of all transactions contemplated by the Allied Farmers Proposal, the Trustee is authorised and directed to release the Company from its obligations under the Trust Deed (save for any obligations thereunder that are, or are expressed to be, continuing in nature).

4.

That the Trustee be directed and authorised, and the Company be authorised, to enter into all documents and take all steps as may be required to give effect to the Allied Farmers Proposal including, without limitation, the release of the Trustee from any obligations it has under the Transaction Document (as defined in clause 1.02 of the Trust Deed).

The Extraordinary Resolution set out above is conditional on: (a)

approval by the holders of secured stock issued by United Finance Limited of the Extraordinary Resolution proposed to them by United Finance Limited as set out in the Explanatory Memorandum;

(b)

approval by the holders of subordinated notes and bonds issued by Hanover Finance Limited and Hanover Capital Limited respectively, of the Extraordinary Resolutions proposed to them by Hanover Finance Limited and Hanover Capital Limited as set out in the Explanatory Memorandum; and

(c)

Allied Farmers and the Company providing notice in writing to the Trustee confirming that all Conditions (as defined in the Agreement for Assignment of Finance Assets in Exchange for Debenture Obligations dated 17 November 2009 between Allied Farmers and the Company (amongst others)) have been satisfied or waived in accordance with their terms.

NOTES If the Extraordinary Resolution is passed and the conditions of the implementation of the Allied Farmers Proposal are satisfied, all Depositors (whether or not they vote in favour of the Extraordinary Resolutions) will become shareholders of Allied Farmers Limited and will cease to have any claims on the Company. Other meetings The meeting of Depositors is intended be held contemporaneously with meetings of subordinated noteholders of Hanover Finance Limited, bondholders of Hanover Capital Limited and secured stockholders of United Finance Limited (in each case subject to requisite quorum requirements). Resolution The resolution will be put as an Extraordinary Resolution and, if passed, be binding on all Depositors. The quorum for the meeting shall be Depositors present in person or by representative holding or representing a majority in nominal amount of the Deposits. If within half an hour after the time appointed for the meeting a quorum is not present, the meeting shall be adjourned to such day and time not being less than 14 days thereafter and to such place as may be appointed by the Chairman. At such adjourned meeting the Depositors present in person or by representative and entitled to vote, whatever the value of the Deposits held by them, shall be a quorum for the transaction of business including the passing of Extraordinary Resolutions. Notice of any such adjourned meeting shall be given in the same manner (except in respect of the period of notice) as that of an original meeting and such notice shall state that the Depositors present in person or by representative at the adjourned meeting whatever their number and whatever the amount of Deposits held by them shall form a quorum. Voting Voting at the meeting shall be decided by a poll of Depositors. Each Depositor who is present at the meeting in person or by proxy, attorney or representative shall have one vote for every $1.00 of nominal amount of Deposits of which they are the Depositor. For the Extraordinary Resolution to be passed, not less than 75% of the votes given on such a poll must be voted in favour of the Extraordinary Resolution. A Depositor who is an individual may vote personally or by his/her representative (being a person appointed by an instrument by way of proxy or by power of attorney). A Depositor that is a company may vote by its representative (being a person appointed by an instrument by way of proxy or power of attorney or a person authorised by the directors of that Depositor company). A representative need not be a Depositor and shall have the right to speak at the meeting.

3 In the case of joint Depositors, the vote of the senior holder who tenders a vote (whether in person or by representative) shall be accepted to the exclusion of the votes of the other joint Depositor(s). Seniority shall be determined by the order in which names stand in the register of Depositors. A Proxy Appointment Form for use at the meeting is enclosed with this notice of meeting. See the instructions below and on the Proxy Appointment Form for an explanation of how to use the Proxy Appointment Form. You should bring the Proxy Appointment Form to the meeting as it also constitutes your voting paper. If the Deposits are held jointly, all Depositors should sign the Proxy Appointment Form. If Deposits are held by a company, a representative should bring to the meeting evidence that he or she is authorised to act on behalf of the company. If you have decided how you will vote on the Extraordinary Resolution and do not intend to attend the meeting, you should complete and sign the Proxy Appointment Form and deposit it with the Company by: •

posting it to Hanover Finance Limited, Private Bag 92119, Auckland 1142, New Zealand;

•

faxing it to +64 9 488 8787; or

•

delivering it to Level 2, 159 Hurstmere Road, Takapuna, Auckland (c/- Computershare Investor Services Limited),

in each case so as to be received by the Company by no later than 10.30am on 15 December 2009. If you direct your proxy how to vote, the person you appoint as proxy will be entitled to attend the meeting to represent your interests, but will not be issued with voting papers. Your vote will be automatically counted on a poll. If you appoint your proxy with a discretion on how to vote, your proxy will be issued voting papers and will need to vote. If your proxy does not attend the meeting your vote will not be counted. You may therefore wish to appoint as an alternate to your named proxy “The Chairman of the Meeting”. You may name “The Chairman of the Meeting” as your sole proxy if you wish. If you omit to name a person as proxy you will be deemed to appoint the Chairman of the Meeting as your proxy. The Chairman of the Meeting intends to vote Proxies marked “Proxy discretion” (or any proxy form where, in relation to how the proxy is to be voted, the form is invalid) in favour of all resolutions. The Trustee may in its absolute discretion at any time accept and elect to treat as valid any instrument of proxy notwithstanding that it is received or produced at a place other than that specified above or out of time. Defined terms Terms defined in the Trust Deed have the same meaning in this notice of meeting and these notes.

UNITED FINANCE LIMITED STOCKHOLDERS’ NOTICE OF MEETING

NOTICE OF MEETING OF UNITED FINANCE LIMITED SECURED STOCKHOLDERS NOTICE IS GIVEN that a meeting of holders of Secured Stock (the Stockholders) of United Finance Limited (the Company) issued pursuant to a trust deed (the Trust Deed) dated 12 March 2002 (as amended) between the Company and Perpetual Trust Limited (the Trustee), will be held at Auckland on 16 December 2009, at 10.30 am at the Newmarket Room, Ellerslie Event Centre, 80-100 Ascot Avenue, Greenlane East, Auckland, New Zealand, to consider and, if thought fit, pass as an Extraordinary Resolution, the resolution set out below. EXTRAORDINARY RESOLUTION: ALLIED FARMERS PROPOSAL It is hereby resolved, by way of Extraordinary Resolution (subject to the conditions set out below) to, among other things: (a) cancel part of the amount owing to the Stockholders; (b) immediately following that cancellation, approve the exchange of their Secured Stock for ordinary issued shares of Allied Farmers Limited (Allied Farmers); (c) approve the sale of substantially all of the assets of the Company to a subsidiary of Allied Farmers and direct the Trustee to release its security over those assets; and (d) instruct the Trustee to release the Company, HFP Investments Limited and its subsidiaries and the ultimate shareholders of the Company (Hotchin Investments Limited, Forefront Investments Limited, Mark Hotchin and Eric Watson) from the security and other support provided by them in support of the debt restructuring completed by the Company in December 2008. Specifically, it is resolved by way of Extraordinary Resolution, subject to the conditions set out below: 1.

That the Allied Farmers Proposal (as described in the Explanatory Memorandum dated 23 November 2009 sent to Stockholders with the notice of meeting in relation to this Extraordinary Resolution) be ratified, confirmed and approved.

2.

That, without limiting paragraph 1: a.

The Company is released from the payment of 10 cents of each $1.00 of principal amount of the Secured Stock outstanding as at 31 December 2008;

b.

The Secured Stock (following the above release) be exchanged for an issue of fully paid ordinary shares in Allied Farmers Limited (the “Allied Farmers Shares”) at a price per share of the volume weighted average price of price setting trades through the NZSX market in the five trading days prior to 16 December 2009 (to be issued pro rata between Stockholders by reference to the outstanding principal amount due to them by the Company on their Secured Stock (following the above release) with entitlements to Allied Farmers Shares of more than 0.25 being rounded up and entitlements to Allied Shares of 0.25 or less being rounded down) as more particularly described in the Explanatory Memorandum;

c.

The Trustee is directed and authorised to consent to the sale (directly or indirectly) by the Charging Group to a subsidiary of Allied Farmers of substantially all of the Charged Assets in the manner contemplated by the Allied Farmers Proposal (“Sale Assets”) and in respect of that sale to: i.

subject to being indemnified to its satisfaction, release the security constituted by the Trust Deed over the Sale Assets;

ii.

accept the endorsement by the Company of a promissory note issued by the Allied Farmers subsidiary as satisfaction of the Company’s obligations to repay the Stock Indebtedness;

iii.

subject to being indemnified to its satisfaction, grant releases of and provide any instructions necessary to terminate the Support Arrangements (as defined in clause 16.13 of the Trust Deed) and/or permit the transfer of those assets in the manner contemplated by the Allied Farmers Proposal,

in each case as contemplated by the Allied Farmers Proposal and as more particularly described in the Explanatory Memorandum;

Document Number: 13748381374838

2

d.

The Trustee is directed and authorised to accept the benefit of a deed poll in relation to the delivery of the Allied Farmers Shares to Stockholders.

3.

That, subject to the completion of all transactions contemplated by the Allied Farmers Proposal, the Trustee is authorised and directed to release the Company from its obligations under the Trust Deed (save for any obligations thereunder that are, or are expressed to be, continuing in nature).

4.

That the Trustee be directed and authorised, and the Company be authorised, to enter into all documents and take all steps as may be required to give effect to the Allied Farmers Proposal including, without limitation, the release of the Trustee from any obligations it has under the Transaction Document (as defined in clause 1.2 of the Trust Deed).

The Extraordinary Resolution set out above is conditional on: (a)

approval by the holders of secured deposits issued by Hanover Finance Limited of the Extraordinary Resolution proposed to them by Hanover Finance Limited as set out in the Explanatory Memorandum;

(b)

approval by the holders of subordinated notes and bonds issued by Hanover Finance Limited and Hanover Capital Limited respectively, of the Extraordinary Resolutions proposed to them by Hanover Finance Limited and Hanover Capital Limited as set out in the Explanatory Memorandum; and

(c)

Allied Farmers and the Company providing notice in writing to the Trustee confirming that all Conditions (as defined in the Agreement for Assignment of Finance Assets in Exchange for Debenture Obligations dated 17 November 2009 between Allied Farmers and the Company (amongst others)) have been satisfied or waived in accordance with their terms.

NOTES If the Extraordinary Resolution is passed and the conditions of the implementation of the Allied Farmers Proposal are satisfied, all Stockholders (whether or not they vote in favour of the Extraordinary Resolutions) will become shareholders of Allied Farmers Limited and will cease to have any claims on the Company. Other meetings The meeting of Stockholders is intended to be held contemporaneously with meetings of secured depositors and subordinated noteholders of Hanover Finance Limited, and bondholders of Hanover Capital Limited (in each case subject to requisite quorum requirements). Resolution The resolution will be put as an Extraordinary Resolution and, if passed, be binding on all Stockholders. The quorum for the meeting shall be Stockholders present in person or by representative holding or representing a majority in principal amount of the Stock. If within half an hour after the time appointed for the meeting a quorum is not present, the meeting shall be adjourned to such day and time not being less than 14 days thereafter and to such place as may be appointed by the Chairman. At such adjourned meeting the Stockholders present in person or by representative and entitled to vote, whatever the principal amount of the Stock held by them, shall be a quorum for the transaction of business including the passing of Extraordinary Resolutions. Notice of any such adjourned meeting shall be given in the same manner (except in respect of the period of notice) as that of an original meeting and such notice shall state that the Stockholders present in person or by representative at the adjourned meeting whatever their number and whatever the amount of Stock held by them shall form a quorum. Voting Voting at the meeting shall be decided by a poll of Stockholders. Each Stockholder who is present at the meeting in person or by proxy, attorney or representative shall have one vote for every $1.00 of the principal amount of Stock of which they are the Stockholder. For the Extraordinary Resolution to be passed, not less than 75% of the votes given on such a poll must be voted in favour of the Extraordinary Resolution. A Stockholder who is an individual may vote personally or by his/her representative (being a person appointed by an instrument by way of proxy or power of attorney). A Stockholder that is a company may vote by its representative (being a person appointed by an instrument by way of proxy or by power of attorney or a person authorised pursuant to the Stockholder company’s constitution). A representative need not be a Stockholder and shall have the right to speak at the meeting.

3 In the case of joint Stockholders, the vote of the senior holder who tenders a vote (whether in person or by representative) shall be accepted to the exclusion of the votes of the other joint Stockholder(s). Seniority shall be determined by the order in which names stand in the register of Stockholders. A Proxy Appointment Form for use at the meeting is enclosed with this notice of meeting. See the instructions below and on the Proxy Appointment Form for an explanation of how to use the Proxy Appointment Form. You should bring the Proxy Appointment Form to the meeting as it also constitutes your voting paper. If the Stock is held jointly, all Stockholders should sign the Proxy Appointment Form. If the Stock is held by a company, a representative should bring to the meeting evidence that he or she is authorised to act on behalf of the company. If you have decided how you will vote on the Extraordinary Resolution and do not intend to attend the meeting, you should complete and sign the Proxy Appointment Form and deposit it with the Company by: •

posting it to United Finance Limited, Private Bag 92119, Auckland 1142, New Zealand;

•

faxing it to +64 9 488 8787; or

•

delivering it to Level 2, 159 Hurstmere Road, Takapuna, Auckland (c/- Computershare Investor Services Limited),

in each case so as to be received by the Company by no later than 10.30am on 15 December 2009. If you direct your proxy how to vote, the person you appoint as proxy will be entitled to attend the meeting to represent your interests, but will not be issued with voting papers. Your vote will be automatically counted on a poll. If you appoint your proxy with a discretion on how to vote, your proxy will be issued voting papers and will need to vote. If your proxy does not attend the meeting your vote will not be counted. You may therefore wish to appoint as an alternate to your named proxy “The Chairman of the Meeting”. You may name “The Chairman of the Meeting” as your sole proxy if you wish. If you omit to name a person as proxy you will be deemed to appoint the Chairman of the Meeting as your proxy. The Chairman of the Meeting intends to vote Proxies marked “Proxy discretion” (or any proxy form where, in relation to how the proxy is to be voted, the form is invalid) in favour of all resolutions. The Trustee may in its absolute discretion at any time accept and elect to treat as valid any instrument of proxy notwithstanding that it is received or produced at a place other than that specified above or out of time. Defined terms Terms defined in the Trust Deed have the same meaning in this notice of meeting and these notes.

HANOVER FINANCE LIMITED SUBORDINATED NOTEHOLDERS’ NOTICE OF MEETING

NOTICE OF MEETING OF HANOVER FINANCE LIMITED SUBORDINATED NOTEHOLDERS NOTICE IS GIVEN that a meeting of holders of Subordinated Notes (the Noteholders) of Hanover Finance Limited (the Company) issued pursuant to a trust deed (the Trust Deed) dated 14 October 2002 (as amended) between the Company and Perpetual Trust Limited (the Trustee), will be held at Auckland on 16 December 2009, at 10.30am at the Newmarket Room, Ellerslie Event Centre, 80-100 Ascot Avenue, Greenlane East, Auckland, New Zealand, to consider and, if thought fit, pass as an Extraordinary Resolution, the resolution set out below. EXTRAORDINARY RESOLUTION: ALLIED FARMERS PROPOSAL It is hereby resolved, by way of Extraordinary Resolution (subject to the conditions set out below) to, among other things: (a) cancel part of the amount owing to the Noteholders; (b) immediately following that cancellation, approve the exchange of their Subordinated Notes for ordinary issued shares of Allied Farmers Limited (Allied Farmers); and (c) approve the sale of substantially all of the assets of the

Company to a subsidiary of Allied Farmers; and (d) instruct the Trustee to release HFP Investments Limited and its subsidiaries from the security and other support provided by them in support of the debt restructuring completed by the Company in December 2008. Specifically, it is resolved by way of Extraordinary Resolution, subject to the conditions set out below: 1.

That the Allied Farmers Proposal (as described in the Explanatory Memorandum dated 23 November 2009 sent to Noteholders with the notice of meeting in relation to this Extraordinary Resolution) be ratified, confirmed and approved.

2.

That, without limiting paragraph 1: a.

The Company is released from the payment of: i.

20 cents of each $1.00 of principal amount of the Subordinated Notes outstanding as at 31 December 2008; and

ii.

the 50 cents of each $1.00 of principal of the Subordinated Notes outstanding as at 31 December 2008 which would otherwise have been cancelled on completion of the debt restructure proposal implemented pursuant to extraordinary resolutions passed by the Noteholders on 9 December 2008;

b.

The Subordinated Notes (following the above release) be exchanged for an issue of fully paid ordinary shares in Allied Farmers Limited (the “Allied Farmers Shares”) at a price per share of the volume weighted average price of price setting trades through the NZSX market in the five trading days prior to 16 December 2009 (to be issued pro rata between Noteholders by reference to the outstanding principal amount due to them by the Company on their Subordinated Notes (following the above release) with entitlements to Allied Farmers Shares of more than 0.25 being rounded up and entitlements to Allied Shares of 0.25 or less being rounded down) as more particularly described in the Explanatory Memorandum;

c.

The Trustee is directed and authorised to accept the benefit of a deed poll in relation to the delivery of the Allied Farmers Shares to the Noteholders.

3.

That, subject to the completion of all transactions contemplated by the Allied Farmers Proposal, the Trustee is authorised and directed to release the Company from its obligations under the Trust Deed (save for any obligations thereunder that are, or are expressed to be, continuing in nature).

4.

That the Trustee be directed and authorised, and the Company be authorised, to enter into all documents and take all steps as may be required to give effect to the Allied Farmers Proposal including, without limitation, the release of the Trustee from any obligations it has under the Transaction Document (as defined in clause 1.1 of the Trust Deed).

The Extraordinary Resolution set out above is conditional on: (a)

approval by the holders of secured deposits and secured stock issued by Hanover Finance Limited and United Finance Limited respectively of the Extraordinary Resolutions proposed

Document Number: 13748201374820

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to them by Hanover Finance Limited and United Finance Limited as set out in the Explanatory Memorandum; (b)

approval by the holders of bonds issued by Hanover Capital Limited, of the Extraordinary Resolution proposed to them by Hanover Capital Limited as set out in the Explanatory Memorandum; and

(c)

Allied Farmers and the Company providing notice in writing to the Trustee confirming that all Conditions (as defined in the Agreement for Assignment of Finance Assets in Exchange for Debenture Obligations dated 17 November 2009 between Allied Farmers and the Company (amongst others)) have been satisfied or waived in accordance with their terms.

NOTES If the Extraordinary Resolution is passed and the conditions of the implementation of the Allied Farmers Proposal are satisfied, all Noteholders (whether or not they vote in favour of the Extraordinary Resolutions) will become shareholders of Allied Farmers Limited and will cease to have any claims on the Company. Other meetings The meeting of Noteholders is intended to be held contemporaneously with meetings of secured depositors of Hanover Finance Limited, secured stockholders of United Finance Limited and bondholders of Hanover Capital Limited (in each case subject to requisite quorum requirements). Resolution The resolution will be put as an Extraordinary Resolution and, if passed, be binding on all Noteholders. The quorum for the meeting shall be two or more Noteholders present in person or by representative holding or representing a majority in nominal amount of the Notes. If within half an hour after the time appointed for the meeting a quorum is not present, the meeting shall be adjourned to such day and time not being less than 14 days thereafter nor more than 42 days thereafter and to such place as may be appointed by the Chairman. At such adjourned meeting the Noteholders present in person or by representative and entitled to vote, whatever the value of the Notes held by them, shall be a quorum for the transaction of business including the passing of Extraordinary Resolutions. At least seven days’ notice of any such adjourned meeting shall be given in the same manner as that of an original meeting (except in respect of the period of notice) and such notice shall state that the Noteholders, present in person or by representative at the adjourned meeting, whatever the number of Notes held by them shall form a quorum. Voting Voting at the meeting shall be decided by a poll of Noteholders. Each Noteholder who is present at the meeting and entitled to vote (whether personally or by representative) shall have one vote for every $1.00 of principal amount of Notes of which they are the Noteholder. For the Extraordinary Resolution to be passed, not less than 75% of the votes given on such a poll must be voted in favour of the Extraordinary Resolution. A Noteholder who is an individual may vote personally or by his/her representative (being a person appointed by an instrument by way of proxy or power of attorney). A Noteholder which is a company may vote by its representative (being a person appointed by an instrument by way of proxy or power of attorney or a person authorised pursuant to the Noteholder company’s constitution or any other empowering provision). A representative need not be a Noteholder and shall have the right to speak at the meeting. In the case of joint Noteholders, the vote of the senior holder who tenders a vote (whether in person or by representative) shall be accepted to the exclusion of the votes of the other joint Noteholder(s). Seniority shall be determined by the order in which names stand in the register of Noteholders. A Proxy Appointment Form for use at the meeting is enclosed with this notice of meeting. See the instructions below and on the Proxy Appointment Form for an explanation of how to use the Proxy Appointment Form. You should bring the Proxy Appointment Form to the meeting as it also constitutes your voting paper. If the Notes are held jointly, all Noteholders should sign the Proxy Appointment Form. If the Notes are held by a company, a representative should bring to the meeting evidence that he or she is authorised to act on behalf of the company. If you have decided how you will vote on the Extraordinary Resolution and do not intend to attend the meeting, you should complete and sign the Proxy Appointment Form and deposit it with the Company by: •

posting it to Hanover Finance Limited, Private Bag 92119, Auckland 1142, New Zealand;

•

faxing it to +64 9 488 8787; or

3 •

delivering it to Level 2, 159 Hurstmere Road, Takapuna, Auckland (c/- Computershare Investor Services Limited),

in each case so as to be received by the Company by no later than 10.30am on 15 December 2009. If you direct your proxy how to vote, the person you appoint as proxy will be entitled to attend the meeting to represent your interests, but will not be issued with voting papers. Your vote will be automatically counted on a poll. If you appoint your proxy with a discretion on how to vote, your proxy will be issued voting papers and will need to vote. If your proxy does not attend the meeting your vote will not be counted. You may therefore wish to appoint as an alternate to your named proxy “The Chairman of the Meeting”. You may name “The Chairman of the Meeting” as your sole proxy if you wish. If you omit to name a person as proxy you will be deemed to appoint the Chairman of the Meeting as your proxy. The Chairman of the Meeting intends to vote Proxies marked “Proxy discretion” (or any proxy form where, in relation to how the proxy is to be voted, the form is invalid) in favour of all resolutions. The Trustee may in its absolute discretion at any time accept and elect to treat as valid any instrument of proxy notwithstanding that it is received or produced at a place other than that specified above or out of time. Defined terms Terms defined in the Trust Deed have the same meaning in this notice of meeting and these notes.

