Barratt shares soar after covenant deal with bank

Jun 21 2008 by Iain Laing, The Journal

REPORTS of a deal between embattled housebuilder Barratt Developments and its banks sent shares in the firm soaring yesterday.

Trade publication Building said agreement had been reached to waive a clause that could put debt-laden Barratt in breach of its banking covenants following a land valuation write-down later this year.

Shares in the company jumped more than 20%, with rivals such as Persimmon and Taylor Wimpey also enjoying near double-digit rises as a result. Quoting a source close to the negotiations, Building said the waiver centred around the firm’s asset cover covenants, which govern the ratio of debt to net assets.

This is thought to be 85%, and analysts have forecast it is likely to be breached following a hefty write down in the firm’s £5bn land bank.

The waiver will remain until Barratt has repaid £400m that was borrowed to fund last year’s £2.2bn acquisition of Wilson Bowden, Building said. It has until 2011 to do this, the report added.

Barratt faces a test at the end of this month to determine whether any covenant breach has occurred. Auditors will check whether the group’s net debt at its year end of June 30 – expected to be £1.7bn – exceeds 85% of the firm’s net asset value, which is assets less total liabilities.

A further test will take place based on December 31.

Last week chief executive Mark Clare confirmed he was in discussions with banks over a possible covenant waiver.

In the event of a further deterioration in the housing market he said he hoped lenders would allow the limits to be breached temporarily until further funding was secured, either from development sales or a cash injection from investors.

“We believe we could get some sort of a waiver,” Mr Clare said at the time.

“The banks are not different to anybody else – they want to see us come through the other side.” However, a spokesman for Barratt declined to comment on the report.

The sector has been under intense pressure recently amid fears over future trading amid the housing market slowdown. Despite yesterday’s leap, Barratt’s shares are currently worth a tenth of their value a year ago.

Investor fears over the potential covenant breach saw Barratt shares slump by more than 40% in value last week alone.

The sector was rocked again this week after more gloomy forecasts for the industry. Goldman Sachs said on Wednesday that the UK housing market was only “at the start” of a deep downturn, which could last up to three years.