Taylor Wimpey faces 7 February financial deadline

Taylor Wimpey’s financial clock is ticking: the housebuilder needs to complete discussions with a myriad of debt providers before 7 February 2009 otherwise the current holders of £450m of bonds could ask for their money back.

TW is suffering from an ongoing tumble in its credit ratings.

A BB-plus rating is the lowest of the various investment grades and TW currently earns only a BB-minus credit ranking, having slipped from one grade above the investment grade threshold to two grades below – the territory of junk bonds – in the space of just five weeks.

The company was re-rated by credit rating agency Fitch three times in that short period.

TW had only recently told investors that a new deal with its banks would be signed by the end of the year. They were necessary because it currently faces a breach in its debt covenants.

The expectation in the City was that an agreement would be reached by the end of October. That plan has been blown away.

Debt structure

Taylor Wimpey sits on £1.6bn of net debt.

That sum divides between:

• £870m of bank debt.
• £450m of traded Eurobonds.
• £380m of private placements (another form of lending, one which is not publicly traded).

At one time, TW borrowed in a straightforward fashion from the UK clearing banks but normal sources were augmented by two issues of Eurobonds in 2002 and 2004 as well as 12 private placements.

“Each of the placements are owned by several banks resulting in a total of 20 to 30, and the majority of them will need to give their agreement to any new terms,” said one housebuilding analyst with a London stockbroker.

“The trouble is that banks now, in general, don’t want to lend to housebuilders on any terms. It’s not that they will be seeking better terms but rather that they want their money back.

“When Barratt went through the motions, banks were still relatively happy to do deals with housebuilders but now they don’t want to lend to anyone. Barratt got there before the wider global financial problems appeared.

“Barratt started renegotiations back in February and it was only on 8 July that it got its new facilities in place and even then it took a little while longer before they were properly signed off.

Time running out?

“The issue for Taylor Wimpey is - will it run out of time?”

A spokeswoman for TW said its coordinating banks have expressed a wish to stay on board.

TW is unique in having publicly traded bonds. They carry their own set of covenants which could be breached before the equivalent trigger is pulled on its bank debt.

TW’s Eurobonds currently trade at half their face value. There is a view that hedge funds have spotted an opportunity and are looking to manipulate the situation to their advantage.

“They are trying to bring forward the company’s troubles,” said another analyst. “They are investing in the bonds while still shorting the shares, looking to reach the point where the company is forced into liquidation.”

If hedge funds managed to push TW over the edge they would get their bonds redeemed; it is one of the terms of failure. Once the company had gone down they would be able to buy pseudo-shares from the administrator and make further considerable returns in the process.

“Whoever set up up the bond structure thought TW was another General Electric,” said the analyst. “It has put the company into a vulnerable position. Taylor Wimpey has never been more exciting.”