HANOVER CAPITAL LIMITED BONDHOLDERS’ NOTICE OF MEETING

NOTICE OF MEETING OF HANOVER CAPITAL LIMITED BONDHOLDERS NOTICE IS GIVEN that a meeting of holders of Bonds (the Bondholders) of Hanover Capital Limited (the Company) issued pursuant to a trust deed (the Trust Deed) dated 4 October 2005 between the Company and Perpetual Trust Limited (the Trustee), will be held at Auckland on 16 December 2009 at 10.30am at the Newmarket Room, Ellerslie Event Centre, 80-100 Ascot Avenue, Greenlane East, Auckland, New Zealand, to consider and, if thought fit, pass as an Extraordinary Resolution, the resolution set out below. EXTRAORDINARY RESOLUTION: ALLIED FARMERS PROPOSAL It is hereby resolved, by way of Extraordinary Resolution (subject to the conditions set out below) to, among other things: (a) cancel part of the amount owing to the Bondholders; (b) immediately following that cancellation, approve the exchange of their Bonds for ordinary issued shares of Allied Farmers Limited (Allied Farmers); and (c) instruct the Trustee to release HFP Investments Limited and its

subsidiaries from the security and other support provided by them in support of the debt restructuring completed by the Company in December 2008. Specifically, it is resolved by way of Extraordinary Resolution, subject to the conditions set out below: 1.

That the Allied Farmers Proposal (as described in the Explanatory Memorandum dated 23 November 2009 sent to Bondholders with the notice of meeting in relation to this Extraordinary Resolution) be ratified, confirmed and approved.

2.

That, without limiting paragraph 1: a.

The Company is released from the payment of i

20 cents of each $1.00 of principal amount of the Bonds outstanding as at 31 December 2008; and

ii

The 50 cents of each $1.00 of principal of the Bonds outstanding as at 31 December 2008 which would otherwise have been cancelled on completion of the debt restructure proposal implemented pursuant to extraordinary resolutions passed by the Bondholders on 9 December 2008;

b.

The Bonds (following the above release) be exchanged for an issue of fully paid ordinary shares in Allied Farmers Limited (the “Allied Farmers Shares”) at a price per share of the volume weighted average price of price setting trades through the NZSX market in the five trading days prior to 16 December 2009 (to be issued pro rata between Bondholders by reference to the outstanding principal amount due to them by the Company on their Bonds (following the above release) with entitlements to Allied Farmers Shares of more than 0.25 being rounded up and entitlements to Allied Farmers Shares of 0.25 or less being rounded down) as more particularly described in the Explanatory Memorandum;

c.

The Trustee is directed and authorised to accept the benefit of a deed poll in relation to the delivery of the Allied Farmers Shares to Bondholders.

3.

That, subject to the completion of all transactions contemplated by the Allied Farmers Proposal, the Trustee is authorised and directed to release the Company from its obligations under the Trust Deed (save for any obligations thereunder that are, or are expressed to be, continuing in nature).

4.

That the Trustee be directed and authorised, and the Company be authorised, to enter into all documents and take all steps as may be required to give effect to the Allied Farmers Proposal including, without limitation, the release of the Trustee from any obligations it has under the Transaction Document (as defined in clause 1.1 of the Trust Deed).

The Extraordinary Resolution set out above is conditional on: (a)

approval by the holders of secured deposits and secured stock issued by Hanover Finance Limited and United Finance Limited respectively, of the Extraordinary Resolutions proposed to

Document Number: 13748401374840

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them by Hanover Finance Limited and United Finance Limited as set out in the Explanatory Memorandum; (b)

approval by the holders of subordinated notes issued by Hanover Finance Limited, of the Extraordinary Resolution proposed to them by Hanover Finance Limited as set out in the Explanatory Memorandum; and

(c)

Allied Farmers and the Company providing notice in writing to the Trustee confirming that all Conditions (as defined in the Agreement for Assignment of Finance Assets in Exchange for Debenture Obligations dated 17 November 2009 between Allied Farmers and the Company (amongst others)) have been satisfied or waived in accordance with their terms.

NOTES If the Extraordinary Resolution is passed and the conditions of the implementation of the Allied Farmers Proposal are satisfied, all Bondholders (whether or not they vote in favour of the Extraordinary Resolutions) will become shareholders of Allied Farmers Limited and will cease to have any claims on the Company. Other meetings The meeting of Bondholders is intended to be held contemporaneously with meetings of secured depositors and subordinated noteholders of Hanover Finance Limited, and secured stockholders of United Finance Limited (in each case subject to requisite quorum requirements). Resolution The resolution will be put as an Extraordinary Resolution and, if passed, be binding on all Bondholders. The quorum for the meeting shall be five or more Bondholders present in person or by representative holding or representing more than one half of the principal amount of the Bonds. If within half an hour after the time appointed for the meeting a quorum is not present, the meeting shall be adjourned to such day and time not being less than 14 days thereafter and to such place as shall be appointed by the Chairman. At such adjourned meeting, the Bondholders present in person or by representative and entitled to vote, regardless of the number or principal amount of the Bonds held or represented by them, shall be a quorum for the transaction of business including the passing of Extraordinary Resolutions. At least seven days’ notice of any such adjourned meeting shall be given in the same manner as that of an original meeting (except in respect of the period of notice), and such notice shall state that the Bondholders present in person or by representative at the adjourned meeting whatever their number and whatever the principal amount of Bonds held or represented by them shall form a quorum. Voting Voting at the meeting shall be decided by a poll of Bondholders. Each Bondholder who is present at the meeting in person or by representative and who was a Bondholder as at the close of business on 18 November 2009 shall have one vote for every nominal $1.00 of Bonds of which they are the Bondholder. For the Extraordinary Resolution to be passed, not less than 75% of the votes given on such a poll must be voted in favour of the Extraordinary Resolution. A Bondholder who is an individual may vote personally or by his/her representative (being a person appointed by an instrument by way of proxy or by way of power of attorney). A Bondholder that is a company may vote by its representative (being a person appointed by an instrument by way of proxy or power of attorney or a person authorised pursuant to the Bondholder company’s constituent documents or otherwise permitted by law). A representative need not be a Bondholder and shall have the right to speak at the meeting. In the case of joint Bondholders, the vote of the senior holder who tenders a vote (whether in person or by representative) shall be accepted to the exclusion of the votes of the other joint Bondholder(s). Seniority shall be determined by the order in which names stand in the register of Bondholders. A Proxy Appointment Form for use at the meeting is enclosed with this notice of meeting. See the instructions below and on the Proxy Appointment Form for an explanation of how to use the Proxy Appointment Form. You should bring the Proxy Appointment Form to the meeting as it also constitutes your voting paper. If the Bonds are held jointly, all Stockholders should sign the Proxy Appointment Form. If the Bonds are held by a company, a representative should bring to the meeting evidence that he or she is authorised to act on behalf of the company. If you have decided how you will vote on the Extraordinary Resolution and do not intend to attend the meeting, you should complete and sign the Proxy Appointment Form and deposit it with the Company by: •

posting it to Hanover Capital Limited, Private Bag 92119, Auckland 1142, New Zealand;

•

faxing it to +64 9 488 8787; or

3 •

delivering it to Level 2, 159 Hurstmere Road, Takapuna, Auckland (c/- Computershare Investor Services Limited),

in each case so as to be received by the Company by no later than 10.30am on 15 December 2009. If you direct your proxy how to vote, the person you appoint as proxy will be entitled to attend the meeting to represent your interests, but will not be issued with voting papers. Your vote will be automatically counted on a poll. If you appoint your proxy with a discretion on how to vote, your proxy will be issued voting papers and will need to vote. If your proxy does not attend the meeting your vote will not be counted. You may therefore wish to appoint as an alternate to your named proxy “The Chairman of the Meeting”. You may name “The Chairman of the Meeting” as your sole proxy if you wish. If you omit to name a person as proxy you will be deemed to appoint the Chairman of the Meeting as your proxy. The Chairman of the Meeting intends to vote Proxies marked “Proxy discretion” (or any proxy form where, in relation to how the proxy is to be voted, the form is invalid) in favour of all resolutions. The Trustee may in its absolute discretion at any time accept and elect to treat as valid any instrument of proxy notwithstanding that it is received or produced at a place other than that specified above or out of time. Defined terms Terms defined in the Trust Deed have the same meaning in this notice of meeting and these notes.

EXPLANATORY MEMORANDUM

EXPLANATORY MEMORANDUM 1.

INTRODUCTION This Explanatory Memorandum is issued by Hanover Finance Limited (“HFL” or “Hanover”), United Finance Limited (“UFL” or “United”) and Hanover Capital Limited (“HCL” or “Hanover Capital”) (together, the “companies”). Accompanying this Explanatory Memorandum are Notices of Meeting which have been prepared for meetings of the HFL Secured Depositors, UFL Secured Stockholders, HFL Subordinated Noteholders and HCL Bondholders (together, the “investors”), to be held at the Ellerslie Event Centre, Auckland at 10.30am on 16 December 2009 to seek approval, by way of Extraordinary Resolutions, of the proposal from Allied Farmers Limited (“Allied” or “Allied Farmers”) described in this document (“Allied Farmers Proposal”). The meetings of the HFL Secured Depositors, UFL Secured Stockholders, HFL Subordinated Noteholders and HCL Bondholders are to be held contemporaneously. This will enable all investors to participate in discussions about the Allied Farmers Proposal and its implementation. This will allow investors to consider all matters raised at the meeting for each group of investors, however investors should consider their own position when deciding how to vote on their Extraordinary Resolutions. Even if an individual investor does not wish to approve the Allied Farmers Proposal, it is still important to cast their vote on the applicable Extraordinary Resolutions, as the outcome of the Extraordinary Resolutions is relevant to whether or not the Allied Farmers Proposal is implemented. Certain conditions apply to the Allied Farmers Proposal. These are described under the heading “Conditions” in Section 2 below. If the Allied Farmers Proposal is approved and implemented, investors will become shareholders of Allied Farmers whether or not they vote in favour of their Extraordinary Resolutions. The risks associated with holding shares are different from the risks associated with holding the investments. Information on the risks in respect of the Allied Farmers’ shares is set out in the Allied Farmers Simplified Disclosure Prospectus and the Grant Samuel independent expert report. The disclosures in this document are important and should be read carefully. It is important that you either attend the meeting personally or complete and lodge a Proxy Appointment Form. If you do not understand the contents of this document or are in any doubt about the action to be taken, you should consult your financial, legal or other adviser immediately.

2.

OVERVIEW OF THE ALLIED FARMERS PROPOSAL Background In December 2008, the investors agreed to restructure their investments in the companies, including extending the time for repayment of those investments over the period through to December 2013. Since that time: •

the companies have been operating under a new governance regime approved by investors under the Debt Restructure;

•

David Henry has been appointed independent Chairman, and Des Hammond has been appointed as an additional independent director, to the Hanover, United and Hanover Capital boards; and

•

the companies have repaid an aggregate of $31.7 million (or 6 cents per dollar outstanding) to the holders of HFL Secured Deposits and UFL Secured Stock.

When the Debt Restructure was entered into, it was anticipated that the property market would stabilise and potentially show signs of recovery in late 2009 or early 2010. However, as indicated in the September 2009 Investor Update, market indicators have continued to move in a more negative direction and trading conditions in general, and the property market in particular, continue to be challenging.

2

Against this background, the companies have recently updated investors on the impact of the subsequent significant deterioration in the property development sector, which has resulted in a large number of borrowers being unable to repay or refinance their loans as they fall due. In the investor update, the directors advised that the current forecasts indicate that the companies are no longer likely to achieve full repayment to all investors under the Debt Restructure. Directors have estimated that: •

the return to HFL Secured Depositors is likely to be approximately 70 cents per dollar payable under the Debt Restructure (inclusive of the 4 cents per $1.00 paid to 30 June 2009)

•

the return to UFL Secured Stockholders is likely to be approximately 90 cents per dollar payable under the Debt Restructure (inclusive of the 4 cents per $1.00 paid to 30 June 2009)

•

they are unable to forecast any repayment for HFL Subordinated Noteholders or HCL Bondholders.

The Allied Farmers Proposal In August 2009, HFL and UFL were confidentially approached by Allied Farmers to discuss a proposal by which Allied Farmers would acquire substantially all of the Finance Assets of HFL and UFL. Under the proposal, Allied Farmers will acquire the debentures issued by the companies in exchange for shares in Allied Farmers (as detailed further below). The debentures would then be redeemed by Allied Farmers, with the proceeds off-set against the consideration payable for the Finance Assets. The Allied Farmers Proposal effectively results in the exchange of the debt securities held by investors for a tradable equity shareholding in a publicly listed entity. There is currently no effective market for the debentures issued by the companies, so the Allied Farmers Proposal is expected to provide greater liquidity and the potential of an equity return (i.e. rather than receiving a fixed return, investors return will be any distributions declared by the board of directors of Allied Farmers, and any change in market value of their shares). Note that no assurance can be given as to whether or at what level distributions will be declared by Allied Farmers, or of the price at which shares in Allied Farmers may be sold (see the Grant Samuel independent expert report, and the section of this Explanatory Memorandum headed “Grant Samuel independent expert report”, for further details). The Allied Farmers Proposal is also expected to provide the potential for investors to realise all or part of their remaining investments when they choose. Allied Farmers Limited is listed on the NZSX securities market operated by NZX Limited (“NZX”). Allied Farmers is a rural services’ and finance group operating throughout New Zealand and currently has approximately 5,200 listed shareholders. Allied Farmers has over 90 years experience providing livestock trading, rural merchandise, finance, and real estate services. Allied Farmers’ 100% subsidiary, Allied Nationwide Finance Limited has been providing diversified investment and finance solutions to New Zealanders for over 30 years. Further information on Allied Farmers can be found in the Simplified Disclosure Prospectus prepared by Allied Farmers, which accompanies this document and on Allied Farmers’ website at www.alliedfarmers.co.nz. Conditions Implementation of the Allied Farmers Proposal is conditional upon the investors approving the Allied Farmers Proposal by Extraordinary Resolutions in accordance with the Trust Deeds. The Allied Farmers Proposal is also conditional on Allied Farmers shareholders approval, the consent from certain lenders to the Axis Companies, and other usual conditions. Allied Farmers has convened a meeting of its shareholders to be held before the investors’ meetings to approve it proceeding with the Allied Farmers Proposal. If the Allied Farmers shareholders do not approve the Allied Farmers Proposal the investor meetings described in this Explanatory Memorandum will be cancelled. If approved, completion of the Allied Farmers Proposal is expected to occur immediately following the investor meetings. Completion is required to occur on or prior to 30 December 2009 (unless extended by agreement between Allied Farmers and Hanover). Grant Samuel independent expert report Grant Samuel has provided an independent expert’s report for investors which gives an independent view on the merits of the Allied Farmers Proposal.

3

The Grant Samuel independent expert report concludes that the Allied Farmers Proposal is superior to the status quo and to receivership and that an alternative superior offer is unlikely. The report also states that the consideration being offered by Allied Farmers is considered fair and that, to the extent there is any transfer of value between the investors and Allied Farmers shareholders, it will be insignificant particularly given that the investors will own approximately 97% of an enlarged Allied Farmers following completion of the Allied Farmers Proposal. Grant Samuel has also identified a number of differences for investors between holding debt securities in the companies and equity securities in Allied Farmers. Investors should review the analysis in the Grant Samuel independent expert report in its entirety (particularly section 6 entitled “Merits”), however in their summary they note: “The ownership of shares is a very different investment from holding either Secured Deposits, Secured Stock, Subordinated Notes or Capital Bonds. While there is generally more liquidity associated with equity instruments, there is no entitlement to regular payments with holders’ returns coming from dividends and changes in share price. Holders of equity have the lowest priority over available funds in a company. Grant Samuel note that this is essentially the current position of Investors under the current ownership of Hanover, given that there is no tangible value left within Hanover for the Shareholders, (Messrs Hotchin and Watson) whether the Proposal is implemented or not.”

The report also notes: “There is potential for Allied Farmers to benefit from improved liquidity and share price with the increase in its market capitalisation under the Proposal. However, it is likely that in the short term the shares in Allied Farmers will trade at a lower price than the original transfer value, particularly if there are large numbers of sellers of these securities.”

Exchange of Debentures If the Allied Farmers Proposal is approved, investors of each class of debentures that approves the Allied Farmers Proposal will assign their investments in the companies to Allied Farmers in exchange for ordinary shares in Allied Farmers. Prior to being assigned, the investors will agree to cancel part of the amount owing to them under their investments to recognise a reduction in the underlying value of the companies’ assets being acquired by Allied Farmers. The exact amounts being cancelled are as follows: •

In respect of HFL Secured Deposits, 22 cents of each $1.00 of principal amount of the HFL Secured Deposits outstanding as at 31 December 2008 (which, taking into account the 6 cents per $1.00 already paid, will leave 72 cents per $1.00 outstanding);

•

In respect of UFL Secured Stock, 10 cents of each $1.00 of principal amount of the UFL Secured Stock outstanding as at 31 December 2008 (which, taking into account the 6 cents per $1.00 already paid, will leave 84 cents per $1.00 outstanding);

•

In respect of HFL Subordinated Notes: (i) 20 cents of each $1.00 of principal amount of the HFL Subordinated Notes outstanding as at 31 December 2008; and (ii) the 50 cents of each $1.00 of principal of the HFL Subordinated Notes outstanding as at 31 December 2008 which would otherwise have been cancelled on completion of the Debt Restructure in December 2013 (which will leave 30 cents per $1.00 outstanding); and

•

In respect of HCL Bonds: (i) 20 cents of each of $1.00 of principal amount of the Bonds outstanding as at 31 December 2008; and (ii) the 50 cents of each $1.00 of principal of the HCL Bonds outstanding as at 31 December 2008 which would otherwise have been cancelled on completion of the Debt Restructure in December 2013 (which will leave 30 cents per $1.00 outstanding).

The reduction in the amount owed to investors results in remission income, tax on which Hanover, United and Hanover Capital rather than Allied Farmers or the investors, will be responsible for. Allied Farmers Shares As consideration for the transfer of the HFL Secured Deposits, UFL Secured Stock, HFL Subordinated Notes, and HCL Bonds (following the above debt reduction), Allied Farmers will issue shares in itself to the investors. In aggregate, Allied Farmers has agreed to issue shares to investors for a total issue price of $396.2m. Each investor will be entitled to receive shares having a total issue price equal to the outstanding principal amount of the debentures held by that investor (following the reductions referred to above). Details on the outcomes for investors are set out in more detail under the heading “Outcomes for Investors” below.

4

The number of the Allied Farmers shares to be issued by Allied Farmers to investors will be calculated by reference to the market value of Allied Farmers shares on the NZSX over the five business days prior to the meeting of Hanover investors. The market value will be determined by calculating the volume weighted average price of price setting trades through the NZSX over that five business day period. In calculating the number of Allied Farmers shares to be issued to each investor, any fractional entitlement which is in excess of 0.25 Allied Farmers shares will be rounded up to the next whole number (with any fractional entitlement of 0.25 Allied Farmers shares or less being ignored). Subject to the Allied Farmers Proposal becoming unconditional, the shares are expected to be issued on 17 December 2009. As at the date of this Explanatory Memorandum, it is estimated that if the Extraordinary Resolutions are passed and the Allied Farmers Proposal is implemented, the investors will hold over 96% of Allied Farmers’ total issued shares. The following table sets out the range of outcomes which would result from the newly issued shares being priced within the 30 to 40 cents range. Number of new shares issued and resulting capital structure Issue Price per Share (cents) Existing Market Capitalisation of Allied Farmers Value of assets acquired Market Capitalisation*

0.40

0.38

0.36

0.34

0.32

0.30

15,078,682

14,324,748

13,570,814

12,816,880

12,062,946

11,309,012

396,177,220

396,177,220

396,177,220

396,177,220

396,177,220

396,177,220

411,255,902

410,501,967

409,748,033

408,994,099

408,240,165

407,486,231

37,696,705

37,696,705

37,696,705

37,696,705

37,696,705

37,696,705

Number of Shares Existing Allied Farmers shareholders Number of Shares issued to Holders Total of shares on issue after Completion

990,443,049

1,042,571,630

1,100,492,276

1,116,227,116

1,238,053,811

1,320,590,732

1,028,139,754

1,080,268,335

1,138,188,981

1,202,923,821

1,275,750,516

1,358,287,437

% Ownership Existing Allied Farmers Shareholders

3.7%

3.5%

3.3%

3.1%

3.0%

2.8%

96.3%

96.5%

96.7%

96.9%

97%

97.2%

Total 100.0% 100.0% *Market Capitalisation is not a proxy for equity.

