Pressure to reach agreement grows as interest charges on debts are set to spiral to £170m
Taylor Wimpey has come under pressure from its banks to strike a deal to relax lending terms by next month, after failing to reach an agreement last week.
It is understood the housebuilder’s four lenders want a deal in place early into their fourth financial quarters, which run from October to December.
The pressure from Lloyds TSB, HSBC, Barclays and Royal Bank of Scotland comes despite the fact that Taylor Wimpey chief executive Pete Redfern claimed last week the company had until the end of the year to do a deal. At that stage it is likely to breach its loan-to-value covenants, a key test to ensure a company is operating within its means.
A source close to the talks between the housebuilder and its banks said Taylor Wimpey had aimed for an announcement to coincide with its interim results last Wednesday, but pulled back at the eleventh hour to carry out more due diligence.
He said: “They missed Wednesday but the banks want certainty on this next month. By that time they are approaching their year end and will want to get it wrapped up.”
Taylor Wimpey has said there is nothing blocking a deal and the source said lenders felt the same. He said: “They’re doing the mechanistic stuff and looking at how the numbers pull together. The lenders will be looking for detail on land writedowns and forward projections.”
Meanwhile, the terms of any deal are expected to take a heavy toll on Taylor Wimpey’s bottom line. The company’s interest charge this year on debt of £1.7bn is expected to be in the region of £115m.
According to the source a relaxation of covenants will add several percentage points to the repayment rate. The annual sum would be closer to £170m and the monthly charge would increase from about £9.6m to about £14m.
One City analyst said: “Given that its EBIT [earnings before interest and tax] this year will be £140m maximum, that doesn’t look good. But that’s the price you pay to secure your ongoing status.”
Another industry observer said the company would have to prolong its self-imposed exile from the land market to survive. They said: “It will spend so much time paying down its debt, there won’t be anything left to invest, even if it wanted to. It will be trading purely for the benefit of the banks.”
As part of the deal, Taylor Wimpey is also expected to have its annual land buying capped by the banks, in similar fashion to Barratt. The source said: “Only once its interest cover covenants return to an appropriate level will the cap be removed.”
It will also have to get the banks to sign off on any major land transactions.
Meanwhile, sources close to the talks between Crest Nicholson and its banks have suggested that a deal to relax its lending covenants is imminent. It is understood the £676m-turnover housebuilder handed a plan to its lenders last week to persuade them to relax the arrangements and the reaction was favourable.