Prospect of banks forming 'Taylor Wimpey NewCo'

The slide in Taylor Wimpey’s shares to 5p today means that 34bn new shares would need to be issued - with a total value of £1.7bn - before a debt-for-equity swap could be undertaken.

At a blow that would eliminate the house builder’s current £1.7bn mountain of debts – so happiness on that score – but the holders of the existing 1bn shares in TW would find themselves snookered.

Their 1bn shares would amount to just 3% of the new enlarged stock of 35bn shares which in turn would mean that a paper-stake which is today worth 5p would suddenly be valued at less than 0.2p.

The City view is that the latest woes that TW is suffering, by way of a daily share price collapse, is basically the reaction to Fitch’s further downgrading move last Friday.

The credit ratings group put TW into the CCC band, the definition of which is “imminent default”.

What is even worse for existing shareholders is that should 34bn new shares arrive on the scene, the law states that if one group owns more than 90% of the total, it can force the balance of shareholders to hand over their shares.

There is the chance that all TW’s creditors could agree to form a single new entity.

“The net asset value of Taylor Wimpey’s shares stands at well over £2,” said one analyst who covers the house building sector. “Agreed, what we don’t know is what further write-downs there might be and hence how that would affect the asset value figure, but it will still be massively ahead of today’s trading price of 5p.

“The main issue bearing down on TW’s price is the weight of the effective issue of new shares that lies just round the corner.”

It had been thought until last week that TW’s high noon, in terms of breaching its covenants, was 7 February 2009.

However the company has revealed that it needs to get its finances in order by 1 January.

Followers have been asking where did that new date come from and how had TW’s management kept it under wraps?

“It is either the first time we have had an insight into the finer details relating to the group’s US private placements of debt – or else the banks have brought their deadline forward,” said the analyst.

“It now looks as if TW’s banks are not on their side.

“That means they could well give the company a simple ultimatum saying ‘give us the company’.

“That would result in the formation of what might be called Taylor Wimpey NewCo which would be a new entity run differently from the present.”

The good news for existing employees is that NewCo couldn’t simply lay everyone off and simply sell the land bank on, piece by piece.

“It is unlikely to do anything significantly different to the current management, only perhaps discount more than they are currently doing. If prices are at a 15% discount today, that could be racked up to 25%.

“But there is a point beyond which discounts are not sensible as NewCo would need to recover its construction costs. Without a cash contribution at all, debts would start to grow once again.”

So the work force can breathe a sigh of relief – apart from the top management team that is.

The banks are expected to already have “company doctors” lined up to take over the running of the group.

The core skill of a house builder, in the good times, is in buying land. At the moment TW is not buying.

“With the core skill no longer required, what is needed right now is a good marketing specialist to head up the company and these people are available from anywhere,” said the analyst.

“If the debt holders set the ball rolling they have to know what to do next before making their push, but there are whole departments in these banks sitting there, able to step in and keep a company ticking forward.”