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HFL has also provided Axis with a revolving credit (RC) facility in order to fund its general
working capital requirements. Two such facilities were combined in a new facility on 21
December 2007. Out of the total facility amount of $22.0m an amount of $12.6m was drawn at
19 August 2008. Interest of 17% p.a. is being capitalised on the balance. Axis has ultimately
received proceeds of $4.0m of HFL dividends in February/March 2008 and applied a portion of
the proceeds from the sale of 5 properties ($8.5m) in order to partly repay the facility. The
facility matures on 30 December 2008.


322. HFL has historically paid dividends to its immediate shareholders, HCL and HFSL. Total
dividends paid over the four year period FY05 to FY08 amounted to $136.6m. Reported profits
after tax over the same period were $131.6m.

323. Until February 2008 HFL applied a dividend policy whereby $2m was distributed each month.
This policy was suspended with effect from March 2008, however, dividends have continued to
be declared on a month by month basis since then until June 2008, when the last dividends
were declared and paid.

324. The following distributions totalling $45.5m were made by HFL in the year ending 30 June 2008:

ƒ $2.0m ($1.1m to HCL and $0.9m to HFSL) in each of the following months: July 2007 to
October 2007 and December 2007 to May 2008. An additional $2m dividend in February
2008 and March 2008 were applied towards partial repayment of the Axis RC facility. The
dividends in April and May 2008 were declared conditional on the payments being applied
to reduce related party exposures.

ƒ $10.0m dividend in September 2007, which was applied to reduce the related party loan
balance to Axis.

ƒ $8.0m special dividend in October 2007, with $4.2m paid to HCL and $3.8m paid to HFSL,
also conditional on the dividends being applied to reduce related party exposures.

ƒ $5.5m in June 2008 to HCL and HFSL split in equal amounts. We understand these
dividends were used to fund the acquisition of certain properties from HFP Investments.

325. The minutes of the Board meetings confirm that all distributions during the period reviewed were
supported by consideration of solvency and a formal board solvency certificate was prepared.

326. We understand that all HFL dividends ($45.5m) were passed up to Hanover Group Limited and,
in turn, to Hanover Group Holdings Limited (HGHL). Of the total dividends of $45.5m, HGHL
then made the following payments (refer funds flow summary below):

ƒ $23.5m (in total) was paid out to Hotchin Investments Limited (a company controlled by
Mark Hotchin), Forefront Investments Limited and Cullen Investments Limited (both
companies controlled by Eric Watson). Of the $23.5m paid to these parties, $9.5m was
then applied to reducing the balance of the Axis RC facility; and

ƒ $22.0m was also directly applied by HGHL to pay down the balance of the Axis RC

327. In total $31.5m of dividends were directly and indirectly applied to the reduction of Related Party
loans with an additional reduction by $37m funded from sources outside the dividend flow.

328. HCL paid a total of $13.9m by way of principal and interest to HCL Capital Bondholders. This
was funded via the redemption of Redeemable Preference Shares (RPS) of $9.7m by HFL, a
cash reduction in HCL of $3.2m and by using part of an HCL income tax refund of $2.1m.

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Property transactions

329. Omara Property Group Limited (Omara), another company jointly controlled by the
Shareholders applied the funds received from HFL dividends of $9.5m and additional funds
totalling $15.9m to acquire certain properties from various Axis Companies for $18.3m and from
HFP Investments for $7.1m. Axis applied $9.5m of its subsidiary’s proceeds to the repayment
of the RC facility.

Funds flow summary

330. The following diagram summarises the flow of dividends during the year from 1 July 2007 to 30
June 2008 from HFL, dividends to HCL Bondholders, cash flows surrounding the purchase of
properties by Omara from HFP Investments and various Axis subsidiaries, with the latter
applying some of the funds received against a reduction in the Axis RC facility provided by HFL:


Cullen Investments

Forefront Investments Hotchin Investments Omara Property Group

Limited Limited Limited

purchase of HFP Investments Limited
Hanover Group Holdings properties

Payment on behalf of the

$45.5m Shareholders $22m
price for
Hanover Group Limited HCL Bondholders properties

Various Axis Property

$22.3m $23.2m $13.9m1 Group subsidiaries

Hanover Financial Services

Hanover Capital Limited
Limited $9.5m of the
proceeds from
property sales
Dividends Dividends RPS issue
$22.3m $23.2m $0.8m
Axis Property Group
Holdings Limited
Hanover Finance Limited

Repayment of loan
Dividends (RC) $31.5m

United Finance Limited

Note 1: HFL dividends were fully passed on further up the Group by HCL. Payments to HCL Bondholders were funded by HFL RPS redemptions
of $9.7m, a cash reduction in HCL of $3.2m and an income tax refund for HCL of $2.1m.

