Allied Farmers to issue another billion shares

Allied Farmers has settled its $5 million dispute with Hanover Finance but investors face a huge dilution to their holdings thanks to a pending bonus share issue.

Allied toady released its annual report a week late with its accounts qualified by auditor PwC, which expressed doubts over whether the company could repay debts to Allied Nationwide Finance (in receivership).

The rural services company said its after tax operating loss was $41 million, down $2 million from the preliminary result announced in August.

The company had refused to pay Hanover Finance $5 million in transaction costs related to its merger deal in December 2009 and faced a law suit as a result.

However, Allied said today it had reached a settlement involving a contribution toward legal and settlement costs incurred by Hanover, the terms of which were confidential.

The merger deal saw Allied take over the loans and assets of Hanover and United Finance while investors swapped their stricken debt instruments for shares in Allied Farmers.

They were issued 1.9 billion shares at 21c but the market value has since plunged to 0.5c.

At the time they were told the deal was the only “realistic” way of getting back the majority of the $554 million they sunk into the Hanover companies, then owned by Mark Hotchin and Eric Watson.

Another billion shares 
As part of the deal Allied gave its own shareholders a bonus share reset mechanism to “protect” them from downside to the deal if the assets acquired were written down below the $396 million ascribed at the time.

Those assets have since been revalued at less than $90 million.

As a result of the updated valuations Allied will issue 118.09 million new shares to its original shareholders.

Further to that, under a price adjustment right (PAR), the company also has an obligation to issue 977.34 million additional shares to institutional invesors who took part in a share placement in August 2010.

Under listing rules Allied can only issue 390.5 million (equivalent to 20% of the shares on issue) at this time, but will seek shareholder approval to issue the remaining 586.7 million shares at it annual meeting in late November.

Former Hanover investors who hold about 97% of the company, following the debt for equity swap, will be heaviliy diluted by these new shares, many of which are to be issued to ACC and Australian investor Duncan Saville, who took part in the placement.

Noteholders convert
And its bad news for Allied Farmers capital note holders, owed $12.6 million.

The company said that due to further write downs in asset values it remained in breach of an equity covenant ratio.

After discussions wit the trustee, Allied said it was left with no other “feasible or commercial” option but to covert the capital notes into ordinary shares.

“Therefore all of the Capital Notes will be automatically converted into ordinary shares in the Company at a 5% discount to the weighted average sale price of the ordinary shares over the 20 business day trading period prior to the maturity date.”