21 December 2012
NZX Regulation Decision
Allied Farmers Limited
Application for waiver from Listing Rule 9.1.1
1. Allied Farmers Limited (“ALF”) is a Listed Issuer with ordinary shares quoted on the NZX Main Board.
2. ALF’s assets primarily consist of ex-Hanover Finance Limited and ex-United Finance Limited property and loan assets held by Allied Farmers Investments Limited (“AFIL), interests in livestock salesyards, a real estate business, and a 67 percent investment in a trading joint venture subsidiary, NZ Farmers Livestock Limited (“NZFL”). Total assets of the ALF Group are approximately $32 million.
3. The ALF Group’s secured debt to Crown Asset Management Limited (“CAML”) is currently $18.7 million and is secured over all of the assets of ALF and its subsidiaries (excluding NZFL and its subsidiaries, which have separate secured funding arrangements with a trading bank) pursuant to a first ranking General Security Deed (the “CAML Debt”). The CAML Debt is currently being repaid by way of the ongoing realisation of AFIL assets, primarily being the gradual sale of lifestyle sections at Jacks Point in Queenstown. This is expected to take another 2-3 years. 100 percent of the proceeds of the sale of AFIL assets are required to be paid to secured lenders, including CAML in reduction of the CAML Debt.
4. Receipt of ongoing third party funding support is one of the assumptions underlying ALF’s view that it is able to operate on a going concern basis. After a number of weeks of discussion with CAML, ALF delivered a funding proposal to CAML on 10 December 2012, as described below (the “Funding Proposal”). On 13 December 2012 CAML indicated that it is supportive of the Funding Proposal subject to obtaining requisite approvals and agreeing documentation.
5. The Funding Proposal is as follows:
(a) CAML purchases at book value the following AFIL assets for $13,484,462 (“Asset Sale”):
(i) All of AFIL’s Jacks Point sections ($11,343,824);
(ii) Loan Assets ($1,902,000); and
(iii) Other Assets ($238,638).
(b) CAML Debt reduced by $13,099,028.
(c) CAML repays $385,433 to trading bank to fully repay prior charge over Jacks Point sections, in partial set off of Asset Sale purchase price.
(d) CAML provides a funding facility to ALF Group (“Funding Facility”).
6. NZSX/NZDX Listing Rule (“Rule”) 9.1.1 prohibits, except with the prior approval of an ordinary resolution of shareholders, an Issuer from disposing of an asset which would change the essential nature of the business of the Issuer, or in respect of which the gross value is in excess of 50 percent of the Average Market Capitalisation of the Issuer.
7. ALF’s Average Market Capitalisation (“AMC”) over the 20 Business Days preceding the date of ALF’s application was less than $2.3 million. Therefore, the value of the Funding Proposal exceeds 50 percent of ALF’s AMC.
8. In the absence of a waiver, entry into the Asset Sale would therefore require approval by an ordinary resolution of the shareholders of ALF under Rule 9.1.1(b).
9. ALF has applied to NZX Regulation (“NZXR”) for a waiver from Rule 9.1.1 to allow ALF to enter into the Asset Sale without the prior approval of an ordinary resolution of shareholders.
10. In support of its application, ALF makes the following submissions:
(a) The Funding Facility, which CAML has said will only be made available via the Funding Proposal, is urgently required on or before 21 December 2012 to support the assumptions underlying ALF’s going concern basis, and any delay in receiving such funding could significantly destroy the value of the investments (particularly in the rural businesses) and therefore put ALF at risk. CAML, as secured lender, understands those risks and that understanding underpins its motivation to provide funding support, which also has the effect of being in the best interests of shareholders. If the Funding Facility was not provided the Directors would need to seriously consider whether ALF could continue to trade, in which case significant value would be lost for shareholders, creditors and other stakeholders;
(b) ALF does not consider that it is practical or possible to seek the approval of shareholders for the Asset Sale as:
(i) The Funding Proposal has only been able to be finalised very recently and on an urgent basis (the formal Funding Proposal was put to CAML on 10 December 2012), and CAML were able to provide its support on a very timely basis – 12 December 2012. The urgency has not arisen due to any lack of foresight or diligence on either ALF’s or CAML’s part;
(ii) CAML has insisted that the Asset Sale occur on or before 21 December 2012. CAML has given no indication whether or not the support for the Funding Proposal will remain available if that deadline is not met, and therefore ALF wishes to negate the risk of the support for the Funding Proposal being withdrawn, with the likely ensuing prejudicial outcome for ALF and its shareholders, by ensuring that it can urgently conclude the Asset Sale, which would not be possible if a shareholders’ meeting were required;
(iii) 21 December 2012 is considerably earlier than the earliest date ALF could reasonably arrange for a meeting of shareholders in compliance with the Rules;
(iv) the costs associated with seeking shareholder approval for the Asset Sale would outweigh the benefits in the context of ALF’s very low AMC. We note in this regard that ALF has just recently gone through the expense of an Annual Meeting. Whilst at that time the Funding Proposal had not been developed, at the Annual Meeting shareholders were told that ALF was discussing funding proposals with CAML and of the need to realise assets more quickly, with no adverse comment. Further, an announcement was made to the market the same day which included the copies of the slides indicating the risk associated with CAML accepting a funding proposal, and that the next steps included the continued property and other asset sales. Again, ALF has received no adverse comment or feedback on that announcement. Furthermore, ALF has very limited cash and resources and therefore the cost of another shareholders’ meeting is relatively very expensive and ultimately a cost that impacts on shareholder value;
