A stinging report by the statutory manager of Allan Hubbard's companies has identified high levels of lending to the volatile dairy sector as posing significant risk to the return of $96 million of investors' capital.
Government-appointed company Grant Thornton has told investors the value of their investments may be overstated by more than 25% in one company and another company may deliver losses.
It has highlighted the outcome of offering free loans, unpaid interest, accumulating losses, poor governance and claims that cash balances as stated to investors do not exist.
The investigation and asset sales look set to continue, possibly for "years".
The Hubbard entities under management are now being stung by the volatility in the dairy sector and farmers' inability to repay large loans involving tens of millions of dollars.
The Government placed Mr Hubbard's assets under statutory management on June 20, and the Serious Fraud Office has launched a separate, ongoing, investigation.
Grant Thornton released its second report yesterday, hard on the heels of Hubbard supporters' increasingly vocal calls for the Government to put an end to the dual investigation.
The supporters say there was no fraudulent or misleading behaviour by Mr Hubbard and investors were suffering increasing hardship from their funds being frozen under statutory management.
Investors in Mr Hubbard's Aorangi Securities, already stressed because of the frozen funds, have been told by Grant Thornton they are unlikely to see any significant return of capital until next year, at the earliest, but a small payment may be made during October.
Mr Hubbard's widespread investments in the dairy sector are unravelling as lenders are unable to pay, leaving an estimated 50% shortfall in interest payments.
"Many of the relevant farming businesses are struggling financially. They have been unable to make payments to Aorangi,' Grant Thornton said.
"We do not yet know the exact value of Aorangi's investments in the farming industry."
Many of Aorangi's loans are to about 25 dairy farms and Grant Thornton has estimated only 17 loans out of 51 will meet their September 30 deadline interest payment obligations - a shortfall of $1 million, or 50% of what is due to Aorangi investors.
"There is an alarming gap between the income that Aorangi [Securities] is presently receiving from its loans and investments and the amount it needs to pay out to its investors," Grant Thornton said, but added a "small amount" of available cash may be used for the October repayment.
"Mr Hubbard has allowed Aorangi to accept deposits from investors on call and to invest those funds in investments or loans which are nearly all long-term in nature," Grant Thornton said.
Many Aorangi investments ranked behind all other creditors of the farming ventures, which was "far from ideal", Grant Thornton said.
The manager praised Mr Hubbard for having pledged to investors that his stake in Aorangi could be used to help offset potential losses, but Grant Thornton believe he would not be able to contribute further funds.
"In our opinion the accounting records and governance relating to the assets the company [Aorangi] holds are very poor," Grant Thornton said.
Its work on Hubbard Management Funds - valued at $82 million in statements by Mr Hubbard to investors in March - was "substantially complete".
However, the managers believe the total value of Hubbard Management Funds was "at least 25% less" than reported by Mr Hubbard to investors.
"The reason for this is that some of those statements included investments and cash balances, which did not exist," the company said.
The Hubbard Management Fund was "relatively high risk" and was not typical for investors involved, while the investments allocated to investors in statements were "in excess of those actually held", Grant Thornton said.
The Te Tua Charitable Trust, which borrowed $24 million from Aorangi at 10% interest, is estimated to have losses up to $15 million.
The trust's "helping hand" loans were largely interest-free for five to seven years for farmers and sharemilkers, starting with an initial repayment holiday.
"Te Tua has taken over loans where entities have encountered financial difficulties. There are unlikely to be recoverable," the manager said.
Of Aorangi, it noted the prospects for investors "rely heavily"on the "very volatile" dairy sector and profitability of farms.
A progress report was due in September, but Grant Thornton warned asset realisation and the final solution "may take several years".
Aorangi Securities Ltd
• Received $96 million from investors.
• "Purported" equity from Mr Hubbard of $34 million.
Has invested $130 million in. -
• $83 million: farming entities ($59 million in Hubbard-associated farm businesses, $24 million in first and second land mortgages).
• $24 million in Mr Hubbard's Te Tua Charitable Trust.
• $23 million "other" commercial entities, including $10 million in Hubbard-controlled Southbury Group, $13 million first and second mortgages to businesses.
Hubbard entities under statutory management
Aorangi Securities, Hubbard Management Funds, plus seven associated charitable trusts; Te Tua Charitable Trust, Otipua Charitable Trust, Oxford Charitable Trust, Regent Charitable Trust, Morgan Charitable Trust, Benmore Charitable Trust and the Waiiti Charitable Trust. Allan and Jean Hubbard.
- Statutory managers second report
Hubbard Management Funds
• March value $82 million
• Invested in private equity funds, second-tier companies, "penny dreadfuls", few blue chip, "many illiquid investments".
• March report of $6 million uninvested funds, but cash available at date $350,000
• Value of company at least 25% below March statements, since deteriorated further.
Te Tua Charitable Trust
• Lent $24 million by Aorangi, at 10% interest.
• Majority of trust's "helping hand" 5-7 year loans interest-free, initial repayment holiday.
• Hubbard has estimated $10 million loss.
• Valuer estimated further $5 million loss.
• A more than $10 million exposure to Southbury Group.
