Taylor Wimpey - Open offer

The Telegraph and the Times are reporting that Taylor Wimpey is finalising a £400m - £500m open offer:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/29/cnwimp129.xml
http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article4232047.ece
(the Times reports bank debt of £1.9bn, but I think they're confused - £800m of that is debentures).

Good news if they can avoid the dragging out of a rights issue - and per my last post I thought this sort of cash injection would be needed as a condition for banks relaxing their financial covenants.

According to Berkeley, land prices are down 25%:
http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article4227871.ece

Accounts
So where will this leave TW's accounts? Taking the numbers from mid-2008 in my last analysis:

Inventory: £5.4bn (this assumes they are depleting their land bank and slowing new builds)
Receivables: £300m
Cash: £200m

Current Payables: £600m
Non-current payables: £300m
Debenture loans: £800m
Bank loans: £1bn
Retirement benefit obligation: £200m

Assets of £5.9bn, liabilities of £2.9bn.

25% land write-downs would suggest about £1bn write-down on inventory. A £500m injection of cash would mostly go to paying down bank loans. So things might look something like this:

Inventory: £4.4bn
Receivables: £300m
Cash: £300m

Current Payables: £600m
Non-current payables: £300m
Debenture loans: £800m
Bank loans: £600m
Retirement benefit obligation: £200m

Assets of £5bn, liabilities of £2.5bn. Net debt is £1.4bn, vs. net assets of £2.5bn - gearing of 56%. The key challenge is then to keep things on an even keel throughout the credit crunch.

Prospects
Let's look at two potential outlooks for the next couple of years.

Positive scenario
A mild recession spreads across much of the world. Falling demand means that oil prices fall back to under $100 a barrel. The pressure on inflation in Britain eases substantially. The Bank of England keeps interest rates at 5% for the remainder of 2008, and then makes some modest cuts in early 2009. Particular sectors in Britain such as construction and retailing lay off workers, but these are not enough to substantially affect the economy at large.

In 2009 the economy begins to pick up in the US. Subprime-related write-offs are reversed at some institutions that have taken the biggest hit, such as RBS. Large, well-capitalised banks begin to compete harder for mortgage business.

House prices undergo a prolonged, slow decline, falling 20% peak to trough. Construction costs fall along similar lines, due to widespread unemployment in the construction sector. Land prices fall by 40% peak to trough. Lower interest rates start to have a galvanising effect towards the later half of 2009.

Taylor Wimpey rides out the slowdown, keeping margins at around 10%. Gradually volume begins to pick-up.

Negative Scenario
Oil prices continue to soar. The inflationary pressures cause the Bank of England to raise interest rates to 7% by the end of 2009. Significantly higher mortage payments lead to widespread economic malaise. Repossessions and bankruptcies spike. For those without at least 30% equity in their homes, mortgage rates are approaching 10%.

House prices fall 50% peak to trough. Barratt and Taylor Wimpey are forced sellers of land, driving prices down 90%, and causing all indebted housebuilders to breach financial covenants. Ruinous debt-for-equity swaps leave existing shareholders holding pennies. Meanwhile, small builders with no debt snap up land on the cheap, and take advantage of plummeting construction costs.

Conclusion
We live in interesting times.