Builder's finances on shaky foundations

Taylor Wimpey is going cap-in-hand to shareholders after losing £660m in the recent slowdown...

Last Updated: 31 Aug 2010

Taylor Wimpey, Britain’s biggest housebuilder, confirmed this morning that it is seeking an emergency cash injection of £500m from its investors, after admitting that a ‘significant downturn’ in the housing market had caused big losses in the value of its land-bank. According to the statement (which it was forced to issue following press reports yesterday), it’s writing a whopping £550m off the value of its UK portfolio, plus £70m in the US and another £40m in Spain, forcing it into the private share sale.

The weekend reports suggested that Taylor Wimpey was in imminent danger of breaching its banking covenants, the agreements it makes with lenders about the state of its finances. Last week its credit rating was downgraded to junk status, which means it will be more expensive for it to raise money in the future and set alarm bells ringing about the state of its balance sheet. TW insisted today that it remained ‘within the terms of our banking covenants’, but admitted that the only way it will continue to do so is by changing one of them – and it will only be allowed to do that if it raises more cash.

Of course there are no prizes for guessing why TW is struggling. Since its formation last year, following the merger of Taylor Woodrow and Wimpey, the housebuilder has seen the market deteriorate rapidly; with the credit crunch making it much harder to shift new houses, its order book has been hammered. And there’s no sign of light at the end of the tunnel: the Bank of England said this morning that new mortgage approvals dropped to 42,000 in May, the lowest figure since 1993 and a 64% drop on this time last year, while property information group Hometrack is predicting that property sales are set to collapse to their lowest level since the 1970s.

‘In the UK it has become apparent that we have entered a significant downturn,’ admitted TW today. So it’s no wonder its share price has plummeted more than 60% this year. All it can do is stopping buy new land, cut costs (it recently shut 13 of its 39 UK offices) and try to batten down the hatches. If it does manage to persuade shareholders to stump up £500m, let’s just hope that’s enough for it to weather the storm – at the moment its foundations are looking a little shaky...

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