100.0%

100.0%

100.0%

100.0%

New shareholders

Further information on these shares to be issued by Allied Farmers, and risk factors applying to Allied Farmers, is available in Allied Farmers Simplified Disclosure Prospectus which accompanies this Explanatory Memorandum. Bonus Shares To provide protection for its existing shareholders should the realisable value of the assets to be acquired from the companies be less than $396.2m, Allied Farmers will issue bonus shares to its existing shareholders prior to implementing the Allied Farmers Proposal. A shortfall in the value of the acquired assets will be deemed to exist if, during the period up to 30 June 2011, the total amount realised by Allied Farmers from the Finance Assets it acquires as a result of the Allied Farmers Proposal, together with the residual value of all Finance and Operating Assets it still holds at that date, is less than the assessed value of $396.2 million. For the purposes of this calculation, the valuation of the Finance and Operating Assets is to be undertaken using the same methodology as used by Allied Farmers in calculating its offer price, as explained in more detail in the Appendix. This calculation will be made as part of the audit of Allied Farmers’ financial results for the period ending 30 June 2011 and is expected to be announced at the time its audited financial statements are released. If there is any such shortfall in value at 30 June 2011, the bonus shares will convert into a number of new ordinary shares in Allied Farmers to reflect the shareholding that Allied Farmers existing shareholders would have had if the shortfall had been reflected in values used in agreeing the number of Allied Farmers shares to be issued to investors under the Allied Farmers Proposal. Bonus shares will be issued to each current Allied Farmers shareholder (prior to the share issue pursuant to the Allied Farmers Proposal), at the ratio of 1 bonus share per 10 Allied Farmers shares. Allied Farmers shareholders’ bonus share entitlements will be determined as at 5pm on the date of the meeting of Hanover investors, 16 December 2009. On issue, these bonus shares will have no voting rights (except on a resolution to vary the terms of such shares), no rights to distributions, and no rights to surplus assets on liquidation. Any change to the terms of these bonus shares will be deemed to be an action affecting the ordinary shareholders, and will require the approval by way of a special resolution of the holders of the bonus shares (meaning 75% approval) and a special resolution of the ordinary

5

shareholders of Allied Farmers (including the investors who are issued shares under the Allied Farmers Proposal). If there is a shortfall as at 30 June 2011, the terms of the bonus shares will be reset to be the same as ordinary shares in Allied and the bonus shares will be divided or consolidated at an agreed ratio, and thereafter those shares will carry the same rights as fully paid ordinary shares in Allied Farmers. If there is no shortfall, Allied Farmers will redeem all such bonus shares for nil consideration payable to the holders. Note that there are no reciprocal rights if Allied Farmers achieves recoveries in excess of the assessed value. As investors are expected to hold over 96% of the shares on issue in Allied Farmers following completion of the Allied Farmers Proposal, almost all that excess value will be to their benefit in this event. Allied Farmers Simplified Disclosure Prospectus and the Grant Samuel independent expert report provide further information in respect of these bonus shares. Acquisition of Finance Assets and Operating Assets Under the Allied Farmers Proposal, Allied Farmers will acquire the finance assets of HFL and UFL consisting of: •

All loans and advances of HFL (being the relevant loan/facility agreement or document creating an indebtedness, and any security held in respect of that loan (except where such security is granted by an entity that is controlled directly or indirectly by Hanover, UFL or any of the Shareholders)) but excluding an intercompany loan between HFL and HFP Investments Limited;

•

All loans and advances of UFL (being the relevant loan/facility agreement or document creating an indebtedness, and any security held in respect of that loan (except where such security is granted by an entity that is controlled directly or indirectly by Hanover, UFL or any of the Shareholders);

•

All investment assets of HFL and UFL, other than the shares in HFP Investments Limited (which currently holds all of the shares in the Axis Companies, which will be transferred to Allied Farmers under the Allied Farmers Proposal, but also has other residual obligations) and all charging subsidiaries; and

•

Certain assets provided under the Debt Restructure Shareholder Support Package, consisting of approximately $10.5m cash which is currently in a solicitor’s trust account in escrow to support the scheduled payments required under the Debt Restructure, all issued shares in the Axis Companies, the mortgage over the Matarangi Beach Estates property currently held by HFP Investments Limited and certain intercompany debts owed by the Axis Companies to HFP Investments Limited,

(together, the “Finance Assets”). In addition to the Finance Assets, the following assets will also be transferred to Allied: •

Computer software and hardware dedicated to the support of the business of the companies (to the extent they can be practically severed); and

•

Furniture and fittings, including workstations, chairs, mobile units and screens,

(together, the “Operating Assets”), and Allied Farmers will also assume the rights and obligations of certain contracts, such as the head office lease, and equipment leases (the “Assumed Contracts”). The Finance Assets and the Operating Assets will be assigned to Allied Farmers in consideration of: (i) Allied Farmers off-setting the proceeds it is entitled to on redemption of the debentures it receives from investors against its obligation to pay a purchase price of $396.2 million for those assets ; (ii) Allied Farmers taking over the Assumed Contracts; (iii) Allied Farmers making the contribution towards the companies’ residual obligations (see the section headed “residual obligations” below); and (iv) any GST. The consideration to be paid reflects Allied Farmers’ assessment of the recoveries available of the Finance Assets. The consideration has been attributed by Allied Farmers as follows: •

$301.8 million for HFL’s assets

6

•

$49.9 million for UFL’s assets

•

$44.5 million for the assets held under the shareholder support provided as part of the Debt Restructure

The companies will remain responsible for all transaction costs, whether or not the Allied Farmers Proposal proceeds, which include the professional costs of financial, legal, accounting and taxation advisers, the costs of the Trustees and their advisers, the costs of printing and distributing this Explanatory Memorandum and the associated notices of meeting and the costs of holding the meetings of investors. If the Allied Farmers Proposal proceeds, Allied Farmers will contribute $5m to HFL and UFL to fund these costs (since cash comprises part of the Finance Assets being acquired by Allied Farmers). If the Allied Farmers Proposal does not proceed, each party will bear its own costs and accordingly this will reduce investor recoveries. Residual Obligations Allied Farmers is not assuming the residual liabilities and obligations of the companies as part of the acquisition, which will remain the sole responsibility of the companies. To fund these obligations, Allied Farmers has agreed to contribute a sum of $5m to the companies’ holding company, Hanover Group Holdings Limited. The residual obligations include the costs of winding up the affairs of the companies, employee entitlements, taxation on the partial remission of the debt securities, the costs of preparing audited financial statements, arranging to discharge the trust deeds and ongoing litigation to which the companies are subject. If the Allied Farmers Proposal is completed, the investors and the Trustees will have no further claim against the companies, their residual assets or any shareholder support. 3.

EXTRAORDINARY RESOLUTIONS The Extraordinary Resolutions propose that the Allied Farmers Proposal be ratified, confirmed and approved. If these Extraordinary Resolutions are approved by the investors, the companies will be permitted, and the Trustees will be directed, to enter into all documents, and take all steps necessary or desirable, to give effect to the Allied Farmers Proposal. In approving the Allied Farmers Proposal, investors are approving: •

the release of the companies from: o

HFL Secured Deposits: 22 cents of each $1.00 of principal amount of the HFL Secured Deposits outstanding as at 31 December 2008;

o

UFL Secured Stock: 10 cents of each $1.00 of principal amount of the UFL Secured Stock outstanding as at 31 December 2008;

o

HFL Subordinated Notes: (i) 20 cents of each $1.00 of principal amount of the HFL Subordinated Notes outstanding as at 31 December 2008; and (ii) the 50 cents of each $1.00 of principal of the HFL Subordinated Notes outstanding as at 31 December 2008 which would otherwise have been cancelled on completion of the Debt Restructure; and

o

HCL Bonds: (i) 20 cents of each $1.00 of principal amount of the HCL Bonds outstanding as at 31 December 2008; and (ii) the 50 cents of each $1.00 of principal of the HCL Bonds outstanding as at 31 December 2008 which would otherwise have been cancelled on completion of the Debt Restructure

•

the transfer of the remaining investments to Allied Farmers in exchange for shares in Allied Farmers on the terms set out in this Explanatory Memorandum

•

the sale of the Finance Assets and Operating Assets by HFL, UFL and HFP Investments to Allied Farmers on the terms set out in this Explanatory Memorandum

•

the discharge and release of the Trust Deeds

•

the release of the support arrangements previously provided for the debt restructure proposals. As a consequence of the HFL Secured Deposits and UFL Secured Stock being repaid and cancelled, the top up obligations of Forefront Investments Limited and Hotchin Investments Limited (which are guaranteed by Eric Watson and Mark Hotchin) of up to $20m under the Cash Injection Deed entered into as part of the Debt Restructure will no longer apply.

7

If the necessary Extraordinary Resolutions are not passed or the Allied Farmers Proposal fails to become unconditional, none of the proposed transactions contemplated by the Allied Farmers Proposal will occur and the Debt Restructure will continue in force as originally contemplated. The Directors unanimously recommend that investors vote in favour of the Extraordinary Resolutions for the reasons set out in the independent Chairman’s letter at the front of this Explanatory Memorandum. It is intended that KPMG will be appointed as scrutineer for the votes in respect of the Extraordinary Resolutions. 4. OUTCOMES FOR INVESTORS Taking into account the payments which have been made under the Debt Restructure, which commenced in December 2008, it is estimated that, at completion of the Allied Farmers Proposal (and based on the shares being valued at their issue price), the investors will have received the following consideration (in a combination of cash repayments to date and the shares in Allied Farmers issued under the proposal): •

For each $1.00 of HFL Secured Deposits at the time of the Debt Restructure = 78 cents

•

For each $1.00 of UFL Secured Stock at the time of the Debt Restructure = 90 cents

•

For each $1.00 of HFL Subordinated Notes at the time of the Debt Restructure = 30 cents

•

For each $1.00 of HCL Capital Notes at the time of the Debt Restructure = 30 cents

A break down of how each dollar of principal outstanding under the debentures as at 31 December 2008 will be satisfied under the Allied Farmers Proposal is set out below:

Aggregate amount to be received, comprising: Repayments to date Amount to be received under Allied Farmers Proposal (by way of the issue of Allied Farmers shares*) Aggregate amount to be released, comprising: Amount already agreed to be released on completion of Debt Restructure Additional amount to be released under Allied Farmers Proposal Total

HFL Secured Deposits

UFL Secured Stock

HFL Subordinated Notes

HCL Bonds

78 cents

90 cents

30 cents

30 cents

$0.06

$0.06

-

-

$0.72

$0.84

$0.30

$0.30

22 cents

10 cents

70 cents

70 cents

-

-

$0.50

$0.50

$0.22

$0.10

$0.20

$0.20

$1.00

$1.00

$1.00

$1.00

* Note that the price at which the shares in Allied Farmers will trade may be lower than the price at which those shares are issued.

Given that the Allied Farmers shares will be issued immediately, and taking into account the current financial position of the companies as reflected in the audited financial statements for the period to 30 June 2009, the directors believe that this compares favourably against both the current estimated returns to investors (based on the forecasts available to the companies as at 9 November 2009) of: •

70 cents per $1.00 payable under the Debt Restructure to HFL Secured Depositors (inclusive of the 4 cents per $1.00 paid to 30 June 2009)

•

90 cents per $1.00 payable under the Debt Restructure to UFL Secured Stockholders (inclusive of the 4 cents per $1.00 paid to 30 June 2009)

•

with the directors being unable to forecast any repayment for HFL Subordinated Noteholders or HCL Bondholders

and the returns originally envisaged under the Debt Restructure of:

8 (cents repaid for every dollar of principal invested) Period ending

Hanover Finance Ltd secured deposits

United Finance Ltd secured stock

Hanover Finance Ltd subordinated notes

Hanover Capital Ltd bonds

Annual

Annual

Annual

Quarterly

Annual

Quarterly

31 Dec 2009

8c

2c

8c

2c

31 Dec 2010

10c

2.5c

10c

2.5c

31 Dec 2011

12c

3c

12c

3c

31 Dec 2012

35c

8.75c

35c

8.75c

31 Dec 2013

35c

8.75c

35c

8.75c

Total

100c

100c

Quarterly

50c

50c

50c

50c

Quarterly

5. TAXATION The following comments are intended to be only a general summary of the New Zealand taxation consequences of the Allied Farmers Proposal for resident taxpayers who are not in the business of holding or dealing in financial arrangements of a type like the investments. Investors should in all cases obtain their own taxation and financial advice based on their own personal circumstances. This advice is based on current law and interpretations thereof on the date of this Explanatory Memorandum. No assurance can be given that applicable tax law and interpretations thereof will not be changed in the future. An investor will not be entitled to claim a tax deduction for: •

the principal amount of their investment that is released under the terms set out in this Explanatory Memorandum; and

•

any remaining loss realised on the assignment of their investment to Allied Farmers under the terms set out in this Explanatory Memorandum.

Dividends on the ordinary shares will be subject to New Zealand income tax at the income tax rate applicable to the investor. NZ resident investors who are subject to tax on the dividends will be entitled to a credit for any imputation credits attached to the dividends. Dividends will be subject to resident withholding tax, except for investors who have provided a certificate of exemption. New Zealand resident investors selling the ordinary shares will be taxable on the proceeds of sale where the investor: •

acquires the ordinary shares with a dominant purpose of resale;

•

is a dealer in investments such as the ordinary shares;

•

carries on a business an ordinary incident of which is the sale of investments such as the ordinary shares; or

•

sells the shares in the course of carrying on an undertaking or scheme entered into for the purpose of making a profit.

Investors who are taxable on the proceeds of a sale of the ordinary shares should be entitled to a deduction for the cost of their ordinary shares. 6. IMPORTANT INFORMATION FOR OVERSEAS INVESTORS Allied Farmers is making its offer of shares as part of the Allied Farmers Proposal to investors in New Zealand, Australia (under the trans-Tasman mutual recognition scheme) and other jurisdictions where and to the extent that it is lawful to do so. For investors in jurisdictions where Allied Farmers is not making such offer, the following process will apply: •

Allied Farmers will first issue all shares to which Overseas Persons may be entitled, to a company nominated by Allied Farmers (the “Nominee Company”) who will hold it on trust in anticipation of making transfers and/or sale as contemplated by the steps outlined below.

9

•

Any Overseas Person wishing to accept the Allied Farmers Proposal will ensure that the offer of Allied Farmers shares under the Allied Farmers Proposal constitutes a legal offer made to them in accordance with the applicable securities laws of their relevant jurisdiction(s) (including any governmental consents or formalities which may be so required).

•

Those Overseas Persons wishing to accept the Allied Farmers Proposal will notify Allied Farmers of their intentions to accept (no later than 31 January 2010), together with sufficient legal evidence that the offer may legally be made to them under their relevant jurisdiction(s). Upon receipt of this, and being satisfied of the legal evidence provided, Allied Farmers will then arrange for the transfer of that Overseas Person’s entitlement of the Allied Farmers shares from the Nominee Company to that Overseas Person.

•

Promptly after 31 January 2010, the Nominee Company, in consultation with Allied Farmers, will sell, or procure the sale of, any remaining shares it holds (being those shares which were not transferred to Overseas Persons), on the NZSX. The sale of these remaining shares will be at such price and on such other terms as the Nominee Company determines in good faith. The proceeds of the sale (after deduction of any applicable costs, stamp duty, taxes and charges) will be remitted to the Overseas Persons. Neither Allied Farmers nor the Nominee Company are able to give any assurance as to the price that will be achieved for the sale of these shares, and Allied Farmers will not be liable for a failure to sell any of these shares, or the failure to sell these at a particular price.

•

The net proceeds of the sale will be distributed in New Zealand dollars to the applicable investors in proportion to their respective entitlements under the Allied Farmers Proposal. Any such distribution of the proceeds of sale will be remitted in New Zealand dollars to the Overseas Person. Allied Farmers estimates that the costs involved in any such sale of shares by the Nominee Company will be a minimum of $30 per Overseas Person. Where the gross proceeds of the sale are less than the actual costs, no distributions will be made.

Those investors who hold securities on behalf of Overseas Persons are each responsible for ensuring that participating in the Allied Farmers Proposal does not breach the applicable laws of the relevant overseas jurisdiction(s). All Overseas Persons are encouraged to consult their qualified financial and/or legal advisors before accepting the Allied Farmers Proposal, and to find out other requirements which must be observed and/or obtained to enable them to participate in the Allied Farmers Proposal. The above arrangements are described in more detail in Allied Farmers Simplified Disclosure Prospectus relating to the issue of shares. Please note that investors can update their address details by contacting the companies on 0800 353 377 or +64 9 357 2600 if calling from overseas. 7. DISCLOSURES •

None of the directors of any of the companies or their associated persons directly or indirectly hold shares in, hold directorships in, or otherwise have an interest in, Allied Farmers. None of the directors or their associated persons currently hold any debentures in any of the companies.

•

As a consequence of the HFL Secured Deposits and UFL Secured Stock being repaid and cancelled, the top up obligations of Forefront Investments Limited and Hotchin Investments Limited (which are guaranteed by Eric Watson and Mark Hotchin) of up to $20m under the Cash Injection Deed entered into as part of the Debt Restructure will no longer apply.

•

The shareholders will retain ownership of the companies and their subsidiaries (except for the Axis Companies which form part of the “Finance Assets” being acquired by Allied Farmers), and are required to pay the transaction costs associated with the Allied Farmers Proposal and manage the residual obligations and costs of the companies, including staff costs, taxation on the remission of debt securities, costs of preparing audited financial statements, arranging to discharge the trust deeds, and ongoing litigation. The funding arrangements for these amounts are described under the headings “Acquisition of Finance Assets and Operating Assets” and “Residual Obligations” above.

•

Both Trustees have confirmed that they have no association with Allied Farmers, except that The New Zealand Guardian Trust Company Limited is also the trustee for Allied Nationwide Finance Limited. As a condition of providing releases of the support arrangements provided for the Debt Restructure the Trustees have required the companies to indemnify them. The Trustees will charge additional

10

fees to the companies, and seek recovery of their reasonable costs (including of engaging their own advisers), to review the notices of meeting, this Explanatory Memorandum the Allied Farmers Simplified Disclosure Prospectus, and the Grant Samuel independent expert report, relating to the Allied Farmers Proposal. The Trustees and their advisers’ fees are not contingent on the outcome of the Allied Farmers Proposal at the meetings of the investors. •

Grant Samuel, who have produced the independent expert’s report for investors, will be paid a fee for their work preparing the report. This fee is not contingent on the outcome of the Allied Farmers Proposal at the meetings of the investors.

•

The companies have also sought financial advice, legal advice, and tax advice to assist them in the review of the Allied Farmers Proposal, the finalisation of the commercial terms, and the preparation of materials for investor consideration. These firms will be paid fees for their professional services on commercial terms.

11

8. GLOSSARY OF TERMS Allied or Allied Farmers means Allied Farmers Limited and, where the context requires, includes its subsidiaries and associate companies. Allied Farmers Proposal means the proposal described in this Explanatory Memorandum which in summary involves (i) the partial release of investors’ debentures (ii) the exchange of investors’ debentures for shares in Allied Farmers and (iii) the sale of the companies finance assets and operating assets in exchange for the redemption and cancellation of the debentures. Allied Farmers Simplified Disclosure Prospectus means the Simplified Disclosure Prospectus dated on or about 23 November 2009 prepared by Allied Farmers which accompanies this Explanatory Memorandum. Axis Companies means Lifestyles of New Zealand Queenstown Limited, LONZ 2008 Limited, LONZ 2008 Holdings Limited, Matarangi Beach Estates Limited, QWF Holdings Limited, Clearwater Avenue Holdings Limited, HPL Rhode Island (2008) Limited, and every subsidiary of such entities. companies means HFL, UFL and HCL. Debt Restructure means the debt restructuring plan implemented pursuant to extraordinary resolutions approved by the investors on 9 December 2008. Debt Restructure Shareholder Support Package means the financial support arrangements provided by the shareholders (being Eric Watson and Mark Hotchin as the ultimate shareholders of the companies). Extraordinary Resolutions means the resolutions set out in the Notices of Meeting. Finance Assets means the loan assets and investments being acquired by Allied Farmers under the Allied Farmers Proposal. HCL or Hanover Capital means Hanover Capital Limited. HCL Bonds means the bonds issued by HCL under the HCL Trust Deed. HCL Bondholders means the holders of the HCL Bonds. HCL Trust Deed means the Trust Deed between HCL and Perpetual Trust Limited dated 4 October 2005. HFL or Hanover means Hanover Finance Limited. HFL Secured Deposits mean the secured deposits issued by HFL under the HFL Secured Deposits Trust Deed. HFL Secured Depositors means the holders of the HFL Secured Deposits. HFL Secured Deposits Trust Deed means the Trust Deed between HFL and The New Zealand Guardian Trust Company Limited dated 18 July 1985, as amended from time to time. HFL Subordinated Notes means the subordinated notes issued by HFL under the HFL Subordinated Notes Trust Deed. HFL Subordinated Noteholders means the holders of the HFL Subordinated Notes. HFL Subordinated Notes Trust Deed means the HFL Trust Deed Relating to the Issue of NZ$20,000,000 Fixed Rate Subordinated Notes between HFL and Perpetual Trust Limited dated 14 October 2002, as amended from time to time. investments or debentures means the HFL Secured Deposits, UFL Secured Stock, HFL Subordinated Notes and HCL Bonds. Notices of Meeting means the notices of meeting in respect of the meetings to be held on 16 December 2009 (or at any adjourned meeting) for each group of investors to consider the Allied Farmers Proposal.