(c) There is no other person who would be willing to provide urgent funding support to satisfy the assumption underlying the going concern basis. No other person would provide support without suitable security over the assets, and ALF does not consider it would be realistic that CAML would support such a position;
(d) ALF has attempted on several occasions to bulk sell the Jacks Point sections to third parties in order to reduce ALF’s holding costs and ownership expenses. Most recently this included an unsuccessful international tender managed by Bayleys Real Estate. Those attempts, and modest “bulk” sales of multiple Jacks Point sections in the past evidence that typically a significant discount to book value is obtained from such sales. In addition, the nature of the loan assets is such that it is highly unlikely that a third person would acquire these at book value. As a result, ALF considers there is no reasonable prospect of another person purchasing the assets on the terms and conditions of the Funding Proposal, and certainly not within the required timeframe. Therefore ALF considers that it has no alternatives to the Funding Proposal and the terms supported by CAML;
(e) Furthermore, the sale of the Jacks Point sections at book value provides significant other benefits for ALF, as it removes ALF’s holding costs. These costs are significant as they include interest costs, rates, ground maintenance, residents association fees, audit fees, and management fees and costs. In addition, the sale to CAML will not attract the significant costs of real estate commissions and marketing costs that would otherwise be incurred. The Asset Sale is therefore a cheaper option for ALF than seeking another buyer;
(f) CAML is not a related person of ALF. Necessarily, the terms of the Funding Proposal and ALF’s decision to enter into the Funding Proposal have been commercially prepared by ALF and ALF’s management, on commercial and arms’ length terms, and ALF is confident that the Funding Proposal is the best outcome it will get given the circumstances where there is no other person willing to provide alternative funding support, that the assets are being transferred at the book value as at the date of settlement, supported by independent valuations and audited by PricewaterhouseCoopers, and a Funding Facility is being made available as part of the Funding Proposal of which the Asset Sale forms part; and
(g) CAML has also indicated that further, more significant/longer term, funding support will be provided once other assets (not part of the Asset Sale) have been realised. ALF does not consider that CAML will provide that additional funding support unless the Asset Sale is completed.
11. Rule 9.1.1 provides:
An Issuer shall not (subject to Rule 9.1.3) enter into any transaction or series of linked or related transactions to acquire, sell, lease, exchange, or otherwise dispose of (otherwise than by way of charge) assets of the Issuer or assets to be held by the Issuer:
(a) which would change the essential nature of the business of the Issuer: or
(b) in respect of which the gross value is in excess of 50% of the Average Market Capitalisation of the Issuer;
except with the prior approval of an Ordinary Resolution of the Issuer or special resolution if that Issuer must obtain approval of the transaction or transactions by a special resolution under section 129 of the Companies Act 1993.
12. On the basis that the information provided to NZXR is full and accurate in all material respects and subject to the conditions below, NZXR grants ALF a waiver from Rule 9.1.1 so that it is not required to obtain shareholder approval prior to entering into the Funding Proposal.
13. The waiver in paragraph 12 is on the condition that the Directors of ALF, certify to NZXR that:
(a) the assets the subject of the Asset Sale are being sold for their current book value;
(b) they consider that the terms and conditions of the Asset Sale (including in particular the price) and the Funding Facility were negotiated on a commercial and arms' length basis and are fair and reasonable; and
(c) they consider that the entry into the Funding Proposal is in the best interests of ALF and all shareholders of ALF.
14. In coming to this decision NZXR has considered the following matters:
(a) ALF urgently requires funding; if funding is not obtained immediately the ALF Directors would need to seriously consider whether ALF could continue to trade and whether ALF could continue as a going concern, in which case significant value would be lost for shareholders, creditors and other stakeholders. It is unlikely that any other person would be willing to provide funding on better terms than those offered by CAML within the required timeframe.
(b) ALF and CAML have been discussing funding options for some time however the Asset Sale aspect of the Funding Proposal was only formulated on 10 December 2012 and agreed to by CAML on 12 December 2012. Accordingly NZXR accepts ALF’s submission that it has not been possible for ALF to seek shareholder approval in accordance with Rule 9.1.1 and meet the timeframe imposed by CAML. If ALF is unable to accept the Funding Proposal on or before to 21 December 2012, it is likely that CAML will withdraw the Funding Proposal.
(c) Shareholders are aware that ALF is realising AFIL’s assets in order to repay debt. The Funding Proposal is an acceleration of this process.
(d) CAML already has security over the sections so the proceeds of any sale to another purchaser would go directly to CAML. The Funding Proposal speeds up this process and saves ALF the costs of holding and marketing the land. There has been no interest in offers by AFL to bulk sell the sections at book value from other potential buyers so ALF may continue to incur these costs for some time if the Funding Proposal does not proceed.
(e) The assets are being transferred at the book value as at the date of settlement. The book value is supported by independent valuations and has been audited by PricewaterhouseCoopers.
15. ALF has requested that this application and any decision remain confidential until the Funding Proposal has been finalised and, if required, announced to the market.
16. In accordance with Footnote 1 to Rule 1.11.2, NZXR grants ALF’s request.