Tax losses

331. HFL received tax losses of $3.5m on 31 December 2007 from Hanover Group Holding Limited
for no consideration.

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Report to NZ Guardian Trust for Investors
Appendix A – Statement of Qualifications, Independence,
Disclaimer, Restrictions, Limitation of Liability and Indemnity


This Report has been prepared by the Corporate Finance division of PricewaterhouseCoopers, which
provides advice on mergers, acquisitions and divestments, valuations, independent expert’s reports
and appraisals, financial investigations and strategic corporate advice.

The Partners responsible for this report are David Bridgman M.Com, LLB, ACA and John Waller
B.Com, CA, both of whom have extensive experience in relation to corporate restructurings and the
preparation of independent expert reports for the benefit of investors.


PricewaterhouseCoopers considers itself independent of Hanover Finance Limited and its related
entities in relation to the Debt Restructuring Proposal. We confirm that:

ƒ We have not been responsible for formulation of the Debt Restructuring Proposal, although we
have provided extensive advice to the Trustees on various iterations of the Proposal and provided
detailed comments and suggestions back to Hanover Group on behalf of the Trustees;

ƒ Our fees for preparation of this Report are based on the time required for its completion, and are
not contingent on the success or implementation of the Debt Restructuring Proposal; and

ƒ We are not, and do not intend to be, a director, officer, or employee of HFL or any associated
entity, however as noted in our Report, PwC may be requested to undertake an ongoing
monitoring role on behalf of the Trustee if the Debt Restructuring Proposal is approved and may
also be asked to act as an independent advisor to the HFL Credit Committee pending
appointment of an independent director approved by the Trustee.

In addition to the provision of this Report, we have carried out the following work during the last three
years for companies in the Hanover Group and parties associated with the Hanover Group:

ƒ In 2007 PwC provided limited tax advice to HFL around PIE (Portfolio Investment Entities)
schemes and funds management. We understand no action was taken by HFL on our advice

ƒ In 2006/2007 PwC was engaged by HFL to negotiate on its behalf a settlement with a group of
clients. This role finished in September 2007; and

ƒ In 2007 PwC Partners John Waller and Colin McCloy were appointed compromise managers of a
creditors’ compromise scheme that was entered into by Wall Group Limited, a wholly owned
subsidiary of Cullen Investments Limited (Cullen), being a company ultimately owned and
controlled by interests associated with Eric Watson. Cullen is not part of Hanover Group. This
compromise is nearing finalisation.

We believe that the independence of PricewaterhouseCoopers asserted in relation to the conduct of

this assignment is not impaired by our other work undertaken for Hanover Group or any of its related

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Disclaimer and restrictions on the scope of our work

The statements and opinions expressed in this Report are based on information available as at the
date of the Report.

In preparing this Report, we have not independently verified the accuracy of information provided to us,
and have not conducted any form of audit in respect of HFL or any of its related entities. Accordingly,
we express no opinion on the reliability, accuracy, or completeness of the information provided to us
and upon which we have relied.

In forming our opinion, we have relied on forecasts and assumptions prepared by HFL about future
events which by their nature are not able to be independently verified. Inevitably, some assumptions
may not materialise and unanticipated events and circumstances are likely to occur. Therefore, actual
results in the future will vary from the forecasts upon which we have relied. These variations may be

The statements and opinions expressed in this Report have been made in good faith and on the basis
that all relevant information for the purposes of preparing this Report has been provided by HFL and /
or its directors and advisors, and that all such information is true and accurate in all material aspects
and not misleading by reason of omission or otherwise. Accordingly, neither PricewaterhouseCoopers
nor its partners, employees or agents, accept any responsibility or liability for any such information
being inaccurate, incomplete, unreliable or not soundly based or for any errors in the analysis,
statements and opinions provided in this Report resulting directly or indirectly from any such
circumstances or from any assumptions upon which this Report is based proving unjustified.

Our opinion has been arrived at based on economic, market and other conditions prevailing at the date
of this Report. Such conditions may change significantly over relatively short periods of time.

We reserve the right, but will be under no obligation, to review or amend our Report, if any additional
information, which was in existence on the date of this Report, was not brought to our attention, or
subsequently comes to light.

Limitation of Liability

PricewaterhouseCoopers will accept liability to pay damages for losses arising as a direct result of
breach of contract or negligence on our part in respect of services provided in connection with, or
arising out of, this engagement but, to the extent permitted by law, any liability of
PricewaterhouseCoopers, its partners and staff (whether in contract, negligence or otherwise) shall in
no circumstances exceed the greater of $1,000,000 or five times the fees paid in aggregate in respect
of all such services.


Guardian Trust and HFL have agreed to indemnify us against claims brought by any third party (which
includes but is not limited to HFL and the Investors). The indemnity covers PricewaterhouseCoopers
for any loss or liability suffered or incurred as a result of or in connection with the preparation of this
Report. The indemnity will not apply to the extent that it has been determined by a Court that there is
negligence or misconduct on our part. The extent of the indemnity from the Trustee is limited to the
realisable value of the asset to which Guardian Trust has recourse under the Trust Deed between itself
and HFL.


We consent to this report being distributed to HFL Secured Depositors.

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