Moratorium proposals: what do investors need to know?

In the second half of 2008 a number of high profile finance companies asked investors to approve moratorium proposals. In all cases, investors approved the proposals. However, whether investors were provided with sufficient information to make a meaningful comparison of the alternatives put before them has been questioned.

The Hanover Finance moratorium proposal, in particular, attracted a great deal of media attention, with some market commentators critical of the level of disclosure in relation to key aspects of the proposal. A "last minute" injunction application to postpone the investor meetings on the grounds that there was not sufficient disclosure in the moratorium documentation was unsuccessful.

At the same time, the Securities Commission, in response to the number of moratorium proposals being put to investors, issued a guidance note on the information that should be provided to investors in relation to such proposals.

What is a moratorium?

In simple terms, the finance companies' moratorium proposals provided investors with a choice between a moratorium (forgoing interest or principal repayments (or both) for a period of time) and a receivership.

A moratorium is intended to allow management to realise assets on an orderly basis. Most finance company plans promised interim repayments on specific dates, although some plans provided for payments to investors only when funds were available. The principal argument made in support of each moratorium proposal was that existing management is more likely to achieve a better return for investors than a receiver.

Moratorium proposal documents are subject to the disclosure requirements of the Securities Act 1978. In most cases, investors are provided with a notice of meeting accompanied by an independent expert's report. Depending on the terms of the proposal, a registered (often short form) prospectus is required (but not an investment statement).

Hanover Finance judgment

Much comment was made about the complexity of the Hanover Finance proposal and the perceived lack of information about key aspects of the proposal. One investor took the matter to the High Court and sought an interim injunction to postpone the investor meetings on the grounds that the lack of information in the materials sent to investors did not allow investors to make an informed decision.

The investor's argument centred on the injection of assets proposed from the transfer of Axis Property Group Holdings Ltd (a company associated with the ultimate owners of the Hanover Group) to the restructuring programme. It was submitted that the statements made in the investor documents regarding shareholder support to be provided to Hanover Finance were over-stated and put too absolutely. Furthermore, there was a failure on the part of Hanover Finance to provide adequate information to investors of the problems with realisation of the Axis assets, when compared with avenues of potential redress against directors or others involved in the company.

Hanover Finance argued that there was sufficient qualification in the reports relating to the Axis assets as the proposal made it clear that realising the $40 million consideration attributed to the properties was dependent on prevailing market conditions at the relevant time. The court agreed with this argument, noting that it was "not convinced that the market values [of the properties], as at the present date, would necessarily change the approach of any particular investor to the decision that needs to be made at the meeting".

The court also expressed the view that this was not the type of case in which the court should intervene. In the court's view the nature of the motion before the investors was "quintessentially a commercial judgement for individual investors to make", namely whether to accept what has been proposed to what might be available through other means.

Although sympathetic to the investors for the lack of time that they were given to consider fully their position, the court considered that it was an issue that could be addressed by the investors making a motion at the meeting seeking an adjournment under the terms of the debenture trust deed. By granting an interim injunction, the court would be removing the ability for investors to assess whether or not an adjournment was necessary, based on the information available to them.

At the meeting, no such request for an adjournment was made and the moratorium proposal was approved by Hanover Finance investors.

Guidance note from the Securities Commission

In early December 2008, the Securities Commission issued a guidance note to assist investors when reviewing moratorium documents. The Commission emphasised the need for investors to make a meaningful comparison between their options. While the total return may be likely to be less under a receivership, any returns will most likely come sooner than under a moratorium. Investors should look at the "net present value" of the amounts that are expected to be recovered under each option, as well as the expected total return. The commission also points out that where payment is deferred under a moratorium proposal, investors are in effect being asked to take a further risk on the performance of the company's assets and management.

Investors should be told what assumptions about the future value of a company's assets have been made by its directors – and how those assumptions would stack up if applied under a receivership.

The commission identified the following as key questions for investors to consider:

1. How would my rights be different under receivership?
2. How much am I likely to get under receivership, and when?
3. How much do the directors think I will get under a moratorium, and when?
4. Which is more in my interests, given my investment needs (including payout timeframes)?
5. What assumptions have the directors made if they say a moratorium will result in better returns? What are the risks compared with the risks of receivership?
6. Who would supervise a moratorium and report to the trustee or investors?
7. What is the plan to change the moratorium proposal if there are changes in the company's situation or economic conditions?
8. Do I get another chance to vote if things aren't going as expected?
9. Is there an independent expert's report and if so what does it say?
10. Have there been any independent valuations of assets?
11. If parties related to the company are contributing assets are there independent valuations?
12. What does the trustee have to say about the moratorium?
13. What are the financial and legal implications for the directors and other related parties under receivership compared with a moratorium?

What this means for future moratorium proposals

While we may have completed the round of moratorium proposals by finance companies, we are likely to see more moratorium proposals as other debt issuers seek to restructure their financing arrangements.

It is clear that the Securities Commission will monitor the level of disclosure in moratorium proposal documents. Issuers should ensure that their documentation enables investors to address the issues which have been identified by the commission in its guidance note.

While the prescriptive disclosure requirements of the Securities Regulations will not necessarily require disclosure of all this information, the commission's view is that investors need to be provided with additional information. The focus should be on a comparison of the alternatives facing investors.

For more information, please contact:

Glenn Joblin
Parner