Coming with the news of poor sales figures for big retailer, Marks & Spencer, the Taylor Wimpey news will undermine investor confidence across the board. The company had been looking for around 500 million pounds ($A1 billion) in new capital from existing big and new shareholders, and had promised to write down the value of its land bank in Britain, Spain and other countries by around 660 million pounds (around $A1.4 billion). The write-down has happened, but the new capital couldn't be found. No one wanted to commit quickly to the refinancing.
The shares plunged 47.5% overnight. Shares in other builders were also hit, with Barratt Developments down 30% to 39½p (about 90 cents) and Persimmon losing 17% to 247pence (around $5.10).
UK brokers said they would be reviewing the industry's health and issuing upgraded estimate sales, earnings and dividends. One, Cazenoves, said in a note that the news wasn't good for the homebuilding sector.
The company's CEO told the media that the recapitalisation failed because "the negotiations were impacted by market movements in the past couple of days – both in house building and generally."
That's a reference to the slump in house prices, as measured by Nationwide Building Society and the 28% drop in new mortgage loans from April to May. There's just no demand for new homes in Britain and the industry has too much capacity and too many players. It is in a far worse state than in Australia.
Quite obviously the new and existing shareholders approached to participate in the refinancing wouldn't play because they have no confidence in the outlook for UK housing and the economy generally.
Taylor Wimpey management seem not to understand that, given the stated confidence of finding new finance as the year goes on. The news came as Britain's largest house builder by volume unveiled a grim trading update, with private housing net reservations down 45% in the first half, compared to the same period of last year. (contracts)
The company says the falling demand for new homes has hampered its ability to repay debt, despite slashing costs by closing one-third of its British offices stopping all land purchases.
The company has net debt of 1.7 billion pounds, or around $3.5 billion, down 200 million pounds or just over $400 million since April. But even that disciplined approach to cutting debt wasn't enough to convince investors to toss in new money. They are worried the company will fail and they will be throwing good money after bad.
The company said it is still in compliance with its debt covenants, although it added: "Without an amendment to the terms of our banking facilities, in certain negative market scenarios we might breach one or more banking covenants at the first testing date in 2009." That could happen by next February.
