Wolseley thought to be at risk of breaching banking covenants

Wolseley, the builders’ merchant, is at risk of breaching its banking covenants if it fails to unveil further restructuring charges on Wednesday, according to one city analyst.

Wolseley is scheduled to issue a trading update in two days’ time as it moves close to the end of its 31 July financial year.

Until then, the company is choosing to keep tight-lipped despite a swath of negative press coverage over the weekend. A spokeswoman told CJ: “We will be issuing our trading update on Wednesday and we have no comment until then.”

All the market sectors in which Wolseley is active have deteriorated since the group made its last public statement in May. At that time it revealed a £50m restructuring charge which it said would cover the following nine months of trading.

The upside of that move was that it would trigger £70m of annual cost savings.

“Will there be a further big lump of restructuring costs announced on Wednesday? Well they might not but I would,” said John Messenger, analyst with stockbroker ABN Amro.

“On 1 August Wolseley starts a new financial year and as things stand it is at risk of breaching its covenants.”

He feels that only by taking another big charge, taking out further costs, will Wolseley find itself with enough leeway to have a chance of not breaching its covenants next year – and even then it could fail to clear that financial hurdle.

Since Wolseley’s statement in May, the situation in the UK housebuilding sector has suffered “torrid times” he notes, while in the US today’s growing worries over Fanny Mae and Freddy Mac, two major American money lenders, mean that “new housebuilding in the US will step down still further again when we were just starting to think that we had reached bottom”, according to Messenger.

In the 12 months to 31 July 2008, the analyst anticipates a pre-tax profit running to £478m while in the following year to the middle of 2009 he sees a king-sized fall to £306m.

That could be the bottom of the trough, with Wolseley’s anticipated profit for 2010 inching back up to £318m.

“Construction is a depressing industry right now,” said Messenger.