Taylor Wimpey - Trading Update

The big news in the TW trading update is that they have failed to agree an equity placing. That's not good.

However, they also released a market update presentation which was quite enlightening:

• After cutting costs, and freezing land spend, they can still generate cash with a 40% lower sales volume and 30% lower prices. But a lot of that will go on interest payments, which they cunningly do not mention.
• Their financial covenants are: EBITDA > 3 times interest cover. Tangible Net Worth > £1.8bn. Gearing <>

The share price is down 50% on this news. I'm not surprised. The possible outcomes from here:

• TW fail to get new equity but survive. Value ~ 250p (in the long run).
• TW fail to get new equity and go under. Value ~ 0p.
• TW get new equity on ruinous terms for existing holders. Value ~10p.
• TW get new equity on decent terms and survive. Value ~200p.
• TW get new equity on decent terms but then need a further raising. Value ~ -40p to +150p.

The odds of TW failing to get new equity has just got hugely more likely. They need new equity as a quid pro quo for renegotiating their banking covenants. Say ~£500m, and their market cap is now well below that. Pete Redfern needed to get this right first time, and he's failed.

I think there's now only a 25% chance that TW raise new equity on decent terms. Perhaps a 10% chance that they survive without needing new equity and without breaching covenants. A 10% chance that they renegotiate covenants without new equity. A roughly 55% chance of ruinous dilution.

That's not great, but at 30p I think it's well priced in. I will definitely hold, and may add more - but only after a lot of thought, and a look at their competitors.