Losses force Trafalgar to explore new cash call

TRAFALGAR House, the contracting, shipping and property group, is being forced to consider launching its third rights issue in less than two years because of continuing losses.

Directors are exploring the possibility of raising up to a further pounds 400m to shore up a balance sheet put under renewed strain by poor trading.

Sources say Trafalgar could report losses of anything up to pounds 100m this year - the second consecutive year of losses - and there is little prospect of paying a dividend out of earnings for several years to come.

News of continued difficulties at Trafalgar will cause dismay in the City, where it was generally assumed the worst was over following the arrival of Hongkong Land as a 25 per cent shareholder and a pounds 204m rights issue earlier this year.

The shares have been strong performers in recent months, buoyed by the arrival of Simon Keswick as chairman and several other directors from the Hongkong Land/Jardine Matheson empire.

However, Trafalgar's trading position and balance sheet appear to be considerably worse than anyone thought when Hongkong Land bought into the company.

Though directors believe they could probably struggle through without new capital, they are keen to put the company on a more secure financial footing to take advantage of business opportunities as the economy pulls out of recession.

An under-resourced company unable to take advantage of the bottom of the economic cycle is of little interest to Hongkong Land, which has appointed four representatives to the Trafalgar House board, including David Gawler as finance director. Hongkong Land is also keen to avoid enforced disposals of prime Trafalgar assets, like the Ritz Hotel, at fire-sale prices.

A raft of new advisers is being brought into Trafalgar to accompany the change in management. Touche Ross, Trafalgar's auditor, has been replaced by KPMG Peat Marwick. Both Kleinwort Benson and UBS Phillips & Drew are expected to be phased out over the next few months and replaced by Robert Fleming and Cazenove.

Trafalgar House promised at the time of its last rights issue in March to pay a dividend of 3.25p per share this year, but admitted that this would have to be paid out of reserves.

It also said there was little sign of an improvement in trading conditions and that the group's core engineering and construction businesses, which tend to lag the economic cycle, anticipated lower levels of activity for the next 12 to 18 months.

Trafalgar's problems began two years ago when it launched a cash bid for the ailing Davy contracting group, financed with a pounds 310m rights issue.

Davy's trading and contractual position proved much worse than Trafalgar anticipated. Losses on property and doubtful accounting policies compounded the problems, giving Hongkong Land the opportunity it needed to build a substantial stake at a knock- down price.