Taylor Wimpey faces new bank deadline of 1 January

Taylor Wimpey’s banking covenants are to be tested as soon as 1 January 2009, rather than the presumed date of 7 February, it has emerged.

The revelation surfaced when the house builder’s finance director answered open questions during a conference call with analysts.

As a result, Fitch has downgraded its rating on Taylor Wimpey’s debt from B to CCC which is well into “junk bond” territory.

A forced liquidation is now a possibility, says Fitch.

The credit rating agency says: “Fitch now believes default at Taylor Wimpey is a real possibility, with a distressed debt exchange, such as debt-for-equity swap, looking increasingly likely.

“Although Fitch believes it less likely, a forced liquidation of the company is also a possibility.”

Should liquidation occur, Fitch estimates that Taylor Wimpey's creditors would lose £1.2bn, only recovering 39% of the house builders' £1.9bn debts.

Rachel Waring, analyst with stockbroker Panmure Gordon, said it was almost certain that Taylor Wimpey's covenants will be breached.

“On the conference call we were told that Taylor Wimpey’s talks with its banks had been disappointing,” she says, “and that it goes beyond the simple issue of having to pay more by way of interest rates.

“People have interpreted that as meaning that the banks are looking for an equity funding or that they want a debt-for-equity swap”.

Taylor Wimpey’s banks look to have decided that they will go double-or-bust, gambling on being able to force TW into offering them either a win-win - or a loss-loss - scenario.

As things currently stand, if Taylor Wimpey did go bust the banks would get to own its land bank. But with no market for such assets at the moment, that is a scenario they would rather avoid.

“With a debt-for-equity swap, if Taylor Wimpey survives there would be an upside for them,” said Waring. “So it’s all or nothing.

“If the group goes under it would be a hugely negative moment but at least it would draw a line under the entire house building sector and we could move on. If a new covenant was agreed, that would also allow things to move on.”

The sentiment towards Taylor Wimpey is that - yes it has the worst problems regarding the level of debt being carried, but its timetable means that it is set to be the first to reach high noon – namely the moment when banks and bondholders are forced to make a fundamental decision regarding the business’s very survival.