After months of controversy surrounding its accounting practices, Hanover Compressor ( HC) announced Friday that CEO Michael McGhan and Chief Operating Officer Charles Erwin were resigning.

Chairman Victor Grijalva will serve as acting CEO until replacements are found.

Shares of Houston-based Hanover plunged 15% to $7.16 on the news. The stock has fallen more than 71% since the start of the year.

"These are the guys that got the company into trouble," said Mark Roberts, an analyst at Off Wall Street Consulting who has been an outspoken critic of Hanover.

In February, the company restated its financial results for 2000 and the first three quarters of 2001 after saying it had improperly recognized revenue on a joint venture called Hampton Roads.

That same month Hanover, which makes pumps used in the transportation of natural gas, announced that its chief financial officer was leaving and that the Securities and Exchange Commission had launched an investigation into its books. Questions have continued to swirl since then.

Executive Privilege

In an SEC filing earlier this year, Hanover revealed that it had extended a $400,000 loan to then-CEO McGhan after advancing a $2.2 million loan to him in 2001. The Center for Financial Research and Analysis took issue with this and with the way Hanover boosted net income in the first quarter using a series of gains. Hanover is scheduled to report its second-quarter results Monday.

When contacted, Peter Schreck, vice president, treasury and planning at Hanover, wouldn't say whether the firm will meet analysts' estimates next week, or whether the resignations had anything to do with the upcoming results. The consensus earnings estimate currently stands at 16 cents a share, according to Thomson Financial/First Call.

Still, Schreck did say that the loans made to its executives would be repaid "in conjunction with the terms in which they were made." He also noted that the new corporate reform bill signed by President Bush on Tuesday stipulates that companies will no longer be allowed to repay loans on behalf of officers and that, going forward, the firm won't lend money to its executives.

"It looks like they're getting the bad eggs out," said Roberts, who neither owns nor shorts Hanover's stock. "But the major issue for Hanover is liquidity."

Roberts said Hanover has $1.1 billion in special purpose entities that must either be refinanced or paid back to investors over the next few years. "If investors want to be paid off, where are they going to get the money from?"

Foreign Affairs

One pressing concern is Hanover's large exposure to Argentina, which devalued its currency in January 2002. Last month, Merrill Lynch analyst Michael Clark said earnings are at risk because the company has been taking too long to renegotiate its contracts there.

Hanover's Schreck said the company has been making progress on this front and added that he isn't concerned about liquidity because only $200 million of the $1.1 billion in the SPEs is due in 2004, with the rest due over the following seven years.

Hanover has also renegotiated its bank covenants to loosen some of the coverage ratio requirements over the next couple of quarters, according to Clark. "Although liquidity is tight, I think it's manageable," he said.

Whether the resignations will affect the firm's credit rating remains to be seen. Last month, Standard & Poor's cut Hanover's bond rating to BB from BB+, with a negative outlook, on concerns about the company's financial position. "The new ratings reflect Hanover's burdensome debt leverage and its inability and questionable willingness to repair its financial profile," S&P said at the time.

Wachovia Securities analyst Yves Siegel downgraded the stock Friday to hold from strong buy, citing the firm's internal issues, a deferral of maintenance and capital expenditures by oil exploration and production companies, and lower earnings expectations. Still, Merrill's Clark raised his rating to near-term buy from near-term neutral.

"The market is looking at this as if there are further improprieties here," he said. "There's always the risk of that, but I don't believe that to be case."

Clark believes McGhan and Erwin were probably forced out as a result of the Hampton Roads matter, but he said Hanover's books have gone through a thorough review since the new CFO arrived, and if another issue was lurking, "we'd have heard about it by now."

Hanover isn't one of the 947 companies whose executives are required to certify their financial results by Aug. 14.