Wolseley share price falls a third after new debt revelation

Wolseley’s share price dropped to 201p yesterday. The 85p fall was almost a third of their previous-day value and was triggered by news that the group’s debt pile had swollen to £3bn.

The trouble is that Wolseley’s debts are in euros, and so the drop in the value of sterling against that currency has taken its toll.

Today’s Financial Times said: “The rising debt, together with falling profits, stoked fears that Wolseley will breach its banking covenants this year, forcing the company into costly debt renegotiations or a dilutive rights issue.

“UBS, its broker, said Wolseley was highly likely to break its covenants when they are tested in July.

“The bank said an equity issue of as much as £750m was ‘virtually unavoidable’.”

Wolseley’s covenants call for its net debt to be no higher than 3.5 times earnings before interest, tax, depreciation and amortisation (commonly referred to as EBITDA).

In the year to July 2008, Wolseley was running with a debt figure multiple of 2.7 times.

The result of currency movements against the pound has been to increase debt by £560m, a rise of 22%.

Imran Akram, analyst with stockbroker Collins Stewart, told the FT that Wolseley has missed an excellent chance to raise capital. He had been advocating such a move for months, arguing that it is ‘inevitable’

The Daily Telegraph’s city column entitled Questor today says Wolseley’s shares are to be avoided.

“Questor had had an avoid recommendation on Wolseley shares since September when the shares were at 470p,” says the paper.

“This was good advice as the stock has fallen by about 57% since then.

“Investors should expect speculation regarding the banking covenants to continue, despite the company saying that the group’s projections continue to show covenant compliance at January 31, 2009.

“That’s because there was no statement regarding covenant compliance beyond this date.”

The Telegraph highlighted speculation of a need for a £400m fundraising (i.e. new shares).