Analyst concerns over Persimmon's £900m debt

Debt issues have put an unwelcome spotlight on the finances of Barratt and Taylor Wimpey but now a third house builder’s name as been thrust into this uncomfortable territory – that of Persimmon.

“There is a risk that the group’s debt facilities will mature at a faster rate than its ability to generate the cash to pay down its debt requirements,” says Robin Hardy, analyst with KBC Peel Hunt.

“Persimmon is seen as a good business, commercially and financially. It has been an active industry consolidator and its acquisitions have been well timed, well priced and have created value for shareholders.”

However, even with that said, Hardy has concerns about Persimmon’s financials because without a refinancing of its debt  – ideally in the near future – it will be trading through the next two years just “to keep ahead of the next maturity”.

Persimmon is not usually regarded as highly indebted but at the financial half-year (30 June 2008) it had debt of more than £900m.

That produced a gearing ratio (i.e. ratio of debts to assets) of 40% (not regarded as high) and left Persimmon with further headroom within its lending facilities.

But Persimmon faces two issues:

• Existing debt capacity is rapidly eroding as it naturally matures.
• A covenant breach on interest-cover is foreseen which might alter the maturity of the debt and increase its cost.

Hardy expects Persimmon to breach its interest-cover covenants in the first half of 2009.

“Cash interest is forecast to be covered by EBITDA [a measure of profit] just twice – the covenants require at least three-times cover,” says Hardy. “The encumbrances on Persimmon from a breach are not public but we fear that, as part of the renegotiation, the group may have to surrender some of its debt facilities or redeem some of them early.

“If debt capacity is withdrawn, Persimmon may not have sufficient resources to fund its working capital requirements by the end of 2010, especially allowing for seasonal working capital swings.”

Close to £1.1bn of Persimmon’s borrowing capacity will disappear by November 2010 to leave the house builder with just an estimated £290m of borrowing facilities.

Those figures mean that in the five and a half years from June 2008, Persimmon must generate a gross £1.3bn if it is to meet all spending commitments, as well as feeding the cost of its current debt, while holding actual debt at a level within the £290m limit.

“We have concerns about the ability of all business in this sector to achieve favourable refinancing in the credit-scarce environment, especially where companies do not have strong relationship banking ties with the UK clearers,” says Hardy.

Persimmon is weak on this score as its debt is entirely syndicated.

Barratt and Redrow have met with success in tying down new agreements but life if getting more difficult, as the current Taylor Wimpey situation shows.

With Persimmon, Hardy says: “The presence of US private placement (USPP) debt does make any potential debt discussions exponentially more difficult.”