12

Operating Assets means the operating assets being acquired by Allied Farmers under the Allied Farmers Proposal. Overseas Persons means investors who are subject to the laws of a country other than New Zealand or Australia, and who are able to establish that under all relevant jurisdictions to which they are subject, the offer of securities under the Allied Farmers Proposal constitutes a lawful offer. Trustees means the trustee of each investment being: •

The New Zealand Guardian Trust Company Limited in respect of the HFL Secured Deposits;

•

Perpetual Trust Limited in respect of the UFL Secured Stock;

•

Perpetual Trust Limited in respect of the HFL Subordinated Notes;

•

Perpetual Trust Limited in respect of the HCL Bonds.

UFL or United means United Finance Limited. UFL Secured Stock means the secured stock issued by UFL under the UFL Trust Deed. UFL Secured Stockholders means the holders of the UFL Secured Stock. UFL Trust Deed means the Trust Deed Relating to the Issue of Secured Stock and Unsecured Deposits between United Finance Limited and Perpetual Trust Limited dated 12 March 2002, as amended from time to time.

13

9. DIRECTORY Companies & Securities Registrar Hanover Finance Limited, United Finance Limited and Hanover Capital Limited Level 4 520 Queen Street Auckland Investor Free Phone: 0800 353 377 or +64 9 357 2600 if calling from overseas Directors of the Companies Desmond Ronald Hammond David Brian Henry Mark Stephen Hotchin Auditor for the Companies KPMG 18 Viaduct Harbour Avenue Auckland Solicitors for the Companies Chapman Tripp Level 35 23-29 Albert Street Auckland Trustee of the HFL Secured Deposits The New Zealand Guardian Trust Company Limited PO Box 1934 Auckland Free Phone: 0800 801 135 Trustee of the UFL Secured Stock, HFL Subordinated Notes and HCL Bonds Perpetual Trust Limited PO Box 112 Christchurch Free Phone: 0800 737 738

14

APPENDIX: CALCULATION OF SHORTFALL The bonus shares to be issued by Allied Farmers to its existing shareholders will convert in the manner described under the heading “Bonus Shares” above (and as more particularly described in Allied Farmers Simplified Disclosure Prospectus) if there is a shortfall below Allied Farmers’ valuation of the assets of $396.177m. A shortfall will occur if, in respect of the period up to 30 June 2011, the total of the following is less than $396.177m: 1.

Cash acquired on completion; plus

2.

The amount received from the sale of any assets since completion (or prior to completion where such sale was approved by Allied Farmers); plus

3.

The amount received from the repayment or any other means of realisation of any assets since 17 November 2009; plus

4.

The value of any assets held by Allied Farmers (as recorded in their audited accounts for the period ended 30 June 2011, but calculated on the basis of the discount rate used by Allied Farmers when determining its assessed value and will exclude any IFRS or other adjustments which discount the value of such assets to a greater extent than the policies used by Allied Farmers in determining its assessed value, including, for example, the adjustment required by clause 63 of the Financial Instruments: Recognition and Measurement (NZIAS 39); less

5.

The Deferred Tax Amount (as described further below) and the amount of any tax arising to Allied Farmers under section CC3 and subpart EW of the Income Tax Act 2007 by virtue of the transactions contemplated by the exchange of debentures for Allied Farmers shares under the Allied Farmers Proposal, less

6.

The interest costs paid in the period by any Axis Company to a third party; less

7.

The amount of any damages suffered by Allied Farmers for any breach of a warranty (less any amount subsequently recovered from any third party in connection with such warranty claim), but not any warranty claim that has already been reflected in the values referred to above.

In calculating the above amounts: (a)

The amount received from the sale of any assets will be calculated as the net cash proceeds from the realisation of the relevant asset (whether by way of sale, refinance by a third party, or enforcement of securities, as the case may be) less all direct holding costs incurred over the period the asset is held by Allied Farmers (including in the case of property investment assets, debt servicing amounts paid to prior ranking third party funders), less non-recoverable legal and professional costs incurred in relation to realisation of the asset, and less all direct realisation costs.

(b)

The value of any assets held by Allied Farmers (as recorded in their audited accounts for the period ended 30 June 2011) will be determined in accordance with generally accepted accounting principles and, in the case of any loan asset or property investment with a value in excess of $2 million, will include the obtaining of an independent registered valuation.

(c)

Any property asset which is held in a subsidiary, special purpose or single asset company will be valued itself (net of debt related to that asset due to any person other than Allied Farmers or any person related to or associated with Allied Farmers) rather than the value of the shares held in that company.

(d)

Deferred Tax Amount means 30% multiplied by the greater of: (i) zero; or (ii) the difference between the aggregate net income (as defined in Income Tax Act 2007) that would have arisen to Allied Farmers and the Acquired Entities if a Deemed Disposal and Liquidation had occurred immediately following completion and the aggregate tax losses (as defined in Income Tax Act 2007) that would have arisen to Allied Farmers and the Acquired Entities if a Deemed Disposal and Liquidation had occurred immediately following completion, where: i.

Acquired Assets means all assets acquired by Allied Farmers and all assets held by the Acquired Entities on completion, other than shares in Acquired Entities.

ii.

Acquired Entities means the Purchased Entities and all entities whose shares or ownership interests are held directly or indirectly by the Purchased Entities on completion.

15

iii.

Deemed Disposal and Liquidation means: (A) the disposal by Allied Farmers of its Acquired Assets to a third party for market value; and (B) the disposal by each Acquired Entity of its Acquired Assets to a third party for market value, the application of the proceeds of such disposal by each Acquired Entity towards repayment of its liabilities, the remittance of any liabilities of the Acquired Entities that remain unpaid, followed by the liquidation or wind-up of the Acquired Entities.

iv.

Purchased Entities means all entities whose shares are acquired by Allied Farmers under the Allied Farmers Proposal.

(e)

The calculations will not take account of general operating costs incurred during the relevant period.

(f)

Allied Farmers is required to separately account for any assets so as to enable the assessment to be effected in the manner required and will procure that not less than two of its independent directors and its auditor each provide a certificate for the benefit of investors confirming that the calculation has been effected in the manner required and that each component of the calculation is materially accurate.

GRANT SAMUEL INDEPENDENT EXPERT REPORT

Hanover Finance Limited, United Finance Limited & Hanover Capital Limited Independent Report On the merits of the Allied Farmers’ Proposal

November 2009

Table of Contents Glossary ......................................................................................................................................................................................... 3
 1.


Introduction........................................................................................................................................................................... 5
 1.1


Background ................................................................................................................................................................. 5


1.3


Summary Terms of the Proposal .................................................................................................................................. 7


1.2
 1.4
 1.5


Recent History ............................................................................................................................................................. 5
 Purpose of the Report.................................................................................................................................................. 8
 Basis of Evaluation ....................................................................................................................................................... 8


2.


Summary of Merits ............................................................................................................................................................... 9


3.


The Proposal in Further Detail .......................................................................................................................................... 12


4.


2.1


Conclusions ................................................................................................................................................................. 9


3.1


Structure of the Allied Farmers’ Proposal ................................................................................................................... 12


3.2
 4.1


Background ............................................................................................................................................................... 19


4.3


Financial Performance ................................................................................................................................................ 20


4.2
 4.4
 5.


4.5


Financial Position ....................................................................................................................................................... 21
 Cash Flow.................................................................................................................................................................. 23


5.1


Background ............................................................................................................................................................... 24


5.3


Financial Performance ................................................................................................................................................ 24


5.4
 5.5


Current Operations..................................................................................................................................................... 24
 Financial Position ....................................................................................................................................................... 26
 Cash Flow.................................................................................................................................................................. 27


Merits................................................................................................................................................................................... 28
 6.1


Catalyst and Rationale for the Allied Farmers’ Initiating the Proposal .......................................................................... 28


6.3


Implications of the Allied Farmers’ Proposal ............................................................................................................... 31


6.2
 6.4
 6.5
 6.6
 7.


Current Operations..................................................................................................................................................... 19


Profile of United .................................................................................................................................................................. 24
 5.2


6.


Profile of Allied Farmers.............................................................................................................................................. 15


Profile of HFL ...................................................................................................................................................................... 19


6.7


The Value of the Allied Farmers’ Proposal .................................................................................................................. 28
 Holding equity compared to holding debt securities ................................................................................................... 33
 Alternatives to the Allied Farmers’ Proposal................................................................................................................ 35
 Other advantages and disadvantages of the Allied Farmers’ Proposal ........................................................................ 37
 Acceptance or Rejection of the Allied Farmers’ Proposal............................................................................................ 39


Qualifications, Declarations & Consents.......................................................................................................................... 40
 7.1


Qualifications.............................................................................................................................................................. 40


7.3


Disclaimers ................................................................................................................................................................ 41


7.2
 7.4
 7.5
 7.6
 7.7


Limitations and Reliance on Information ..................................................................................................................... 40
 Independence ............................................................................................................................................................ 41
 Information................................................................................................................................................................. 41
 Declarations ............................................................................................................................................................... 41
 Consents ................................................................................................................................................................... 42


Appendix A – Overview of Finance Industry

2

Glossary Glossary Term

Definition

$20 million Pledge

The up to $20 million subordinated pledge, personally guaranteed by the Shareholders, available as part of the Support Package in certain circumstances in the event of a shortfall of funds to meet repayment obligations to the Secured Depositors and Secured Stockholders

AFI

Allied Farmers Investments Limited

Allied Farmers

Allied Farmers Limited

Axis Companies

The subsidiaries of HFP, being Clearwater Avenue Holdings Limited, HPL Rhode Island (2008) Limited, Lifestyles of New Zealand Queenstown Limited, LONZ 2008 Limited, LONZ 2008 Holdings Limited, Matarangi Beach Estates Limited, and QWF Holdings Limited and their respective subsidiaries

Capital Bondholders

Holders of Capital Bonds issued by HCL

Capital Bonds

Bonds issued by HCL under the HCL Capital Bonds Trust Deed

Debt Restructure

The debt restructures in respect of debt securities issued by HFL, United and HCL approved by extraordinary resolutions of Investors on 9 December 2008

Guardian Trust

The New Zealand Guardian Trust Company Limited

Hanover

HFL, HCL and United

Hanover Secured Deposits Trust

Trust Deed between HFL and The New Zealand Guardian Trust Company Limited dated 18

Deed

July 1985 in respect of the Secured Deposits, as amended

Hanover Subordinated Notes

HFL Trust Deed Relating to the Issue of NZ$20 million Fixed Rate Subordinated Notes between

Trust Deed

HFL and Perpetual Trust Limited dated 14 October 2002, as amended

HCL

Hanover Capital Limited

HFL

Hanover Finance Limited

HCL Capital Bonds Trust Deed

Trust Deed between HCL and Perpetual Trust Limited dated 4 October 2005

HFP

HFP Investments Limited

Investors

The Secured Depositors, Secured Stockholders, Subordinated Noteholders and Capital Bondholders

Listing Rules

The listing rules applying to the NZSX securities market operated by NZX

Matarangi Beach Estates Loan

The $26 million second mortgage loan to Matarangi Beach Estates acquired by HFP as part of the Debt Restructure

NBDTs

Non-bank deposit takers

NZ IFRS

New Zealand International Financial Reporting Standards

NZX

NZX Limited

Perpetual Trust

Perpetual Trust Limited

The Proposal

The proposal by Allied Farmers to acquire the loan assets and the Support Package assets of HFL and United in exchange for the extinguishment of HFL, HCL and United’s liability to their respective Investors by way of payment in Allied Farmers shares

Secured Depositors

Holders of the Secured Deposits issued by HFL

Secured Deposits

Secured deposits issued by HFL under the HFL Secured Deposits Trust Deed

Secured Stock

Secured Stock issued by United under the United Secured Stock Trust Deed

Secured Stockholders

Holders of the Secured Stock issued by United

Shareholders

Mr Mark Hotchin and Mr Eric Watson

Subordinated Noteholders

Holders of the Subordinated Notes issued by HFL

Subordinated Notes

Subordinated notes issued by HFL under the HFL Subordinated Notes Trust Deed

3

Support Package

The Shareholder Support Package

Trust Deeds

The HFL Secured Deposits Trust Deed, the HFL Subordinated Notes Trust Deed, the HCL Capital Bonds Trust Deed and the United Secured Stock Trust Deed

United

United Finance Limited

United Secured Stock Trust

Trust Deed Relating to the Issue of Secured Stock and Unsecured Deposits between United

Deed

Finance Limited and Perpetual Trust Limited dated 12 March 2002, as amended

4

1. Introduction 1.1

Background On 18 November 2009 Hanover Finance Limited (HFL), United Finance Limited (United) and Hanover Capital Limited (HCL) (collectively Hanover) announced that it had entered into a transaction to sell the entire business to Allied Farmers Limited (Allied Farmers), a company listed on the New Zealand Stock Exchange (NZX) (the Proposal). The Proposal involves Allied Farmers acquiring the assets of Hanover in exchange for shares in Allied Farmers being issued to the holders of: 

Hanover Secured Deposits (the Secured Depositors);



United Secured Stock (the Secured Stockholders);



Hanover Finance Subordinated Notes (the Subordinated Noteholders); and



Hanover Capital Bonds (the Capital Bondholders), collectively the Investors.

In essence the Proposal involves a conversion of all outstanding debt instruments in Hanover for equity in Allied Farmers. If the Proposal is implemented the Investors will collectively own approximately 97% of Allied Farmers at completion. For all intents and purposes the Proposal is therefore a back door listing of Hanover. For it to proceed, the Proposal requires a 75% majority of each class of Hanover Investor to vote in favour of the Proposal under the provisions of the various Hanover trust deeds. Investors will be asked to vote on the Proposal at a special meeting of Investors to be held on 16 December 2009. The Proposal is also a major transaction under the NZSX Listing Rules (Listing Rules) and therefore requires the approval of a simple majority (50%) of shares voted by Allied Farmers shareholders eligible to vote and in attendance at a special meeting. At that meeting, scheduled for 8 December 2009, Allied Farmers shareholders will be asked to vote on the proposed acquisition of the Hanover assets and on the issue of Allied Farmers shares to the Investors. 1.2

Recent History In December 2008 the Investors approved amendments to the Hanover Secured Deposits Trust Deed dated 18 July 1985, the United Secured Stock Trust Deed dated 12 March 2002, the Hanover Subordinated Notes Trust Deed dated 14 October 2002, and the HCL Capital Bonds Trust Deed dated 4 October 2005 (together the Trust Deeds), to allow a debt restructuring (Debt Restructure) of Hanover. The schedule of repayments to the Secured Depositors and Secured Stockholders agreed under the Debt Restructure is summarised as follows: Secured Deposit and Secured Stock Repayments Agreed under Debt Restructure Period ending

Annual

Quarterly

31 December 2009

8c

2c

31 December 2010

10c

2.5c

31 December 2011

12c

3c

31 December 2012

35c

8.75c

31 December 2013

35c

8.75c

Total

100c

5

In addition, under the terms of the Debt Restructure: 

HFL Subordinated Noteholders agreed to receive 50% of their principal repayments, following payment in full of the HFL Secured Depositor obligations, with the payment to be made on 31 December 2013, at which time the remaining 50% of their principal was to be cancelled; and



HCL Capital Bondholders agreed to receive 50% of their principal repayments, following payment in full of the HFL Secured Deposit and HFL Subordinated Note obligations, with payment being made on 31 December 2013, at which time the remaining 50% of their principal was to be cancelled.

At the time of the Debt Restructure, PricewaterhouseCoopers (PwC) was commissioned to opine on the Debt Restructure for The New Zealand Guardian Trust Company Limited (Guardian Trust), as trustee for the Secured Depositors, and by Perpetual Trust Limited (Perpetual Trust) as trustee for the Secured Stockholders. Similarly, Korda Mentha were engaged by Perpetual Trust as trustee for the Subordinated Noteholders and Capital Bondholders. In its report PwC stated it believed that Hanover’s view of the expected loan recoveries was optimistic and instead estimated that the HFL Secured Depositors would receive between 60 cents and 83 cents in the dollar (rather than the full dollar as indicated by Hanover management) and United Secured Stockholders would receive between 56c and 100c in the dollar. At the commencement of the Debt Restructure the following amounts were outstanding to each class of Investor: Debt Restructure – Amounts owing to security holders ($ million) Security Type

Gross value at time of

Less write off under

Value at beginning of

Debt Restructure

Debt Restructure

Debt Restructure

HFL Secured Deposits

463.8

-

463.8

United Secured Stock

64.7

-

64.7

HFL Subordinated Notes HCL Capital Bonds Total

2.1

(1.0)

1.1

24.2

(12.1)

12.1

554.8

(13.1)

541.7

Shareholder Support Package The Debt Restructure incorporated a Shareholder Support Package (the Support Package) provided by Hanover’s ultimate shareholders. United is wholly owned by HFL, which is 50% owned by interests associated with Mark Hotchin and 50% by interests associated with Eric Watson (together, the Shareholders). The Support Package consisted of: 

$10 million in cash, held for the Investors in the event that amounts payable under the Debt Restructure are not paid;



various property owning subsidiaries (the Axis Companies) held by HFP Investments Limited (HFP), a company owned by HFL (87.77%) and United (12.23%). At the time of the Debt Restructure HFL and United both had several loans to the Axis Companies. It was intended that where possible the Axis Companies would provide guarantees and security to support the Debt Restructure. The Axis Companies were acquired by HFP for $40 million, funded by way of a subordinated, interest-free loan, which could only be repaid once all amounts under the Debt Restructure had been paid;



a second ranking mortgage over the Matarangi Beach Estate held by HFP for the benefit of HFL and United with a face value of $26 million; and



a commitment from entities associated with the Shareholders to provide two tranches of $10 million personally guaranteed by the Shareholders (the $20 million Pledge), available in the event of a shortfall of cash to meet principal repayment obligations to HFL Secured Depositors and United Secured Stockholders. The first tranche becomes payable to the extent that the $10 million in cash has been used to meet a shortfall arising for the 12 months to 31 December 2009 and there is a further shortfall for the 12 months to 31 December 2010. Similarly the second tranche becomes payable to the extent there is a shortfall for the period from 1 January 2011 to 31 December 2013,

6

and the $10 million in cash and the first tranche have been utilised. The commitment to fund up to $20 million by the Shareholders ceases if either of HFL or United are placed into receivership, liquidation or any equivalent regime (except where such action is caused by breach of the shareholder support arrangements). The Support Package was only available to Investors if the Debt Restructure was supported by a 75% majority of each class of Investor (i.e.: had the Debt Restructure not been approved the Support Package would not have been provided). Although the Debt Restructure framework assessed that the Support Package would have been self funding, in fact the estimated costs of maintaining the Support Package assets are between $5 million and $6 million annually. These costs comprise the interest and other costs payable to the primary lenders as well as the costs associated with maintaining and operating the various property assets. Events since implementation of Debt Restructure Since the implementation of the Debt Restructure, property and finance markets have deteriorated further and on 10 November 2009 Hanover confirmed that it was unlikely that the underlying assets of the companies would be sufficient to meet all their obligations under the Debt Restructure. The Directors of HFL and United now estimate that the return to Secured Depositors is likely to be approximately 70 cents per dollar of principal with United Secured Stockholders likely to receive approximately 90 cents per dollar of principal. HFL has written down its loan book by a further $274 million since June 2008, and despite its intention under the Debt Restructure to continue its lending activities, very limited new lending has in fact taken place. United has also written down its loan book by $29 million since June 2008. The Axis Companies and the Matarangi Beach Estates Loan have been written down from $66 million to $34 million. 1.3

Summary Terms of the Proposal The Proposal involves Allied Farmers acquiring the finance assets of HFL and United as well the Support Package assets, in exchange for shares in Allied Farmers being issued to the Investors. The Proposal will be undertaken by a wholly owned Allied Farmers subsidiary, Allied Farmers Investments Limited (AFI). To avoid unnecessary complexity Grant Samuel has used the term “Allied Farmers” to describe AFI in this report. Implementation of the Proposal involves the following steps: 

the Support Package assets (less the $20 million Pledge) being transferred from HFP to HFL and United in their respective shares (87.77% to HFL and 12.23% to United);



the Investors releasing HFL and United from an aggregate of approximately $114 million of the amount owing on their respective securities under the terms of the Debt Restructure, being the excess amount over the consideration offered by Allied Farmers;



the Investors assigning the revised net value ($396.2 million) of their Secured Deposits, Secured Stock, Subordinated Notes and Capital Bonds to Allied Farmers in exchange for shares in Allied Farmers of an equivalent ascribed value;



Allied Farmers assigning the Secured Deposits, Secured Stock, Subordinated Notes and Capital Bonds to HFL and United in exchange for the finance assets and Support Package assets of each company; and



an amount of $5 million in cash will be retained by Hanover to fund costs associated with the Proposal including financial, tax, legal, accounting and other fees payable to advisers, amounts payable to the trustees and their advisers, the cost of the independent report and all printing, publicity and meeting costs. An additional $5 million in cash will be paid to Hanover for the costs of exiting the business including tax and contingent liabilities arising from pending litigation.

7

1.4

Purpose of the Report The Directors of the Hanover companies have engaged Grant Samuel & Associates Limited (Grant Samuel) to prepare an independent assessment of the Proposal. There is no requirement to obtain an independent report on the Proposal under the Trust Deeds or under legislation. Nevertheless, the Directors of HFL and United have agreed with the trustees to obtain an independent report on the merits of the Proposal to assist the Investors in making an informed decision.

