Sources say building materials giant will not breach covenants on £2.7bn debt pile

Building materials giant Wolseley will not be forced to raise emergency cash to prevent a breach of banking covenants, according to sources close to its lenders.

The claim follows reports that the company was seeking a lifeline of between £200m and £500m through a rights issue or private equity because of its £2.7bn debt pile.

Chip Hornsby
Chip Hornsby

A source close to its lenders dismissed the suggestion and said extra funds would primarily pay for acquisitions, suggesting a likely figure of £500m.

They said: “Wolseley doesn’t need to raise cash because its covenants are fine. If it raises money it may pay down the debt in the short term – what else would you do with cash? But because it is operating within covenants it would take advantage of the downturn to buy bolt-ons.”

Wolseley, which turned over £16.5bn in the year to 31 July 2008, will breach covenants if debt exceeds 3.5 times its earnings before interest, tax, depreciation and amortisation (EBITDA) at its year end in 2009.

One consensus forecast for EBITDA in 2009 is £655m and debt of £2.2bn, which is 3.35 times greater.

Charlie Campbell, an analyst at Liberum Capital, agreed covenants would not be breached. “It will be tight but there is a lot Wolseley can do to generate cash before then by reducing stock held in branches and cutting staff further if needed,” he said.

The source close to Wolseley’s lenders also dismissed speculation the group would raise cash through private equity, saying the deal, which is expected soon, would purely involve existing shareholders.

Campbell said lenders may have urged Wolseley chief executive Chip Hornsby (pictured) to raise cash quickly because other firms are expected to seek funding from institutional investors this year.

The company declined to comment ahead of a trading update on 26 January.

Tightening up

Annual report and accounts 2008
“We have rigorously reviewed our ability to comply with our banking covenants, in the event that markets continue to deteriorate, to ensure that adequate headroom exists for the future. A contribution to this is the recommendation that there will be no final dividend paid in 2008, resulting in a cash saving of £150m.”