Auditor warns on Allied Farmers ‘going concern’ status

Allied Farmers’ auditor has been unable to verify the company’s financial statements and cannot form an opinion on its going concern status.

PricewaterhouseCoopers issued a heavily qualified opinion on Allied’s financial statements in the rural services and finance company’s annual report released to the market this morning.

The auditor said there was insufficient evidence to verify whether the company would be able to generate sufficient cashflows from its funding initiatives to qualify a going concern assumption.

Allied Farmers took over the assets and loans of Eric Watson and Mark Hotchin’s Hanover finance companies in a debt for equity swap last December.

The company has since written down the value of the loan books from $396.2 million to $94.3 million.

In 2008, the Hanover and United assets were valued at $516.6 million.

'Under considerable pressure'

Allied’s annual report showed a pro forma loss of $79.1 million for the year to June.

The result represents the group without subsidiary Allied Nationwide Finance, which was placed in receivership on August 20.

The company has been selling ex Hanover assets to cut its senior debt to Westpac but it still has total liabilities of $96 million on its balance sheet, including $44.3 million of borrowings on property assets and $12.4 million of capital notes.

In August Allied suspended a proposed capital raising of $9 million due to a breach concerning Allied Nationwide.

This, combined with an obligation to pay all proceeds from asset realisations to Westpac ($12.7 million since year end), has placed “considerable pressure” on the short-term liquidity of the group, Allied Farmers noted in its report.

A number of initiatives need to be completed for the group to continue operations:

• completion of a successful capital raising;

• additional finance to replace debt factoring facilities for Allied Farmers rural;

• collection of $5 million of revolving credit debtors due for payment yesterday;

• further asset sales from ex Hanover property; and

• finalising repayment terms on obligations to Allied Nationwide Finance

Further uncertainty over assets

PricewaterhouseCoopers said the financial statements do not include any adjustments that may need to be made to reflect the situation should the company and group be unable to continue as a going concern.

“Such adjustments may include assets being realised at other than the amounts at which they are currently recorded in the balance sheet. In addition, the company and group may have to provide for further liabilities that might arise and to reclassify certain non-current assets and liabilities as current.”

PWC said asset values might be further negatively impacted by the current credit environment, an increased level of uncertainty in respect of property values and difficulties in assessing borrowers’ ability to meet their future obligations.

“In addition, the recovery of these assets is, in many cases, dependent on the ability to sell the collateral assets in which the company and group have a security interest.

In the current market conditions there is additional uncertainty over the value of some collateral assets and the timing of sale of those assets. We are unable to quantify the potential effect of these uncertainties.

“These financial statements do not include any adjustments that may need to be made to reflect the situation should the directors’ estimates of the amount and timing of the cash flows from loans and advances, inventory – property and investment property prove to be inaccurate.”

Finance foray 'costs shareholders dearly'

Allied’s outgoing managing director Rob Alloway said in his overview that it seemed the world was moving in slow motion.

“Allied Farmers has been trading for 120 years, and has had its fair share of troubles during that time. The recent foray into the finance segment must now count as one of those and one which we recognise has cost our shareholders dearly.”

He reiterated the blame the company has sheeted on Hanover for the massive writedowns incurred.

“While leading up to settlement of the transaction our due diligence confirmed the ascribed value with a comfortable level of reasonability, the fair value assessments of the assets acquired has been a huge disappointment and illustrated a number of shortcomings with governance and management systems at Hanover,” Mr Alloway said.

“In a number of cases, the combined effect of reduced liquidity in the financial sector and reduced demand for property has severely diminished the security value which backs these assets. Many had been historically valued based on what I would describe as ‘blue sky,’ which can only be described, in hindsight, as highly optimistic.”