1.5

Basis of Evaluation Grant Samuel has evaluated the Proposal by reviewing the following factors: 

the estimated value of the assets being acquired by Allied Farmers and the estimated value of the Allied Farmers shares issuable under the Proposal when compared to that estimated value;



the likelihood of an alternative offer and alternative transactions that could realise fair value for the Investors;



the likely market price and liquidity of Allied Farmers shares following completion of the Proposal;



any advantages or disadvantages for the Investors of accepting or rejecting the Proposal;



the timing and circumstances surrounding the Proposal;



an assessment of the alternatives available to the Directors of HFL, United and HCL including maintenance of the status quo and the potential of receivership;



an assessment of the likely future strategic direction of Allied Farmers following the completion of the Proposal; and



the key differences between Investors holding debentures and notes, and holding shares.

Whether the Proposal is in the best interests of the Investors is a broad test that encompasses an assessment of the benefits, disadvantages and risks of the Proposal. Any opinion as to whether the Proposal is in the best interests of Investors will be subjective. Individual Investors having considered the information set out in this report may therefore form different opinions based on their own views of market conditions, the economic outlook and risk preferences. A transaction can be considered to be in the best interests of Investors if they are likely to be better off if the transaction proceeds than they would be if the status quo prevailed.

8

2. Summary of Merits 2.1

Conclusions It is Grant Samuel’s opinion that the Proposal is superior to the status quo (and the prospect of potential receivership) and that an alternative superior offer is unlikely. Allied Farmers’ Proposal The Proposal has been developed with the intention of providing Allied Farmers with a significant capital injection to expand and develop its business whilst providing the Investors with marketable equity in a listed entity in exchange for their illiquid debt securities. It is effectively a back door listing of Hanover and is a form of finance industry consolidation. The transfer of the performing loans to Allied Nationwide Finance Limited (Allied Nationwide) will serve to significantly increase its equity and assist it in obtaining a satisfactory credit rating. The consideration being offered by Allied Farmers is considered fair. To the extent there is any transfer of value between the Investors and Allied Farmers shareholders it will be insignificant particularly given that the Investors will own approximately 97% of an enlarged Allied Farmers (at completion) if the Proposal is implemented. There is potential for Allied Farmers to benefit from improved liquidity and share price with the increase in its market capitalisation under the Proposal. However, it is likely that in the short term the shares in Allied Farmers will trade at a lower price than the original transfer value, particularly if there are large numbers of sellers of these securities. Some Investors may elect to retain their Allied Farmers shares and participate in any value upside that may eventually be realised from the progressive realisation of the Hanover assets under the control of Allied Farmers. The ownership of shares is a very different investment from holding either Secured Deposits, Secured Stock, Subordinated Notes or Capital Bonds. While there is generally more liquidity associated with equity instruments, there is no entitlement to regular payments with holders’ returns coming from dividends and changes in share price. Holders of equity have the lowest priority over available funds in a company. Grant Samuel note that this is essentially the current position of Investors under the current ownership of Hanover, given that there is no tangible value left within Hanover for the Shareholders, (Messrs Hotchin and Watson) whether the Proposal is implemented or not. At the date of the Debt Restructure proposal, PwC produced three scenarios for the estimated distributions available to HFL Secured Depositors. Based on these scenarios, PwC considered that the likely level of loan recoveries and asset realisations during the restructuring period may have been somewhere between 60c and 83c in the dollar. In addition PwC estimated the HFL Secured Depositors would be worse off under a receivership.

9

The chart below illustrates how the three PwC scenarios compare to the current Proposal for HFL Secured Depositors:

PwC also produced two scenarios for the estimated distributions available to United Secured Stockholders. Based on this analysis PwC estimated that the likely level of loan recoveries and asset realisations within United during the restructuring period may have been somewhere between 56c and 100c in the dollar. Again, PwC estimated that the United Secured Stockholders would be worse off under a receivership. The chart compares the two PwC Scenarios and the Proposal:

10

When reviewing the charts above, it is important to acknowledge that since the Debt Restructure was entered into in December 2008, the property development, construction and finance sectors have deteriorated further. Status Quo and potential Receivership Under the status quo, the Investors have no flexibility regarding early repayment of their investment. Repayments are effectively reliant on the management of Hanover being able to realise sufficient cash from the underlying portfolio of assets. The rapid realisation of assets is difficult and undertaking new lending is essentially impossible under current market conditions. The Directors of HFL, United and HCL have now announced that it is likely that those companies will not be able to meet all their repayment obligations under the Debt Restructure. Subordinated Noteholders and Capital Bondholders are now unlikely to receive any payments and Secured Depositors and Secured Stockholders are unlikely to receive all their scheduled payments. In the event that those repayment obligations cannot be met, the trustees for those companies are, in Grant Samuel’s opinion, likely to place them into receivership. The prospect of receivership is not good for the ongoing day-to-day management of Hanover or for the likely realisable value of the remaining securities. Receivers will typically tend to seek to maximise a sale of assets over a short period of time, which will therefore impact on the prices those assets can be sold for and accordingly, the proceeds that Investors may ultimately receive. If the Proposal is implemented, Allied Farmers will have the ability to take a longer term and more proactive approach to the Hanover asset portfolio. This may include, on a case-by-case basis, buying out first ranking securities to take full control of a development and/or investing further funds to ensure completion (and thereby enhancing sale prospects). In Grant Samuel’s opinion a proactive approach to maximising value should result in a superior outcome than a sale in today’s market. For this reason, electing to enter a Debt Restructure in December 2008 was arguably a better choice than receivership. Alternative Offer Given that the Debt Restructure has been operating for a year, and has been the subject of much media and investor scrutiny, there has been ample opportunity for an alternative offer to be made for the Hanover assets or business. We understand that no such offer has been received. Entire Report This report should be read in its entirety as Grant Samuel’s opinion is to be considered as a whole. Selecting portions of the analyses or factors considered by it, without considering all the factors and analyses together, could create a misleading view of the process underlying the opinion. The preparation of an opinion is a complex process and is not necessarily susceptible to partial analysis or summary.

11

3. The Proposal in Further Detail 3.1

Structure of the Allied Farmers’ Proposal The Proposal involves Allied Farmers acquiring the finance assets of HFL and United as well as the Support Package assets, in exchange for shares in Allied Farmers. Implementation of the Proposal would involve the following steps: 

the Support Package assets being transferred from HFP to HFL and United in their respective shares (87.77% to HFL and 12.23% to United);



the Investors releasing HFL, United and HCL from an aggregate of approximately $114 million of the amount owing on their respective securities under the terms of the Debt Restructure, being the excess amount over the consideration offered by Allied Farmers;



the Investors assigning the net value ($396.2 million) of their Secured Deposits, Secured Stock, Subordinated Notes and Capital Bonds to Allied Farmers in exchange for shares in Allied Farmers of an equivalent ascribed value;



Allied Farmers assigning the Secured Deposits, Secured Stock, Subordinated Notes and Capital Bonds to HFL and United in exchange for the finance assets and Support Package assets of each company; and



an amount of $5 million in cash will be retained by Hanover to fund costs associated with the Proposal including financial, tax, legal, accounting and other fees payable to advisers, amounts payable to the trustees and their advisers, the cost of the independent report and all printing, publicity and meeting costs. An additional $5 million in cash will be paid to Hanover for the costs of exiting the business including tax and contingent liabilities arising from pending litigation.

The following diagram outlines the above steps:

Release Secured Deposits, Secured Stock, Subordinated Notes and Capital Bonds HFL, United and HCL (including Support Package)

Step 3

Allied Farmers

Transfer finance and Support Package assets

Assign net value of Secured Deposits, Secured Stock, Subordinated Notes and Capital Bonds

Issue shares in Allied Farmers to Investors

Step 1

Investors release HFL, United and HCL from part of their obligations under the Debt Restructure

Step 2

Investors

12

If the Proposal is implemented then Allied Farmers will assume the lease for Hanover’s premises and certain operating leases necessary for the conduct of the business. In addition it will take over the computer system software, office furniture and fittings, and may employ a number of Hanover staff. Consideration under the Allied Farmers’ Proposal Various discounts have been applied by Allied Farmers to each category of Investor class. The discount assessed by Allied Farmers and the consequent consideration payable to each class of Investor is summarised as follows: Consideration under the Allied Farmers’ Proposal ($ million) Security type

Value at start of

Amount attributed

Total attributed by

Debt Restructure

by Allied Farmers

Allied Farmers for

Total value to be paid in Allied

for Loan and

Support Package

Farmers shares

Property Assets HFL Secured Deposits

463.8

301.8

32.2

334.0

United Secured Stock

64.7

49.9

4.4

54.3

1.1

-

0.6

0.6

12.1

-

7.3

7.3

541.7

351.7

44.5

396.2

HFL Subordinated Notes HCL Capital Bonds Total

In addition to the $396.2 million to be paid by way of Allied Farmers shares, Allied Farmers is paying $10 million in cash to Hanover to cover transaction costs and residual obligations, effectively increasing the price being paid to $406.2 million. The price at which the Allied Farmers shares will be issued will be determined by the volume weighted average price of price setting trades (VWAP) in the 5 trading days prior to the meeting of the Investors. Based on the net value ascribed to the loan and property assets and the Support Package and using an estimated VWAP of $0.35 for analysis purposes, the Investors will own approximately 97% (at completion) of Allied Farmers if the Proposal is implemented. The value of shares to be issued to the Investors under the Proposal compared to the payments received to date under the Debt Restructure are outlined in the table below: Payments received under the Allied Farmers’ Proposal and Debt Restructure (per $1 of principal outstanding at 31 December 2008) Type of Payment

Cash

Allied Farmers’

Allied Farmers’

Shares

Shares

Amount received

Amount to be

Amount to be

Cash and Shares

Total to be received

under Debt

received from

received from

following completion

Restructure to

Loan and

Shareholder

of the Allied Farmers’ Proposal

date

Property Assets

Support

HFL Secured Deposits

$0.06

$0.65

$0.07

$0.78

United Secured Stock

$0.06

$0.77

$0.07

$0.90

HFL Subordinated Notes*

-

-

$0.30

$0.30

HCL Capital Bonds*

-

-

$0.30

$0.30

* the Subordinated Noteholders and Capital Bondholders each agreed to reduce their entitlement to $0.50 in the $1 under the Debt Restructure. Accordingly, $0.30 represents 60% of that reduced entitlement

13

Assets being acquired under the Allied Farmers’ Proposal The assets being acquired under the Proposal comprise the HFL and United loan and property assets and various Support Package assets. The table below outlines the 30 June 2009 book values of the assets being acquired: Assets being acquired under the Allied Farmers’ Proposal ($000s) Gross

Provisions

Net Value

HFL Loans

Add-back NZ 1

IFRS Provisions

Value

Loans since

Net value

realised

being acquired

434,178

(162,894)

271,284

57,781

(20,150)

308,915

United Loans

53,149

(23,378)

29,771

12,394

-

42,165

United Investments

36,869

(24,308)

12,561

1,893

-

14,454 365,534

Support Package assets (Axis Companies including Matarangi Mortgage) Support Package cash Net assets being acquired

34,000 10,500 410,034

It is worth noting that the provisions in the above table are made up of two components. The first is the reduction in the gross value of loans for specific bad debts. The second (added back in the table as NZ IFRS Provisions) is required under NZIFRS, which necessitate a discounting of the expected cash flows over the term of the loan to the present value, using the interest rate originally applicable to the loan. This provision reverses over time as interest income in the income statement. Accordingly, the Directors of Hanover are of the view that it should be wholly or partially disregarded in assessing the value of the loan books. Grant Samuel agrees with this assessment. The Shareholders’ obligation to provide the $20 million Pledge, included as part of the original Support Package, will cease if the Proposal is implemented or in the event of receivership of Hanover (unless receivership is a result of default on the part of the Shareholders). All other components of the Support Package will survive. As part of the Proposal, Allied Farmers has agreed to pay $5 million to Hanover to meet transaction costs. A further $5 million is to be paid to Hanover Group Holdings Limited, a company owned by the Shareholders, to meet the costs of exiting the business including tax and various contingent liabilities associated with ongoing and pending litigation. Bonus Share Issue If the Proposal is approved Allied Farmers will issue its existing shareholders with bonus shares immediately prior to implementation of the Proposal. For every 10 Allied Farmers shares held, existing shareholders will receive 1 bonus share. The bonus shares will be convertible into ordinary shares in Allied Farmers if the audited financial results for the financial year to 30 June 2011 show that Allied Farmers has made a loss (realised or unrealised) on the assets transferred under the Proposal (i.e. the value of any of the Hanover assets realised together with the residual value of any of the Hanover assets still held is less than $396.2 million). The conversion ratio for bonus shares to ordinary shares will be calculated such that Allied Farmers’ shareholders aggregate shareholding in the company is increased to what it would have been immediately after the Proposal if the Hanover assets had been transferred at the value ascribed as of 30 June 2011. The value at June 2011 will be determined in accordance with NZ GAAP but not applying any additional discount that may be required under IFRS financial statement disclosure rules (i.e. a methodology consistent with the valuation of the assets for the purpose of the original Allied Farmers offer under the Proposal) and any loan asset or property investment with a value in excess of $2 million will require an independent registered valuation. The value will be certified by two independent directors of Allied Farmers and the company’s auditor. 1

New Zealand International Financial Reporting Standards

14

Approvals required The Proposal is a major transaction under the NZX listing rules applying to the NZSX securities market operated by NZX and therefore requires the approval of a simple majority (50%) of shares voted by Allied Farmers shareholders eligible to vote and in attendance at the special meeting to be held on 8 December 2009. Allied Farmers will be asked to vote on the acquisition of the HFL and United assets and on the issue of shares to Investors. The Proposal also requires a 75% majority of each class of Hanover Investor who vote, to vote in favour of the Proposal under the provisions of the Trust Deeds. A quorum of 50% of the voting rights of each class of Investor is required in order to conduct a vote on the relevant resolutions. If a quorum is not reached a second meeting will be held at which no minimum quorum will be required. Investors will be asked to consider the Proposal at a special meeting of Investors to be held on 16 December 2009. If the Proposal is approved, Investors will be endorsing (among other things): 

the release of HFL,HCL and United from the following amounts (being in excess of the consideration offered by Allied Farmers): −

Secured Depositors: 22 cents of each $1 of principal amount outstanding at 31 December 2008 (which, taking into account the 6 cents already paid, will leave 72 cents per dollar outstanding);

−

Secured Stockholders: 10 cents of each $1 of principal amount outstanding at 31 December 2008 (which, taking into account the 6 cents already paid, will leave 84 cents per dollar outstanding);

−

Subordinated Noteholders: 20 cents of each $1 of principal amount outstanding at 31 December 2008 and 50 cents of each $1 of principal outstanding at 31 December 2008 which would otherwise have been cancelled on completion of the Debt Restructure (which will leave 30 cents per dollar outstanding); and

−

Capital Bondholders: 20 cents of each $1 of principal amount outstanding at 31 December 2008 and 50 cents of each $1 of principal outstanding at 31 December 2008 which would otherwise have been cancelled on completion of the Debt Restructure (which will leave 30 cents per dollar outstanding);



the transfer by each Investor of the remaining investments to Allied Farmers in exchange for shares in Allied Farmers;



the sale of the finance assets and Support Package assets to Allied Farmers in exchange for the investments; and



the release of the trustees, HFL, HCL, United and the Shareholders from the security and other support provided by the Shareholders in support of the Debt Restructure.

The Proposal is conditional upon all classes of Investors approving the Proposal. 3.2

Profile of Allied Farmers Allied Farmers is a NZX listed company providing rural and financial services including livestock trading, rural merchandise, finance and real estate services. The company currently has 37.7 million shares held across approximately 5,150 shareholders. The company was founded in Taranaki in 1913 and listed on the NZX in 2002. Livestock services are provided through approximately 50 livestock agents at saleyards in the company’s core operating regions including Taranaki, King Country, Waikato, Manawatu, Mid and South Canterbury. Allied Farmers also acts as agent for both buyers and sellers in paddock sales (private treaty sales) and via its online trading platform MyLiveStock.co.nz. There are 14 rural merchandise stores operated under

15

the trading names Taranaki Farmers and King Country Farmers. In addition, Allied Farmers First National is the leading provider of rural and lifestyle real estate services in the Taranaki area. Allied Farmers’ financial services are provided through it’s 100% wholly owned subsidiary Allied Nationwide which offers diversified investment and financing solutions to rural, property, commercial and business customers across New Zealand. On 30 September 2008 Allied Nationwide amalgamated with Speirs Finance, a finance company specialising in finance for commercial vehicles and capital equipment. As at 30 June 2009 Allied Nationwide’s loan book had a net value of $271 million comprising net loans and advances of $142 million and net finance leases of $129 million. A brief financial profile of Allied Farmers is outlined below: Allied Farmers Financial Profile (NZ$000s) Year end 30 June

2006

2007

2008

2009

Revenue

85,173

107,430

110,368

109,530

EBITDA

7,203

15,251

29,750

2,098

EBIT

4,940

13,153

27,325

(299)

Net operating profit after tax

1,334

(2,771)

2,369

(35,017)

Operating Cash Flow

2,988

6,911

84,555

62,070

10,722

28,491

(20,143)

20,285

Total Assets

204,054

341,583

238,256

392,355

Total Liabilities

180,502

316,121

210,950

382,348

23,552

25,462

27,306

10,007

Net Cash Flow

Equity Source: Allied Farmers Financial Reports.

Allied Farmers’ financial performance over the past 4 years has been varied. Despite year on year revenue growth (and broadly flat revenue in 2009) the company has had inconsistent earnings culminating in a $35 million loss in the year to 30 June 2009. This result included a $19.5 million impairment in the goodwill associated with Allied Nationwide, a $10 million increase in interest and finance costs due to the issue of $103 million of commercial paper during the year (matched by a corresponding increase in interest income), and an increase in provision for impaired assets. Allied Farmers announced on 22 October 2009 that it had obtained a waiver from Westpac to its banking covenants which would have otherwise been breached on 30 September 2009 and advised that Westpac had agreed to continue to provide banking support under the terms and conditions agreed in August 2009. Allied Farmers’ current level of equity is unsustainable and needs to be addressed with urgency. If implemented, the Proposal will result in Allied Farmers receiving a substantial increase in equity. In addition as the finance assets and shareholder support assets are converted to cash it will strengthen the liquidity position of Allied Farmers and improve the quality of the capital for rating purposes.

16

The share price performance of Allied Farmers over the last four years is outlined in the chart below:

Allied Farmers shares are very thinly traded and its operating performance over recent years has been driven by a downturn in both sectors of the markets in which it operates - rural servicing and finance. The rights issue undertaken by the company in May and the sale of 8.69% of Allied Farmers’ shares by Speirs Group accounts for the significant uplift in traded volumes in the stock creating an ‘overhang’ putting the thinly traded stock price under further pressure. As of 16 October 2009 Allied Farmers had 37.7 million shares on issue held by approximately 5,150 shareholders. The Company’s top 10 shareholders as at 16 October 2009 are shown in the table below: Allied Farmers – Top 10 Shareholders as at 16 October 2009 Shareholder

Shares (000s)

%

Allied Capital Limited

5,443.0

14.4

John Revell Hynds

4,841.2

12.9

Hubbard Churcher Trust Management Limited

1,592.5

4.2

Nessock Custodians Limited (053 a/c)

1,541.9

4.1

MK Wellington Trustee Company Limited

1,268.0

3.4

New Zealand Central Depository Limited

1,267.0

3.4

Integra Investments Limited

1,016.7

2.7

RotoruaTrust Perpetual Capital Fund Limited

763.3

2.0

James Ian Urquhart

500.0

1.3

Robert Andrew Geary

390.0

1.0

Top 10 Shareholders

18,623.6

49.4

Other Shareholders

19,073.1

50.6

Total

37,696.7

100.0

Allied Capital Limited is 80% owned by interests associated with Robert Alloway, a Director of Allied Farmers and 10% each by Paul Macfie, CEO, and William Giesbers, the Company Secretary of Allied Farmers. As can be seen from the above table the top 10 Allied Farmers shareholders control almost 50% of the company.

17

Allied Farmers also has 15.8 million listed options on issue with an exercise price of $0.60. These options last traded at $0.02 on 11 November 2009. Allied Farmers also has $12.6 million of capital notes on issue which will mature on 15 November 2011, at which time Allied Farmers will decide whether to redeem all or some of the capital notes for cash or offer to renew the capital notes on new terms and conditions. Any capital notes which Allied Farmers does not redeem for cash, or which are not renewed (at the election of the holder) will be automatically converted into shares in Allied Farmers at a 5% discount to the weighted average sale price of the shares over the 20 business day trading period prior to the maturity date.

18

4. Profile of HFL 4.1

Background HFL evolved out of Elders Finance in September 2005 as a specialist property financier with lending exposures predominately in New Zealand and Australia. HFL is 50% owned by the Shareholders. Until July 2008 HFL was funded primarily by publicly issued debentures. Following significant turmoil in the domestic finance and property markets, HFL ceased accepting new debenture investments and, on 23 July 2008 suspended principal and interest payments to investors. As at 30 June 2008, HFL had total assets of $592 million represented by approximately 110 individual loans with a net book value of $500 million. At 30 June 2008 HFL also had $485 million of debenture stock on issue across 13,800 investors. A significant proportion of HFL’s loan book (approximately 45%) consists of loans to property developments located in Queenstown. As at 30 June 2008: 

HFL’s top 10 loans accounted for 55% of its total portfolio;



the top 20 loans accounted for 76% of the portfolio;



approximately 31% of the company’s total loan book was in default; and



a further 11% would have been in default had the loan maturity dates not been extended.

