Taylor Wimpey - Conclusions?

Further to yesterday's post on Taylor Wimpey. What banking covenants are they likely to have? I'm expecting:

- Minimum interest cover - EBITDA to interest costs: let's say 3 times. For 2007 this was just over 4. Are they dumb enough to leave themselves this little margin for error? Probably.

- Gearing - net debt to net asset value: assume no more than 50%. At the end of 2007 this was 38%. Again, a fairly small margin, but that wouldn't surprise me.

Expect both to be calculated at year end. Net debt will vary through the year, e.g. at the moment it is up to £1.9bn from 1.4, but I think they're expecting it to fall again.

So what does this mean for this year? My (very pessimistic) guess was something like a 40% reduction in volume and 50% drop in margins. That would mean profits drop to about £120m, combined with interest payments up to £180m. Not good!

At year end my numbers suggested net debt of £1.7bn vs. net assets of about £2.4bn. Again, not great.

So TW have a lot of debt in debentures with a long life. These shouldn't have any covenants associated with them, which is good. My estimate for end-2008 was for bank loans of £1bn. If my 2008 estimate happens I think they could be a bit scuppered there. A significant rights issue would almost certainly be a condition of renegotiating the financing terms. I'd imagine getting gearing back under 50%, i.e. a rights issue of £500m, or about 50p per share, would be required, and TW would pay higher interest costs in the short-term (so wouldn't see much reduction in interest payments in exchange for that capital).

I'm prepared for that rights issue to happen, and I still think the shares would be good value if it happens. However, I'm not going to go crazy and buy more unless I see some indication that things are improving, since I think I hold enough of this share at this point in the cycle. It could go a lot cheaper.