A proposed capital reconstruction plan by financial services company Dorchester Pacific has merit, PricewaterhouseCoopers says in an independent expert's report but it does disagree with the Dorchester board on some issues.In December 2008, Dorchester inv
A proposed capital reconstruction plan by financial services company Dorchester Pacific has merit, PricewaterhouseCoopers says in an independent expert's report but it does disagree with the Dorchester board on some issues.
In December 2008, Dorchester investors voted in favour of a deferred repayment plan. At that time the company had $163.7 million of secured debenture stock and $8 million of subordinated notes on issue. As at March 31 stockholders had received payments amounting to $81.85m -- half their principal investment.
But since the start of the deferred repayment plan, Dorchester had property loan losses that were not anticipated in initial forecasts, resulting in a deterioration of net assets and shareholder funds.
Updated financial forecasts suggested a risk Dorchester would be unable to meet scheduled commitments, including one this month. In response Dorchester proposed the capital reconstruction plan, which is to be put to a vote of investors in Auckland on June 30.
Under the plan four new securities are to be issued to debenture stockholders in return for their outstanding debenture stock.
Those securities are units in a unit trust holding four hotel properties, $20 million in aggregate of three-year secured interest bearing notes, shares in Dorchester, and options to acquire further shares.
The plan is also conditional, among other things, on Dorchester raising a minimum of $8m of new capital in a $10m capital raising.
PricewaterhouseCoopers said that provided certain key success factors materialised, including favourable market conditions and the achievement of group operating forecasts, stockholders could potentially recover a significant portion or possibly all of their original investment.
But it had identified several matters where it disagreed with the opinions or assumptions made by the Dorchester board in forming the reconstruction plan.
One of those issues was that the plan offered stockholders shares equivalent to 50% of the total shares in Dorchester before the rights issue, but in its view 50% seemed low and should be higher, PricewaterhouseCoopers said.
Another was that under the plan any operating losses in relation to the properties in the unit trust would only be underwritten by Dorchester in the first year of the plan.
PricewaterhouseCoopers said it considered that to the extend that any operating losses may be incurred by the unit trust, those losses should be underwritten by Dorchester.
It also considered that the interest rate of % on the notes was below what would be expected for an instrument of that nature.
The independent report also described as "challenging" a five-year financial forecast for Dorchester prepared by its board.
The board's base case estimate of returns to investors was based on the assumption the group would achieve the five-year forecasts. To the extent the group did not meet its forecasts then the value of the shareholding and notes could decline, PricewaterhouseCoopers said.
If Dorchester achieved its financial forecasts, there was potential for an increase in its market capitalisation over time.
Stockholders who elected to retain shares and options would benefit from any future upside, but there was a risk that the short term value of Dorchester shares would trade at a discounted rate.
Receivership was an option available to Dorchester, the report said.
The Dorchester board had assessed that in a receivership scenario, the recovery range for stockholders would be 66c to 76c in the dollar on their original principal.
In comparison, the board estimated the value of the capital reconstruction plan to stockholders was 85.4c to 90.7c per dollar of original investment, with the potential for further returns.
PricewaterhouseCoopers said the board's receivership assumptions appeared conservative, and in its view recoveries in a receivership could be higher.
But it also said it doubted stockholder recoveries in a receivership would exceed the low end of the board's base case estimate of return to investors. Given the risks around the property and finance company sectors the recoveries could be significantly lower.