By 30 June 2009 approximately 73% of HFL’s loan book was impaired. HFL’s primary exit strategy for the majority of its significant mezzanine debt positions was to refinance the loan positions through conventional debt provided by mainstream banks. Unfortunately with the deterioration in both the property and finance markets in New Zealand, sources of refinance are limited, if not non-existent. As at 30 June 2009 approximately 74% of HFL’s loan book was either secured by second mortgages or unsecured and almost all of HFL’s loans were capitalising interest loans, leaving the total of principal and interest outstanding until maturity. By any measure, the security position and debt servicing ability of most of the HFL loan portfolio was poor. In December 2008, with little alternative other than receivership, HFL put forward the Debt Restructure, which was approved by a 93% majority of HFL Secured Depositors, a 76% majority of HFL Subordinated Noteholders and a 93% majority of HCL Capital Bondholders. As at 30 June 2009 HFL has written down a further $309 million of assets, predominantly its loan assets ($274 million) and investment in United ($32 million). HFL’s net asset position has moved from $65 million at 30 June 2008 to a net liability position of $38 million, rendering HFL technically insolvent but for the Debt Restructure. 4.2

Current Operations HFL is operating under the terms of its Debt Restructure, and is neither taking any new deposits nor making any new loans (except in certain circumstances) in accordance with the Debt Restructure. Effectively HFL is undertaking a managed wind down of its loan book in order to meet its repayment obligations under the Debt Restructure. Given the latest significant write down in the value of its assets it appears unlikely that HFL will have sufficient funds to meet all of its obligations under the Debt Restructure.

19

4.3

Financial Performance The financial performance of HFL for the years ended 30 June 2008 and 2009 is shown in the table below: HFL Financial Performance (NZ$000s) Year end 30 June

2008

2009

Interest income

128,329

89,528

Interest expense

(65,900)

(47,890)

Net interest income

62,429

41,638

Other income

11,544

2,426

Net operating income

73,973

44,064

Operating expenses

(17,809)

(18,450)

Impairment expenses

(39,831)

(308,862)

16,333

(283,248)

Fair value adjustment on debt restructure

-

169,939

Interest expense cancelled on Debt Restructure

-

21,875

Principal cancelled on debt restructure

-

1,037

Tax expense

(6,157)

(11,639)

Profit (loss) after tax

10,176

(102,036)

Profit before income tax

The following points should be taken into consideration when reviewing the table above: 

interest income has declined as the number of non-performing loans in the HFL portfolio has increased;



interest is no longer accruing on the Secured Deposits or Subordinated Notes contributing to a decline in interest expense;



operating expenses consist of auditor’s fees, depreciation and amortisation, personnel expenses and various other administrative costs. In the 2009 financial year significant increases occurred in auditors fees, legal and consulting fees as part of the loan recovery process and debt restructure costs with decreases in personnel costs, other legal and consulting fees, marketing and management fees offsetting these increases;



HFL experienced a significant impairment of its loan book in the year to 30 June 2009. The $309 million impairment expense consists of increases in the provision for credit impairment of $137 million, a further write off of bad debts of $137 million and a $35 million impairment in the value of HFL’s subsidiary investments including $32 million impairment of its investment in United and a $3 million impairment of its investment in FAI Finance Limited (FAI);



under NZ IFRS HFL is required to apply fair value accounting principles, which have created several anomalies in the accounts. Approximately $62.7 million of the total $309 million impairment expense represents the difference between the sum of the estimated future cash flows from the HFL loan book and the net present value of those same cash flows discounted using the original effective interest rate applicable to the loans (in this case approximately 19%). The $62.7 million will be progressively written back to the income statement as revenue over the life of the loans (assuming no change in the timing and amount of the estimated future cash flows). Of this amount $5.0 million has been written back in the 30 June 2009 income statement leaving $57.7 million to be brought to account in future years;



the second anomaly caused by fair value accounting principles under IFRS is the “fair value adjustment on debt restructure” which represents a one-off gain of $169.9 million in the income

20

statement of HFL arising as a result of the restructure of the Secured Deposits, Subordinated Notes and Capital Bonds. The fair value gain on Debt Restructure will progressively reverse over the term of the Debt Restructure as follows: Debt Restructure Reserve – Amortisation (NZ$000s) Year end 30 June

$

2009

20,701

2010

41,798

2011

41,319

2012

38,552

2013

23,379

2014

4,190

Total Reserve

169,969

The reversal of the Debt Restructure reserve flows through the income statement of HFL at the interest expense line. The $20.7 million reversal for the year ended 30 June 2009 plus the $21.9 million future interest cancelled under the Debt Restructure forms the majority of the $47.9 million total interest expense. Excluding the one-off $169.9 million fair value adjustment on the debentures net of the $57.7 million discounting on the loans and advances HFL’s net loss after tax would have been $193.5 million. 4.4

Financial Position The financial position of HFL as at 30 June 2008 and 2009 is outlined in the table below: HFL – Balance Sheet (NZ$000s) Year ended 30 June Cash and cash equivalents Receivables and prepayments Net loans and advances Investments Intangible assets Other assets

2008 36,860

2009 1,947

3,284

8,658

499,919

271,284

43,796

155

376

315

7,682

3,810

591,917

286,169

Trade and other payables

8,444

6,884

Provisions

2,049

865

485,077

296,760

2,243

348

Total Assets

Secured deposits Capital bonds Loan sharing arrangement

29,247

19,400

527,060

324,257

Net assets

64,857

(38,088)

Share capital

71,650

71,651

Retained earnings

(9,624)

(260,903)

2,831

151,164

64,857

(38,088)

Total liabilities

Reserves Total equity

The following points are relevant when considering the above table: 

HFL’s cash reserves have been significantly depleted with the company paying out $27.8 million to Secured Depositors under the terms of the Debt Restructure;



as at 30 June 2009 HFL’s net loans and advances were comprised as follows:

21

HFL Net Loans and Advances – 30 June 2009 $000s

%

Gross loans and advances

434,178

100.0

Provisions for individually impaired assets

(162,894)

(37.5)

Net loans and advances

271,284

62.5

Neither past due nor impaired

52,490

19.3

Past due but not impaired

21,280

7.8

Individually impaired assets (Gross amount $360,407 less impairment provision $162,894)

197,513

72.9

271,284

100.0



the value of investments declined significantly between 2008 and 2009 due to a $35 million impairment - $32 million in relation to United and $3 million in relation to FAI;



other assets include deferred tax as at 30 June 2008 and non current assets held for sale (FAI) as at 30 June 2009;



the value of the Secured Deposits declined by the NZ IFRS “fair value” adjustment ($149.2 million being the full adjustment of $169.9 million less the $20.7 million reversal of the debt restructure reserve) and by the amount of repayments made to 30 June 2009; and



excluding the two NZ IFRS fair value adjustments of $149.2 million (favourable adjustment) on the face value of the Secured Deposits (net of the $20.7 million reversal) and the negative impairment of $57.7 million on the face value of the loans – a net favourable adjustment of $91.5 million, HFL’s equity is negative $129.5 million. Whether adopting the stated equity of negative $38 million as at 30 June 2009 or the negative $129.5 million if the two IFRS adjustments are reversed – HFL would be insolvent were it not for the Debt Restructure.

22

4.5

Cash Flow The cash flows for HFL for the years ended 30 June 2008 and 2009 are shown in the table below: HFL – Statement of Cash Flows (NZ$000s) Year end Interest and fee income Dividend income

2008

2009

117,745

38,767

12,801

1

(3,769)

5,875

Interest and fees paid

(74,003)

(9,352)

Payments to suppliers and employees

(18,838)

(20,350)

Sundry income

Income tax paid

(11,011)

(841)

Net decrease in loans and advances

230,878

(1,878)

Net decrease in secured deposits

(329,281)

(20,794)

-

(18,554)

Principal payments under debt restructure plan Net decrease in capital bonds

(7,191)

(169)

Net increase in loan sharing arrangement

24,810

(11,937)

Net cash flow from operations

(57,859)

(39,232)

(375)

4,900

Purchase of investments Purchase of property, plant and equipment

(13)

(321)

Purchase of intangible assets

(154)

(260)

Net cash flow from investing activities

(542)

4,319

(45,500)

-

Dividends paid Issue of redeemable preference shares Redemption of redeemable preference shares Net cash flow from financing activities Net cashflow

800

-

(9,733)

-

(54,433)

-

(112,834)

(34,913)

23

5. Profile of United 5.1

Background United is a wholly owned subsidiary of HFL which was established in 2002 as a specialist and primarily second-mortgage, lender to the commercial and residential property sectors in New Zealand and selected offshore markets. Until July 2008 United was funded primarily by publicly issued debentures. Following significant turmoil in the domestic finance and property markets, United ceased accepting new debenture investments and, on 23 July 2008, suspended principal and interest payments to investors. As at 30 June 2008 United had total assets of approximately $100 million including a loan portfolio of approximately 20 individual loans with a net book value of $73.8 million. At 30 June 2008 United also had $67.5 million of debenture stock on issue across 2,575 investors. A significant proportion of United’s loan book comprises loans on property developments located in Queenstown (approximately 40% as at 30 June 2009) and Australia (approximately 28% as at 30 June 2009). Almost 90% of United’s loan book is either unsecured or secured by second mortgage. As at 30 June 2009 approximately 44% of United’s loan book was impaired. In December 2008 United put forward a Debt Restructure in conjunction with HFL, which was approved by a 94% majority of United Secured Stockholders. As at 30 June 2009 United has written down a further $29 million of its loan book. United’s net asset position has moved from $25 million at 30 June 2008 to almost nil.

5.2

Current Operations United is operating under the terms of its Debt Restructure and is neither taking any new deposits nor making any new loans (except in limited circumstances in accordance with the Debt Restructure). Effectively United is undertaking a managed wind down of its loan book in order to meet its repayment obligations under the Debt Restructure. Given the latest significant write down in the value of its assets it appears unlikely that United will have sufficient funds to meet all of its obligations under the Debt Restructure. The Proposal has arisen as a result of these circumstances.

5.3

Financial Performance The financial performance of United for the years ended 30 June 2008 and 2009 is shown in the table below: United Group Financial Performance (NZ$000s) Year end 30 June

2008

2009

Interest income

27,828

14,658

Interest expense

(10,609)

(6,121)

Net interest income

17,219

8,537

Other income

(7,447)

(22,128)

Net operating income

9,772

(13,591)

Operating expenses

(3,174)

(4,788)

Impairment expenses

(8,395)

(29,011)

Profit before income tax

(1,797)

(47,390)

Fair value adjustment on debt restructure

-

23,595

Interest Cancelled on Debt Restructure

-

3,147

Tax expense

(1,407)

(3,725)

Profit after tax

(3,204)

(24,373)

24

The following points should be taken into consideration when reviewing the table above: 

interest income has declined as the number of performing loans in the United portfolio has reduced. Interest expense declined as interest is no longer accruing on the Secured Stock;



operating expenses are broadly flat other than costs associated with the debt restructure and loan recovery;



United experienced a significant impairment of its loan book in the year to 30 June 2009 of approximately $29 million;



under NZ IFRS United is required to apply fair value accounting principles, which have created several anomalies in the accounts. Approximately $12.4 million of the total $29 million impairment expense represents the difference between the sum of the estimated future cash flows from the United loan book and the net present value of those same cash flows discounted using the original effective interest rate applicable to the loans. The $12.4 million will be progressively written back to the income statement as revenue over the life of the loans (assuming no change in the timing and amount of the estimated future cash flows);



the second anomaly caused by fair value accounting principles under NZ IFRS is the “fair value adjustment on debt restructure” which represents a one-off gain of $23.6 million in the income statement of United arising as a result of the restructure of the Secured Stock. The fair value gain on debt restructure will progressively reverse over the term of the debt restructure as follows: Debt Restructure Reserve – Amortisation Year end 30 June

$000s

2009

2,881

2010

5,815

2011

5,745

2012

5,354

2013

3,232

2014 Total Reserve

568 23,595

The reversal of the debt restructure reserve flows through the income statement of United at the interest expense line. The $2.9 million reversal for the year ended 30 June 2009 forms the majority of the total interest expense. Excluding the one-off $23.6 million fair value adjustment United’s net loss after tax would have been $33.7 million.

25

5.4

Financial Position The financial position of United as at 30 June 2008 and 2009 is outlined in the table below: United Group Balance Sheet (NZ$000s) Year ended 30 June

2008

Cash and cash equivalents

3,812

Receivables and prepayments

2009 176

1,261

1,551

Net loans and advances

51,588

29,771

Investments

35,919

12,561

Intangible assets

85

11

Other assets

2,605

-

Total Assets

95,270

44,070

3,095

2,528

Trade and other payables Provisions

33

-

Secured deposits

67,491

41,381

Total liabilities

70,619

43,909

Net assets

24,651

161

Share capital

31,886

31,887

Retained earnings

(7,428)

(52,515)

193

20,789

24,651

161

Reserves Total equity

The following points are relevant when considering the above table: 

United’s cash reserves have been significantly depleted with the company paying out $3.9 million to Secured Stockholders under the terms of the Debt Restructure;



as at 30 June 2009 United’s net loans and advances were comprised as follows: United Net Loans and Advances – 30 June 2009 $000s

%

Gross loans and advances

53,149

100.0

Provisions for individually impaired assets

(23,378)

(44.0)

Net loans and advances

29,771

56.0

Neither past due nor impaired

3,774

25.1

Past due but not impaired

2,327

4.4

Reconciliation

Individually impaired assets (Gross amount $47,048 less impairment provision $23,378)

23,670

70.5

29,771

100.0



the investments principally relate to a property development in Australia. development declined significantly in the year to 30 June 2009;

The value of this



other assets comprise deferred tax assets at 30 June 2008;



the value of the Secured Stock declined by the NZ IFRS “fair value” adjustment ($20.7 million being the full adjustment of $23.6 million less the $2.9 million reversal of the debt restructure reserve) and by the amount of repayments made to 30 June 2009; and



excluding the two NZ IFRS fair value adjustments of $20.7 million favourable adjustment on the face value of the Secured Stock (net of the $2.9 million reversal) and the negative impairment of $14.3 million on the face value of the loans and investments – a net favourable adjustment of $6.4 million, United’s equity is negative $6.3 million, rendering United insolvent were it not for the Debt Restructure.

26

5.5

Cash Flow The cash flows for United for the years ended 30 June 2008 and 2009 are shown in the table below: United Group Statement of Cash Flows (NZ$000s) Year end 30 June Interest and fee income Sundry income

2008

2009

7,394

1,505

621

756

Interest and fees paid

(7,384)

(466)

Payments to suppliers and employees

(3,590)

(5,708)

Income tax paid

(5,243)

(62)

Net decrease in loans and advances

77,817

6,659

Net decrease in secured deposits

(93,618)

(2,809)

-

(2,587)

(24,003)

(2,712)

(9,807)

(920)

Principal payments under debt restructure plan Net cash flow from operations Purchase of investments Purchase of property, plant and equipment

(46)

(4)

(9,853)

(924)

Dividends paid

(12,800)

-

Net cash flow from financing activities

(12,800)

-

Net cashflow

(46,656)

(3,636)

Net cash flow from investing activities

27

6. Merits 6.1

Catalyst and Rationale for the Allied Farmers’ Initiating the Proposal The Proposal has eventuated due to a combination of factors:

6.2



in December 2008 investors in HFL, United and HCL approved a Debt Restructure that involved a suspension of interest and principal payments and no new deposits or loans being accepted or made (except under limited circumstances). The Directors of HFL and United have recently announced that it is highly unlikely that HFL and United will be able to meet all its repayment obligations under the Debt Restructure;



in mid to late 2008, several other New Zealand finance companies had already either entered into receivership or agreed similar moratoria with their debt security holders. The various moratoria arrangements and the collapse of numerous other finance companies led to speculation that consolidation of the industry would occur (Appendix A contains an overview of the New Zealand Finance Industry). A further catalyst for consolidation has been the announcement by the Government of measures regulating finance companies, designed to reduce the possibility of future finance company collapses by ensuring appropriate levels of capital. The regulations require finance companies with liabilities greater than $20 million to obtain a credit rating to receive the benefit of the extended Crown retail deposit guarantee. Allied Farmers also has been severely impacted by the global financial crisis. Allied Farmers’ shares have languished on the NZX for years, in part due to the limited liquidity in the stock, but also because of the inconsistent earnings of the business. The Proposal has been developed with the intention of providing Allied Farmers with a significant capital injection to expand and develop both its Allied Farmers and Allied Nationwide businesses;



the Proposal is effectively a ‘back-door’ listing of the Hanover businesses, with Investors exchanging their investments for shares in the underlying assets of Hanover. In effect the current Shareholders are acknowledging the true position of the Investors who effectively own the underlying assets of the business upon which they are dependent to obtain repayment of their principal investment;



it is arguable that part of the Shareholders’ motivation for advocating the Proposal is to avoid their obligation to provide the up to $20 million Pledge (supported by a personal guarantee from each of the Shareholders of up to $10 million each), which was available under the Support Package in the event there was a shortfall of funds to meet repayment obligations to the Secured Depositors or Secured Stockholders. The guarantees fall away if the Proposal is implemented. However, it is important to note that the personal guarantees also fall away in the event of receivership which is an increasingly likely scenario (unless the receivership is caused by the shareholders defaulting on the guarantees). The guarantees will be reduced by $10 million on 31 December 2009 if the quarterly repayment ,then due, under the Debt Restructure is made (which is expected in the event the Proposal does not proceed). In Grant Samuel’s opinion the Proposal has little impact on the $20 million Pledge, as it is considered to have little value under the Proposal or the likely alternative, a receivership; and



the Debt Restructure approved by Investors in December 2008 is foundering. The Proposal is a major transaction for Allied Farmers and could provide the impetus to transform the highly geared Allied Farmers business. In addition, the combination of performing HFL, United and Allied Nationwide loans may assist Allied Nationwide in obtaining a satisfactory credit rating, which will be required if Allied Nationwide is to be covered by the Government deposit guarantee scheme. Such cover should beneficially impact reinvestment rates.

The Value of the Allied Farmers’ Proposal 

The Investors are now effectively the owners of the assets of Hanover. As at 30 June 2009 HFL has a substantial deficit of shareholders funds totalling $129.5 million (when the NZ IFRS fair value adjustments to the loan assets and debentures are reversed). Similarly, United has a deficit of

28

shareholders funds of $6.3 million as at 30 June 2009 (when the NZ IFRS fair value adjustments are reversed). There is nothing left for the Shareholders, Messrs Hotchin and Watson, either now, or after the Proposal. The equity for debt swap merely recognises the current situation that the assets of HFL and United are wholly owned by the Investors; 

Grant Samuel has compared the value of the net assets of HFL and United as recorded in the 30 June 2009 accounts with the price being offered by Allied Farmers under the Proposal. The price being offered is $396.2 million compared to a carrying value of $410.0 million. To arrive at the $410.0 million, NZ IFRS fair value adjustments of $72.1 million have been added back. These adjustments were made to reflect the fact that even if the full written down book value of the loans outstanding were received it would take a number of years for full realisation to eventuate. Given the similarity between the offer consideration and the assessed carrying value Grant Samuel believes the consideration being offered by Allied Farmers is fair, particularly when the Investors will own approximately 97% of the enlarged Allied Farmers (at completion);



the price being paid by Allied Farmers of $396.2 million is only marginally less than the $410.0 million of “value” being transferred to Allied Farmers. Based on its current balance sheet Allied Farmers could not raise any debt to purchase the loan book. Allied Farmers would not, even if it had the financial capability, pay $396.2 million cash for the assets being transferred to it as there still exists significant uncertainty as to the amount and timing of the repayment of the approximately the 40 loans outstanding across the HFL and United loan portfolios;



the consideration being offered is shares in Allied Farmers. Investors are receiving shares in proportion to the assessed value of the underlying assets being transferred to Allied Farmers. In other words following the issue of the new shares the Investors will own almost exactly the same proportionate share of the recapitalised Allied Farmers as they currently own of Hanover (prior to the impact, if any, of the bonus share mechanism). The issue price of the shares is arguably more important to the existing shareholders of Allied Farmers who are being severely diluted, albeit that they do have benefit of the bonus share adjustment mechanism;



the number of shares to be issued to Investors will not be determined until immediately before the meetings being called to consider the Proposal. The timing of the setting of the price could allow the Allied Farmers share price to be manipulated. The Allied Farmers shares are infrequently traded and in relatively small volumes. The price could, in Grant Samuel’s opinion, be relatively easily moved upwards. It would be unfortunate for the Investors if the Allied Farmers share price increased in the days leading up to the meetings and then, if the Proposal was approved, the price fell back to, or below, its current level. Grant Samuel would expect the price to be volatile for a period after the new shares are issued as some former Investors will seek to immediately sell their new shares as this will present the first realisation event for these Investors since the company went into a moratorium. Investors should take advice from a sharebroker before deciding to sell;



the Investors are being asked to release Hanover from a portion of their repayment obligations under the Debt Restructure. The amount to be forgiven for each class of security is outlined in the table below:

29

Obligations to be forgiven by Class of Security ($ million)

Total principal outstanding under the Debt

Secured

Secured

Capital

Deposits

Stock

Bonds

64.7

12.1

463.8

Sub Notes

Total 541.7

1.1

Restructure (27.8)

(3.9)

-

-

(31.7)

Net amount outstanding

436.0

60.8

12.1

1.1

510.0

Agreed value of finance assets

(301.8)

(49.9)

(32.2)

(4.4)

(7.3)

(0.6)

(44.5)

102.0

6.5

4.8

0.5

113.8

Principal repayments to date

Agreed value of Support Package assets Net amount to be written off

(351.7)

% of principal under the Debt Restructure

22.0%

10.0%

40.0%*

40.0%*

Return – cents per $1 invested

78c

90c

60c*

60c*

* at the commencement of the Debt Restructure the Capital Bondholders and Subordinated Noteholders agreed to receive only 50% of their initial investment. Based on the original face value each investor in Capital Bonds and Subordinated Notes will receive only 30 cents in the dollar of their original investment



it may ultimately be possible for Investors to recoup their full investment. This outcome would require a major revaluation of the underlying loan portfolio, which Grant Samuel considers is unlikely. Assuming an issue price of $0.35 for the Allied Farmers’ shares (for analysis purposes) the table below shows the price at which each class of Investor would need to sell their Allied Farmers shares in order to receive a return of 100c in the dollar of their principal investment at the time of the Debt Restructure. The analysis below ignores the time value of money and brokerage costs that would be payable upon the sale of shares: Share price at which Investors receive 100c in the $1 Class of Investor

Amount to be received

Number of Shares Issued

per $1 in Allied Farmers

at 35 cents per share

shares

Allied Farmers share price required to recoup $1



Secured Depositors

$0.72

2.06

$0.49

Secured Stockholders

$0.84

2.40

$0.42

Subordinated Noteholders

$0.30

0.87

$1.15

Capital Bondholders

$0.30

0.87

$1.15

Under the Debt Restructure holders of the Subordinated Notes and Capital Bonds are now unlikely to receive any payments. Under the Proposal they will be allocated $600,000 and $7.3 million of value in shares in Allied Farmers (based on assumed issue price of $0.35). Together these amounts represent 2% of the total value attributed by Allied Farmers to the loans and assets of Hanover. At the time of the Debt Restructure the gross value attributed to the Subordinated Notes and Capital Bonds represented 4.7% of the total gross value. It is arguable that under the Proposal the holders of Subordinated Notes and Capital Bonds are being treated favourably. The impact on the Secured Depositors and the Secured Stockholders of Allied Farmers attributing some value to the Subordinated Notes and Capital Bonds is minimal and is a function of the offer being made by Allied Farmers and not a decision of Hanover. The Subordinated Note and Capital Bonds holders have suffered a much greater proportionate loss in value reflecting the relative status of their securities. In Grant Samuel’s opinion the total of $7.9 million being attributed to the Subordinated Notes and Capital Bonds is reasonable and does not unfairly prejudice or favour any one group of security holders.

