Barratt Developments in effect quashed what looked to be a rare piece of good news in the housebuilding sector Friday, as it failed to confirm media reports it had reached an agreement with its banks to waive a key banking covenant.
Shares in the builder jumped 25 per cent in early trading after trade magazine Building reported banks were taking an understanding view of the company’s £1.8bn debt burden.
Other shares in the sector also rose about 10 per cent on the news, before doubts emerged, with Barratt conspicuously not issuing a statement about material amendments to its banking facilities.
“If we had anything to announce, we’d announce it,” the company told the FT.
People close to the situation said if the news story were true, it would constitute a material fact that Barratt would be obliged to communicate to the markets.
“They’re talking to banks, that much we know, but there’s no way anything’s been signed,” one said. “It might happen, but it hasn’t yet.” The company declined to comment on whether its “asset cover covenants” – a measure of net debt against net tangible assets – had been amended, or even make clear if such an amendment would force it to update investors. Most analysts agree that this is the covenant most likely to be breached early in the downturn, particularly if Barratt is forced by its auditors to write down the value of the land after house price falls.
Excluding writedowns, analysts expect the ratio of debt to tangible assets to reach 80 per cent by the year-end on June 30, with 85 per cent the level that would trigger a shift in power to Barratt’s main banks, HSBC, Royal Bank of Scotland, Barclays and Lloyds TSB.
Mark Clare, chief executive, soothed investors last week by assuring them the company was operating “well within” its covenants, and was in “active dialogue” with its creditors.
As recently as Thursday he implied the covenant in question was still active when he clarified details of the circumstances that would cause, in his eyes, its conditions to be breached.
Tristan Chapple of Phoenix Asset Management, a small fund that is now Barratt’s largest shareholder with 8.5 per cent, said the story sounded credible, though the company had not communicated anything to shareholders.
Other market players emphasised the role of short-selling. Manoj Ladwa, a trader at TradIndex, said: “The shorts are closing positions ahead of the weekend. The covenant story adds a positive bias.” Meanwhile, others close to the sector all but dismissed the news. “The point of banking covenants is that they force people to sit down at the table when they’re breached, nothing more. In this case it’s happening already.”
Barratt slipped back to a 9 per cent gain in the afternoon before rallying late in the day to close up 9½p at 89¾p, a 12 per cent rise.