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6.3

Implications of the Allied Farmers’ Proposal If the Proposal is successful then Allied Farmers will remain a listed company but will essentially transition from being a rural services company to being predominantly a finance and investment company, at least in the short-term. In these circumstances: 

control of Allied Farmers will pass to HFL and United Investors. Allied Farmers currently has 37.7 million shares on issue. Based on a share issue price of $0.35, the estimated number of shares required to be issued to Investors is approximately 1.1 billion. As a result the Investors will control approximately 97% of Allied Farmers at completion. A series of potential outcomes using a range of potential issue prices is outlined in the table below and illustrates that regardless of the Allied Farmers share issue price, there is only a minor impact on the percentage Investors will own: Range of outcomes using different issue prices ($m unless otherwise specified) Issue price (per share)

$0.30

$0.40

$0.50

11.3

15.1

18.8

22.6

Value of assets acquired

396.2

396.2

396.2

396.2

Combined market capitalisation

407.5

411.3

415.0

418.8

Market cap of existing business

Current Allied Farmers shareholders

$0.60

37.7

37.7

37.7

37.7

Shares to be issued to Investors

1,320.6

990.4

792.4

660.3

Total shares on issue at completion

1,358.3

1,028.1

830.1

698.0

Ownership by existing shareholders Ownership by Investors (at completion)

2.8%

3.7%

4.5%

5.4%

97.2%

96.3%

95.5%

94.6%

Although they will unquestionably have control over Allied Farmers, individual Investors will have only minor influence in a shareholder vote, as Investors are not likely to act jointly or in concert; 

the price at which Investors will be issued Allied Farmers shares will be determined with reference to the VWAP of the 5 trading days prior to the meeting of Investors intended to be held on 16 December 2009. If subsequently the trading price of Allied Farmers exceeds $0.60 there is a likelihood that the 15.8 million Allied Farmers options currently listed on the NZX will be exercised. If every Allied Farmers option were exercised the current shareholders and option holders of Allied Farmers would control an increased percentage of the company. Assuming a VWAP of $0.60, and assuming all options were exercised, the current Allied Farmers shareholders would hold 7.5% of the post-transaction company compared with 5.4% if no options were exercised. This is considered highly unlikely given the current share price of $0.31 as at 20 November 2009;



Allied Farmers’ market capitalisation will increase significantly if the Proposal is implemented. Allied Farmers’ current market capitalisation is approximately $13 million and it had net assets as at 30 June 2009 of approximately $10 million. The acquisition of $396.2 million of assets from HFL and United will increase the net assets of Allied Farmers at the outset to approximately $406 million. The eventual market capitalisation is a function of the share price, but with a substantially greater market capitalisation, Allied Farmers will undoubtedly have a greater market presence. The increased profile may result in improved analyst coverage of the company and thereby engender greater interest in the shares, which may ultimately be reflected in improved liquidity and price of the shares;



Allied Farmers propose to realise a significant sum of cash, over time, from the HFL and United assets. The cash will be used to grow its existing rural services businesses through acquisition and to support the Allied Nationwide finance business, pursuing acquisition opportunities in the finance sector as they arise;



it is possible that the share price of Allied Farmers will decline materially in the short term. If successful, the Proposal is likely to result in a significant number of Investors looking to monetise or “cash up” what they can of their original investment in Hanover by disposing of their Allied Farmers shares as soon as practicable. It is conceivable that the pool of buyers for Allied Farmers shares in

31

the early stages of implementation of the Proposal will be limited, with potential buyers waiting to observe how the stock trades following the Proposal and for the new Allied Farmers business to establish a track record before investing. This will have a significant negative impact on the Allied Farmers share price at least in the short term but possibly for a lengthy period; 

there is a possibility that the cashing up process may exhibit a lag as the Investors who are unfamiliar with owning and selling shares determine how to exit their investment in Allied Farmers. Any discount would also have an impact on the amount per dollar Investors would be able to realise from their initial investment. That is, the greater the discount at which Allied Farmers’ shares trade following the Proposal, the smaller the amount Investors will receive of their original investment if they choose to sell their shares. Over time the trading price of Allied Farmers will be dependent on the underlying performance of the business, the degree and value to which it realises the assets acquired from HFL and United, and its dividend yield;



Allied Farmers will be well positioned for further industry consolidation both in the rural services and finance sectors. Allied Farmers will have a very strong post transaction balance sheet provided the management of the entity can adequately oversee the collection of non-performing loans;



Grant Samuel understands that the performing loans in the HFL and United portfolios will be transferred from Allied Farmers to its subsidiary Allied Nationwide. These loans will serve to increase the robustness of the underperforming Allied Nationwide portfolio and assist it in obtaining a satisfactory credit rating. Approximately 20% of the overall HFL and United loan portfolio is considered to be performing. The remaining non-performing or impaired loans will remain with Allied Farmers to collect and administer. The effect of this transfer is to separate the good loans from the bad loans;



there is no provision under the terms of the Proposal for Investors to gain automatic representation on the Allied Farmers Board of Directors. However, as the Investors will control approximately 97% of Allied Farmers at completion, they will ultimately determine the composition of the board. It is understood that Allied Farmers may make offers of employment to a number of HFL and United employees following completion of the Proposal. The employment of current HFL and United employees may provide a degree of continuity in terms of knowledge of the HFL and United loan books and the interface with borrowers;



the five largest loans at fair value in both HFL and United which comprised over 50% of the gross value loans of all are listed below: Hanover Five Largest Exposures (30 June 2009) Description

Location

Mixed Use Property Development

Queenstown

$72.4 m

Kawerau Falls

Hotel Development

Queenstown

$88.7 m

Jacks Point

Residential Development

Queenstown

$44.9 m

Kinloch Golf Course

Golf & Residential Development

Taupo

$24.0 m

Silverdale

Industrial Land Development

Silverdale

Five Mile

Total

2

Gross Loan Value

$23.1 m $253.1 m

Each of these developments will take a number of years before there will be significant realisations or an outright sale. Given the stage of development and in some cases complexities surrounding other securities mean that under a forced sale there would be a significant loss. The ability to take a more proactive management approach to the developments (than is available under the Debt Restructure or potential receivership) should result in a superior outcome. Hanover is severely cash constrained and accordingly is unable to restructure lower or buy-out higher ranking securities to get control of a development or actively pursue recovery of the loans. Equally receivers are typically very reluctant to 2

On 20 November 2009 HFL settled the sale of stage 1 of Five Mile to a third party with most of the cash realised being applied to the reduction of the loan owing to the first mortgagee (not HFL). The balance of the purchase price was left in as vendor finance on commercial terms.

32

incur further liabilities and prefer to get the best price at the time. The Proposal will result in there being no pressure to make repayments to Investors and potentially the ability to borrow to enhance the value of the underlying securities which should result in a superior outcome for the Investors; 

if the Proposal is not approved by either the HFL and United Investors (acting separately) or Allied Farmers shareholders, the status quo will remain, however, there remains a high likelihood that the companies will not be able to meet all their obligations under the Debt Restructure. In this event the trustees are likely to either place the companies into receivership or propose a new Debt Restructure to Investors. The threat of receivership is not good for the day-to-day management of Hanover or for the likely realisable value of the remaining securities, as potential purchasers of the assets are more likely to hold off and wait for a fire sale. In Grant Samuel’s opinion the Proposal is superior to the status quo and high risk of receivership; and



if Allied Nationwide wish to participate in the extended Crown retail deposit guarantee scheme (which extends the Crown guarantee on deposits from October 2010 when the current scheme expires to 31 December 2011) it must obtain a credit rating of BB or better from either Standard and Poors, Moody’s or Fitch. The transfer of a proportion of the performing loans from HFL and United into Allied Nationwide will strengthen the balance sheet of Allied Nationwide and assist, but not necessarily assure Allied Nationwide of obtaining the requisite credit rating. Participation in the extension of the Crown Guarantee is likely to be critical to ensuring Allied Nationwide is able to continue to attract and retain its retail deposit base.

If the Proposal is implemented Allied Farmers will be controlled by the Investors and move from being a diversified rural services company to a large listed finance company. In effect the Proposal is a “back door” listing of the combined HFL and United loan assets. It is likely that in the short term some Investors will look to exit part or all of their investment in Allied Farmers in order to liquidate, to the extent possible, their original investment in Hanover. This is likely to materially depress the Allied Farmers share price and impact the extent and timeframe to which the Investors are able to recover their original investment. It is unclear whether Allied Farmers currently has sufficient in-house management capability to actually manage and collect the acquired assets, although it is understood that it may make offers to some Hanover employees to assist with expertise on the loan books being acquired. If the Proposal is implemented, Allied Nationwide will be better placed to obtain a BB or better credit rating to enable it to participate in the extended Crown retail deposit guarantee scheme which expires on 31 December 2011. 6.4

Holding equity compared to holding debt securities The ownership of shares is a very different investment from holding either Secured Deposits, Secured Stock, Subordinated Notes or Capital Bonds. An overview of the key aspects of each existing Hanover security type is outlined below: 

when issued the HFL Secured Deposits were secured, first ranking deposits upon which interest was paid monthly or quarterly, on a compounding quarterly basis or at maturity. The HFL Secured Deposits were secured against the assets and undertakings of the HFL charging group (consisting of HFL and HFL Australia Pty Limited) and, in general had fixed terms ranging from 3 months to 5 years;



the United Secured Stock when issued was secured by a charge over all of the present and future undertakings of United, UFL Overseas (UK) Limited and UFL Australia Pty Limited. Interest on the Secured Stock was paid either monthly, quarterly, six monthly, annually, on a compounding quarterly basis or at maturity;



the HFL Subordinated Notes when issued were both unsecured and subordinated to the HFL Secured Deposits, any other secured creditors of HFL and any unsecured unsubordinated creditors of HFL. Only the shareholders ranked behind the HFL Subordinated Notes in the distribution of

33

assets on the liquidation of HFL. At the time of issue the HFL Subordinated Notes attracted interest payments quarterly; 

when issued, the HCL Capital Bonds were secured first ranking debt securities on which interest was paid either quarterly, six-monthly or annually, on a compounding basis or at maturity. The preferred bonds were used to subscribe for redeemable preference shares in HFL, ranking behind all secured and unsecured creditors of HFL but ahead of the shareholders. Interest and principal repayments were solely dependent on the payment of dividends by HFL to HCL. The HCL Capital Bonds were secured by a security interest in favour of the Perpetual Trust over all of the assets and undertakings of HCL;



the HFL Secured Deposits, United Secured Stock, HFL Subordinated Notes and HCL Capital Bonds are governed by the Trust Deeds regarding the timing of principal repayments and the permitted activities the company is able to undertake. The Trust Deeds contain covenants which restrict the business of the company and are administered by independent trustees who are required to exercise reasonable diligence to ascertain whether or not the company or charging subsidiaries have breached any provisions of the Trust Deed.

The Debt Restructure altered the terms of issue of each of the above instruments. The maturity date of the HFL Secured Deposits, United Secured Stock, HFL Subordinated Notes and HCL Capital Bonds is 31 December 2013 or such later date agreed by the Investors and interest no longer accrues on any of the securities. Repayments are currently being made in accordance with the repayment plan outlined under the Debt Restructure. The Investors have no flexibility regarding early repayment of their investment and repayments are effectively reliant on the management of Hanover being able to realise sufficient cash from the underlying portfolio of assets, which is now unlikely to meet the expectations outlined to Investors at the time of the Debt Restructure. Shares in listed entities exhibit very different characteristics to any of the above instruments: 

a holder of shares is not entitled to regular income or principal payments of any kind. In general, listed entities endeavour to generate sufficient net cash flows to pay shareholders semi-annual dividends, however, such payments may be more or less frequent and the company is under no obligation to pay dividends. Decisions regarding the future direction and management of the business, including the payment of any dividends, are made by the Board of Directors of the listed entity. Grant Samuel understands that Allied Farmers intends to pay dividends out of its retained earnings. That is, no dividends will be paid from the capital realised from the HFL and United assets, but rather, Investors will be reliant on the underlying earnings of Allied Farmers for the receipt of dividends. Over the longer term the significant injection of capital should improve both earnings and the price at which Allied Farmers’ shares trade. It is important that Investors consider the dividend yield and the potential capital value change (i.e. increase/decrease in the share price) of the shares together rather than either aspect in isolation;



a share in a listed entity represents a minority interest in the equity of the underlying business. As such, shares in listed entities normally trade at a discount (attributable to the lack of control each parcel of shares has over the company as a whole) of 15% - 25% to the full underlying value of the company as a whole, but the extent of the discount (if any) depends on the specific circumstances of each company;



the price at which shares trade is dictated by market forces and significantly influenced by the underlying performance of the business and expectations of future performance as well as demand and supply dynamics. There is no certainty regarding the price at which Allied Farmers shares will trade and it is possible (and in the short term very likely) that the shares will exhibit a material discount to the price at which Allied Farmers shares are transferred to Investors;



in the event of a liquidation holders of equity have the lowest priority over available funds from which to recoup their initial investment. Equity is the highest risk instrument an entity can issue and is therefore expected to realise the greatest reward in the long-term in terms of the potential dividend

34

stream, in the event significant profits are generated. Shareholders also participate in any increase in the value of the underlying business, which is generally reflected in an uplift in the share price of the entity. Allied Farmers will be predominantly owned by HFL and United Investors and accordingly the Investors will bear almost all of the risks and receive almost all of the benefits associated with the underlying business; 

listed companies are regulated by the rules of the exchange on which they trade. Shares in Allied Farmers are regulated by the Listing Rules. Although listed entities do not have the oversight of a trustee, in Grant Samuel’s opinion this is unlikely to have any noticeable impact on either the operation or the security of the underlying business. In terms of financial information the disclosure requirements under the Trust Deeds will be similar to those required under the Listing Rules. However, under the Listing Rules any information of a material nature will be required to be disclosed to the market as soon as practicable, providing shareholders with an additional level of transparency regarding their investment; and



shares in listed entities are significantly more liquid than any of the existing securities held by the Investors. In theory, providing there is sufficient market depth (i.e.: an adequate number of buyers and sellers for the stock), a shareholder in a listed entity may buy and sell their shares as and when they please, during the trading hours of the relevant exchange. There are costs associated with buying and selling shares through share brokers (share broking costs). These costs will apply to the acquisition and sale of Allied Farmers shares (excluding the initial acquisition by the Investors) and are usually in the order of 0.5% to 1.0%.

The Investors currently hold fixed term, illiquid securities of uncertain value. The moratorium has a fixed repayment schedule that is now considered unlikely to be met. It is evident that there is insufficient asset value remaining in HFL and United from which to service all the repayment obligations to Investors under the Debt Restructure. That is, it is likely that Secured Depositors and Secured Stockholders will receive less than the planned 100 cents in every $1 invested and that both HFL Subordinated Noteholders and HCL Capital Bondholders will receive less than 50 cents in every $1 invested. If the Proposal is completed Investors will exchange their ownership of Secured Deposits, Secured Stock, Subordinated Notes and Capital Bonds for shares in Allied Farmers. The ownership of shares in Allied Farmers will represent a minority interest in a publicly listed company traded on the NZX. The Investors will be able to dispose of their Allied Farmers shares at any time provided there are sufficient buyers in the market. However, there is no certainty regarding the price at which Allied Farmers shares will trade and it is possible that Investors may experience a significant decline in the value of their Allied Farmers shares, at least initially, as large volumes of shares are placed on the market by Investors wishing to liquidate their investment and realise cash albeit at a discount. 6.5

Alternatives to the Allied Farmers’ Proposal There are essentially three alternatives to the Proposal – finding an alternate buyer for the HFL and United assets, maintaining the status quo and liquidation or receivership. The merits of each of these alternatives are outlined below: Alternative offer for the HFL and United assets 

the HFL and United Debt Restructure have been in place for almost 12 months. There is a widespread expectation that consolidation of the New Zealand finance sector will occur in the short term with assets subject to moratoria or formal restructure arrangements the most likely acquisition targets by special purpose vehicles established to acquire distressed debt at attractive prices. The Debt Restructure has been a relatively public processes, and it is reasonable to assume that in the current market, if another party was willing to offer a superior price to acquire the Hanover assets, that party would have emerged;

35



the HFL and United assets have not been the subject of a competitive sale process and it is possible, although somewhat unlikely, that another acquirer may offer more for the assets subject to the Proposal. It is the responsibility of the Boards of Directors of the Hanover companies to determine whether a higher and better offer could be extracted by running a competitive sale process, however, it is by no means certain that a competitive sale process would yield any offers; and



an alternative cash offer is a remote possibility but in Grant Samuel’s opinion if it were to eventuate from another party it would be at a substantial discount to the current book value. The exchange of equity for debt under the Proposal means that the Investors are exposed to both the risk that the loan assets will realise less than the transfer value and the possibility (albeit remote) that the assets will realise more over time. A cash offer (if there was one), would be likely to yield a lower result than that available through a swap of debt for equity in Allied Farmers as the buyer will be looking for a high return commensurate with the high risk being assumed.

Continuation of the Debt Restructure 

the repayment plan outlined under the Debt Restructure is unlikely to be realised given the continued decline in asset prices and the recent further impairment of the underlying assets of Hanover. On 10 November 2009 the Directors stated that they believe the return for Secured Depositors will be approximately 70c in the dollar with the return for Secured Stockholders estimated at approximately 90c in the dollar. Subordinated Noteholders and Capital Bondholders may not receive any return of principal invested. The ultimate result of failing to meet its obligations under the Debt Restructure (an event of default) would be receivership;



it is uncertain how much will be realised from the underlying assets of Hanover and if or to what extent the Secured Depositors or Secured Stockholders would be reliant on calling on the personal guarantees provided by the Shareholders. If the Shareholders were unable to honour their obligations under the guarantees, bankruptcy proceedings would likely be initiated, an event of default under the Secured Deposit Trust Deed and the Secured Stock Trust Deed would occur and the trustee may elect to appoint a receiver; and



liquidity in the New Zealand debt market has declined significantly since late 2008 and it is very uncertain when a recovery in the finance and property market will occur. As such there is no guarantee that the underlying assets of HFL and United will not deteriorate further. Conversely, it is possible that a recovery in these markets could result in a write back of impairment provisions accrued to date. In Grant Samuel’s opinion this is a remote possibility in the short to medium term.

Liquidation / Receivership 

if the Proposal is not approved and the company fails to pay all or any part of any two consecutive instalments of principal within 10 business days of the due date for payment (or any other event of default occurs) it is possible that the trustees will elect to place HFL and United into receivership;



it is now clear that management’s original estimate of loan recoveries was optimistic. A significant further write-down of both the HFL and United loan books has been recorded in the year to 30 June 2009. However, it is unlikely that had a receiver been appointed at the time of the Debt Restructure, any of the lost value would have been recovered by way of a sale of the HFL / United loan book at that time. Indeed a sale of the HFL and United loan books would been very difficult to effect at that time. In Grant Samuel’s opinion Investors have not lost any additional value by choosing to not appoint a receiver and enter into the Debt Restructure;



a significant portion of the benefits of approving the Debt Restructure in favour of receivership related to the availability of the Support Package and the continuation of new lending. At the time of the Debt Restructure the Support Package was valued by the Shareholders at $96 million. The Support Package assets being the cash, the Axis Companies and the Matarangi Beach Estates Loan are now valued for the purposes of the transaction at $44.5 million (excluding the $20 million Pledge);

36



a consequence of approving the Debt Restructure in favour of receivership (in December 2008) was the implementation of the Support Package;;



the value gap between a continuation of the Debt Restructure and receivership has narrowed and is now represented only by the $20 million Pledge, which would fall away under receivership (except where receivership is caused by default of the Shareholders), and the costs of the receiver. In practical terms, the $20 million Pledge reduces to $10 million provided the final 2009 payment is made in full on 31 December 2009. When the net present value of payments likely to be received under the Debt Restructure is compared with the timing of payments under potential receivership, the gap narrows further. The key differences between a continuation of the Debt Restructure and receivership are the likely timing of cash flows and the costs associated with a receiver. In Grant Samuel’s opinion the difference between the two scenarios is minimal;



the appointment of a receiver will have the following consequences: −

a receiver could seek to repay amounts owing to the Investors through proceeds from the orderly realisation of assets;

−

a receiver will charge fees based on the hours involved in managing the orderly realisation. These fees will be substantial given the length of time involved and the relatively illiquid nature of the assets. PwC estimated such fees to total approximately $2 million in the year to 31 December 2010, $1.5 million in the year to 31 December 2011 and $1 million per annum thereafter;

−

Grant Samuel believe that a managed realisation of the loan assets by Allied Farmers has the potential to produce greater value to Investors than under a receivership where the receiver will look to maximise price over a shorter term; and

−

no interest would accrue to Investors. By approving the Debt Restructure Secured Depositors and Secured Stockholders waived their right to receive interest payments or accrue interest unless certain performance criteria are met (these performance criteria are very unlikely to be triggered). HFL Subordinated Noteholders and HCL Capital Bondholders have entirely waived their right to interest payments. Accordingly, the Investors are not entitled to have interest accrue on their investments under a receivership scenario.

In Grant Samuel’s opinion, barring a significant recovery of the finance and property sectors in New Zealand, continuation of the Debt Restructure is more likely than not to ultimately end in receivership for Hanover as there are insufficient assets remaining in HFL and United to meet all its obligations under the Debt Restructure (even if the $20 million Pledge was called). The Support Package assets have declined in value, having been affected by the same market factors as HFL and United’s loan books and is now estimated to be worth only $44.5 million (excluding the $20 million Pledge). The Support Package assets, other than the $20 million Pledge (which falls away under either the Proposal or receivership in certain circumstances), will be available regardless of which course of action is pursued. The values likely to be received under either a continuation of the Debt Restructure or potential receivership are similar with the major differences arising as a result of fees payable to a receiver. The Proposal has the advantage of providing immediate liquidity, however, the value at which the Investors will be able to realise this liquidity is uncertain both initially and over time. In Grant Samuel’s opinion an alternative, superior offer for the HFL and United assets is unlikely to be forthcoming. 6.6

Other advantages and disadvantages of the Allied Farmers’ Proposal In assessing the other merits of the Proposal Grant Samuel considered the following factors: 

as with any investment there are risks associated with the market in which the company operates. The risks and opportunities associated with an investment in Allied Farmers are similar to the risks

37

and opportunities associated with continuing with the HFL and United Debt Restructure. include:

They

Opportunities −

the vast majority of the loans being acquired by Allied Farmers are either distressed or impaired, with performing loans comprising only approximately 20% of the total package. There is an opportunity with active loan management to realise significant cash flow from this portfolio. Allied Farmers shareholders, including the Investors, will benefit from any return that Allied Farmers manages to earn on this loan portfolio; and

−

the Proposal will provide a platform from which to grow Allied Nationwide’s finance book in a market where competition is materially less than that experienced between 2005 and 2008. The transfer of parts of the HFL / United loan book will significantly increase the size of Allied Nationwide’s portfolio and equity and should assist its ability to obtain a satisfactory credit rating and enhance its appeal to investors.

Risks −

Allied Nationwide’s ability to obtain a satisfactory credit rating is by no means certain. The loan assets being transferred are significantly exposed to the property market, and it is possible that these assets will not enhance the overall diversity of the Allied Nationwide portfolio;

−

the quality of the loan assets being acquired by Allied Farmers is questionable and it is unclear to what extent Allied Farmers will be able to recover amounts owing on the distressed and impaired loans. Investors will be cautious until Allied Farmers can demonstrate effective recovery of these loans; and

−

it is uncertain whether the Proposal will return more to Investors than would ultimately be realised from a continuation of the Debt Restructure primarily because there is no certainty regarding the future value of Allied Farmers shares or how much cash Investors would be able to realise by selling their Allied Farmers shares.



HFL and United are operating under the terms of the Debt Restructure and are scheduled to make quarterly repayments to the HFL Secured Depositors and United Secured Stockholders over the next 4 years, and a lump sum payment to HFL Subordinated Noteholders and HCL Capital Bondholders in December 2013. These payments are dependent on Hanover realising sufficient cash from its existing loan book and investment assets to meet these obligations. It is almost certain that the assets of Hanover will be insufficient to meet the Debt Restructure obligations in full. The key issue confronting the Investors is whether the Proposal will produce a superior outcome as to other alternatives, including continuing with the Debt Restructure;



the HFL Secured Depositors and United Secured Stockholders were entitled to some potential upside return on their investment in the event the Debt Restructure went as planned. The Proposal contains no such provision. Rather, all Investors will participate to the same extent in any value uplift or decline of the Allied Farmers share price. However, given the material deterioration in the underlying assets of Hanover it is considered unlikely that the necessary thresholds for upside payments to Secured Depositors and Secured Stockholders would be triggered in the event the Debt Restructure were to continue;



financial projections for the duration of the Debt Restructure have been provided for HFL and United. The cash flow forecasts for net realisations range from a low of $305.2 million to a high of $378.9 million for HFL and a low of $54.2 million to a high of $58.8 million for United. If the higher sums are realised Investors can expect to benefit from an increase in the Allied Farmers share price;



if the Proposal is approved Allied Farmers will issue its existing shareholders with bonus shares immediately prior to implementation of the Proposal. For every 10 Allied Farmers shares held, existing shareholders will receive 1 bonus share. The bonus shares will be convertible into ordinary shares in Allied Farmers if the audited financial results for the financial year to 30 June 2011 show

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that Allied Farmers has made a loss (realised or unrealised) on the assets transferred under the Proposal (i.e. the value of any of the Hanover assets realised together with the residual value of any of the Hanover assets still held is less than $396.2 million). The conversion ratio for bonus shares to ordinary shares will be calculated such that Allied Farmers’ shareholders aggregate shareholding in the company is increased to what it would have been immediately after the Proposal if the Hanover assets had been transferred at the value ascribed as of 30 June 2011. The bonus share mechanism seeks to protect existing Allied Farmers’ shareholders and conversely ensure that the Investors collective shareholding in Allied Farmers can be adjusted down if the value of the assets is less the currently ascribed value. There will be no adjustment if the future value of the Hanover assets is greater than $396.2 million i.e. the Investors will share any up side with the existing Allied Farmers’ shareholders. The spectrum of outcomes in terms of the percentage of shares in Allied Farmers that will be held by the Investors following the adjustment in June 2011 is wide. This mechanism essentially means Investors current direct exposure to downward adjustments in the value of the Hanover assets continues even if the Proposal is implemented; and 

6.7

Grant Samuel is satisfied that the estimates of the transaction costs and residual liabilities of $10 million in total are fair to Investors and reflect a reasonable estimate of actual and potential claims against Hanover in respect of the Proposal and ongoing legal and winding up costs.

Acceptance or Rejection of the Allied Farmers’ Proposal Acceptance or rejection of the Proposal is a matter for individual HFL Secured Depositors, United Secured Stockholders, HFL Subordinated Noteholders and HCL Capital Bondholders based on their own view as to value and future market conditions, risk profile, liquidity preference, portfolio strategy, tax position and other factors. In particular, taxation consequences will vary widely across Investors. Investors will need to consider these consequences and should consult their own professional adviser(s).

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7. Qualifications, Declarations & Consents 7.1

Qualifications The Grant Samuel group of companies provides corporate advisory services (in relation to mergers and acquisitions, capital raisings, corporate restructuring and financial matters generally), property advisory services and manages private equity and property development funds. One of the primary activities of Grant Samuel is the preparation of corporate and business valuations and the provision of independent advice and expert’s reports in connection with mergers and acquisitions, takeovers and capital reconstructions. Since inception in 1988, Grant Samuel and its related companies have prepared more than 400 public expert and appraisal reports. The persons responsible for preparing this report on behalf of Grant Samuel are Michael Lorimer, BCA, Simon Cotter, BCom, MAppFin, F Fin, Rachael Boswell , BSc, and Alexa Michau, BBus, CA. Each has a significant number of years of experience in relevant corporate advisory matters.

7.2

Limitations and Reliance on Information Grant Samuel’s opinion is based on economic, market and other conditions prevailing at the date of this report. Such conditions can change significantly over relatively short periods of time. The report is based upon financial and other information provided by the directors, management and advisers of HFL and United. Grant Samuel has considered and relied upon this information. Grant Samuel believes that the information provided was reliable, complete and not misleading and has no reason to believe that any material facts have been withheld. The information provided has been evaluated through analysis, enquiry, and review for the purposes of forming an opinion as to the value of the HFL and United assets. However in such assignments time is limited and Grant Samuel does not warrant that these inquiries have identified or verified all of the matters which an audit, extensive examination or “due diligence” investigation might disclose. An analysis of the merits of the Proposal is in the nature of an overall opinion rather than an audit or detailed investigation. Grant Samuel has not undertaken a due diligence investigation of HFL or United. In addition, preparation of this report does not imply that Grant Samuel has audited in any way the management accounts or other records of HFL and United. It is understood that, where appropriate, the accounting information provided to Grant Samuel was prepared in accordance with generally accepted accounting practice and in a manner consistent with methods of accounting used in previous years. An important part of the information base used in forming an opinion of the kind expressed in this report is the opinions and judgement of the management of the relevant enterprise. That information was also evaluated through analysis, enquiry and review to the extent practicable. However, it must be recognised that such information is not always capable of external verification or validation. However, Grant Samuel in no way guarantees or otherwise warrants the achievability of the projections of future profits and cashflows for HFL and United. Projections are inherently uncertain. Projections are predictions of future events that cannot be assured and are necessarily based on assumptions, many of which are beyond the control of management. The actual future results may be significantly more or less favourable. To the extent that there are legal issues relating to assets, properties, or business interests or issues relating to compliance with applicable laws, regulations, and policies, Grant Samuel assumes no responsibility and offers no legal opinion or interpretation on any issue. In forming its opinion, Grant Samuel has assumed, except as specifically advised to it, that:

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7.3



the title to all such assets, properties, or business interests purportedly owned by HFL and United is good and marketable in all material respects, and there are no material adverse interests, encumbrances, engineering, environmental, zoning, planning or related issues associated with these interests, and that the subject assets, properties, or business interests are free and clear of any and all material liens, encumbrances or encroachments;



there is compliance in all material respects with all applicable national and local regulations and laws, as well as the policies of all applicable regulators other than as publicly disclosed, and that all required licences, rights, consents, or legislative or administrative authorities from any government, private entity, regulatory agency or organisation have been or can be obtained or renewed for the operation of the business of HFL and United, other than as publicly disclosed;



various contracts in place and their respective contractual terms will continue and will not be materially and adversely influenced by potential changes in control; and



there are no material legal proceedings regarding the business, assets or affairs of HFL and United, other than as publicly disclosed.

Disclaimers It is not intended that this report should be used or relied upon for any purpose other than as an expression of Grant Samuel’s opinion as to the merits of the Proposal. Grant Samuel expressly disclaims any liability to any HFL or United Investor who relies or purports to rely on the report for any other purpose and to any other party who relies or purports to rely on the report for any purpose whatsoever. This report has been prepared by Grant Samuel with care and diligence and the statements and opinions given by Grant Samuel in this report are given in good faith and in the belief on reasonable grounds that such statements and opinions are correct and not misleading. However, no responsibility is accepted by Grant Samuel or any of its officers or employees for errors or omissions however arising in the preparation of this report, provided that this shall not absolve Grant Samuel from liability arising from an opinion expressed recklessly or in bad faith. Grant Samuel has had no involvement in the preparation of the notices of meeting issued by HFL and United and has not verified or approved any of the contents of the notices of meeting. Grant Samuel does not accept any responsibility for the contents of the notices of meeting (except for this report).

7.4

Independence Grant Samuel and its related entities do not have any shareholding in or other relationship or conflict of interest with HFL or United that could affect its ability to provide an unbiased opinion in relation to the Proposal. Grant Samuel had no part in the formulation of the Proposal. Its only role has been the preparation of this report. Grant Samuel will receive a fixed fee for the preparation of this report. This fee is not contingent on the outcome of the Proposal. Grant Samuel will receive no other benefit for the preparation of this report. In 2009 Grant Samuel prepared an independent valuation of FAI for the Directors of HFL. FAI is a company owned by Messrs Watson and Hotchin. Grant Samuel considers itself to be independent for the purposes of preparing this report.

7.5

Information Grant Samuel has obtained all the information that it believes is desirable for the purposes of preparing this report, including all relevant information which is or should have been known to any Director of HFL and United and made available to the Directors.

7.6

Declarations HFL and United have agreed that they will indemnify Grant Samuel and its employees and officers in respect of any liability suffered or incurred as a result of or in connection with the preparation of the report. This indemnity will not apply in respect of the proportion of any liability found by a Court to be

41

primarily caused by any conduct involving gross negligence or wilful misconduct by Grant Samuel. HFL and United have also agreed to indemnify Grant Samuel and its employees and officers for time spent and reasonable legal costs and expenses incurred in relation to any inquiry or proceeding initiated by any person. Where Grant Samuel or its employees and officers are found to have been grossly negligent or engaged in wilful misconduct Grant Samuel shall bear the proportion of such costs caused by its action. Any claims by HFL and United are limited to an amount equal to the fees paid to Grant Samuel. Advance drafts of this report were provided to the directors and executive management of HFL and United and the Trustees. Certain changes were made to the drafting of the report as a result of the circulation of the draft report. There was no alteration to the methodology, evaluation or conclusions as a result of issuing the drafts. 7.7

Consents Grant Samuel consents to the issuing of this report in the form and context in which it is to be included in the notices of meeting to be sent to security holders of Hanover. Neither the whole nor any part of this report nor any reference thereto may be included in any other document without the prior written consent of Grant Samuel as to the form and context in which it appears.

GRANT SAMUEL & ASSOCIATES LIMITED November 2009

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Appendix A – Overview of the Finance Industry

Background In the period from 2000 to 2006 the non-bank finance sector in New Zealand grew rapidly reaching an estimated $17.3 billion in total assets (Source: KPMG FIP survey 2008). Finance companies predominantly sourced funds from the public, issuing higher yielding debenture stock, with a disproportionately large proportion of this funding then lent into property development transactions. In 2006 market conditions changed dramatically. National Finance and Provincial Finance were placed in receivership and since then more than 48 finance companies have either failed or suspended interest payments and security redemptions pending a capital restructure. Finance company failures have put at risk over $6 billion in deposits: Financial Institution Failure – Deposits at risk (NZ$ millions) 2006

2007

2008

2009

Total

Closed

-

-

918

-

918

Liquidation

-

21

335

-

356

Moratorium

-

162

1,441

-

1,603

370

932

387

83

1,772

Suspended

-

-

1,263

33

1,296

Other

-

170

-

1

171

Total

370

1,285

4,344

117

6,116

Receivership

Source: interest.co.nz

The initial company failures could, in many cases, be attributed to company specific factors including poor lending practices. However, investor confidence in the non-bank finance sector declined rapidly in the second half of 2007 and finance companies began to experience markedly reduced reinvestment rates. This was compounded by continuing increases in the official cash rate to 8.25% enhancing returns on more traditional products such as bank term deposits, and investors becoming more sensitive to the underlying risks associated with investing in second tier, unrated debt instruments. The events in the second half of 2007 with respect to the global financial crisis and weakening Australasian financial markets have been well documented. By 2008, debenture reinvestment rates for most finance companies had dropped below 30%. As the New Zealand economy slowed and the property market softened many finance companies were rapidly facing unsustainable pressure to liquidate loan portfolios to meet cash demands from investors redeeming maturing debentures. A number of finance companies including HFL, United, Strategic Finance, St Laurence and Dorchester Finance all suspended security redemptions and interest payments with each company pursuing a capital restructuring plan in preference to receivership, while others such as MFS Pacific Finance and Dominion Finance went into receivership. The key contributing factors to finance company failures have been: 

a heavy weighting to property development finance. Market conditions for the property development finance sector have deteriorated to such an extent that the failure of property developments has become self-fulfilling due to lack of refinancing options. The sub-prime mortgage crisis offshore, leading to a tightening of capital markets generally and the availability of credit, has seen a swift deterioration of conditions in the domestic commercial property and development land market. Softening asset prices have led to a slowdown in property sales with a consequent negative impact on those finance companies lending into the property development sector. For the incumbent lender the general outlook is that it will be very difficult to realise cash over the near term from the underlying property assets that provide security for these development loans;

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

the funding model for New Zealand finance companies was based extensively on public borrowing through the issuance of debenture stock and unsecured notes. By its nature this is a “borrowing short, lending long” model that relied on high reinvestment rates by debenture investors and relatively stable market conditions for continuity;



the failure of poorly managed finance companies has negatively impacted on levels of debenture reinvestment in otherwise stronger finance companies, leading to liquidity stress on the majority of the remaining participants. A snowball effect progressively led to lower and lower reinvestment rates across the sector with even the most robust finance companies not being immune; and



in many instances the finance companies had large related party loan positions where the company had lent to developments being undertaken by the owners or directors of the finance company, or their associates. This not only created conflict but also accentuated the collapse of a number of finance companies.

The finance companies that have to date survived the current economic climate have been those finance companies with no or low levels of exposure to development property and related party loans, and funding sources other than public issued debentures (e.g. MARAC, supported by PGC). Today, the non-bank sector continues to face pressures due to global financial market uncertainty and a weak New Zealand economy. The New Zealand Government guarantee, which was introduced in October 2008, has mitigated some of the liquidity issues for a number of finance companies by providing a platform to stem the outward flow of retail deposits. Despite reduced liquidity pressures, a number of finance companies are continuing to face financial troubles due to asset quality deterioration, particularly in relation to property development and the impact of uncompleted projects and declining collateral values. Regulation In October 2008, in an attempt to provide financial stability and to provide New Zealand depositors assurance, the Crown introduced a depositor guarantee for a period of two-year period. The guarantee covers all retail deposits of participating New Zealand-registered banks and retail deposits by New Zealand residents in Non-Bank Deposit Taking institutions (NBDTs), effectively providing a government guarantee AAA credit rating for participating entities’ retail deposits. The guarantee has been extended until 31 December 2011, but will only be available to NBDTs with a rating of BB or higher. This is expected to exclude approximately 30 of the 70 companies within the scheme. In November 2008, the Reserve Bank introduced a new prudential regime for NBDTs in order to reduce the likelihood of future finance company collapses by ensuring adequate capital adequacy. The new regime will have a considerable influence on shaping the industry over the next two to three years. The key objectives of the regime are to promote sound governance, risk management and to increase investor confidence by providing a clear basis for investors to determine the level of risk associated with the entity. The key elements of the new regime include: 

the implementation of related party and governance requirements. This includes a limit on aggregate credit exposures of the deposit taker or the borrowing group to all related parties. The level of exposure must be specified in the trust deed and fixed by agreement between the deposit taker and the trustee and may not exceed 15% of tier one capital. The governance regulations include the obligation to have at least two non-executive directors and a non-executive chairperson;



the implementation of capital adequacy requirements based on the Basel II regime, with only Tier 1 capital being included in the regulatory capital calculations (Note: these capital requirements are likely to be 12 months from the implementation of the regulation). NBDTs will be required to have a minimum capital ratio of 8% if they hold a credit rating and 10% if they do not;



the requirement for NBDTs with liabilities greater than $20m to hold a credit rating, from 1 March 2010; and

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

liquidity regulations to ensure that NBDTs maintain sufficient liquidity to withstand a plausible range of liquidity shocks.

The Government guarantee has reduced the focus on finance company credit ratings in the short term, but as the guarantee reaches its expiry date, a strong credit rating is considered to be essential to raise capital from the retail sector. The credit ratings of the NBDTs that have been rated are summarised in the table below: Non bank deposit taker credit ratings – 1 May 2009 Company

Rating

Rating Issuer

Equitable Mortgages Limited

BB

Standard & Poor’s

HFL Finance Limited

D

Fitch Rating

Hastings Building Society

BB

Fitch Rating

Geneva Finance Limited

CC

Standard & Poor’s

MARAC Finance Limited

BBB-

Standard & Poor’s

Medical Securities Limited

A-

Standard & Poor’s

Nelson Building Society

BB

Fitch Rating

PSIS Limited

BB+

Standard & Poor’s

South Canterbury Finance

BBB-

Standard & Poor’s

UDC Finance Limited

AA

Standard & Poor’s

Wairarapa Building Society

BB+

Standard & Poor’s

Source: Reserve Bank of New Zealand

On 13 August 2009, S&P lowered MARAC’s long term rating to a BB+ “negative outlook”. South Canterbury Finance was downgraded to BB+ from BBB- “negative outlook” after announcing a $37 million full-year loss and $58 million of property loan provision.

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