Market Report: Barratt dives on renewed covenant concerns

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The Independent Online

A Warning that Barratt Developments may have to rework its financial covenants for a second time undermined confidence around the housebuilder, which slumped towards the bottom end of the FTSE 250 with losses of almost 17 per cent last night.

Investors were relieved when Barratt agreed a new covenant package last summer, quelling fears about breaches and dilutive capital raisings as it rose off lows of around 40p per share.

But concerns resurfaced yesterday, with Citigroup arguing that the group remains at risk as the economy sours.

The broker said that while Barratt may have given itself what it thought was plenty of headroom when it agreed the new covenant deal, given the deterioration in trading since "it is possible they are getting closer to their covenants again".

Citi highlighted the group's recent update, when it said that it "continues to operate within its banking facilities and debt covenants".

The broker said: "When asked on the conference call about whether they were operating well within or just within the covenants, Barratt was non-committal. Coupled with our analysis of the deferred tax, this suggests to us that the group is likely to breach its covenants on tangible net worth and net debt with tangible net worth in due course."

As a result, Citi added that Barratt may have to "raise a sizeable amount of fresh equity over the next 12 months".

The assessment sent investors fleeing for cover, which depressed the stock to 66.25p, down 16.67 per cent or 13.25p.

Overall, the FTSE 100 managed to avoid its fifth consecutive session in the red, recovering to 4,052.47, up 0.24 points, after easing below the 4,000-point mark in earlier trading.

Sentiment was undermined by official figures showing that the UK economy contracted by 1.5 per cent in the final three months of 2008, confirming Britain's slide into a recession.

The FTSE 250, which is seen as more representative of the domestic economic picture, was down 79 points, or 1.3 per cent, at 6,088.13.

In the banking sector, the grim economic figures precipitated worries about rising bad debts and the need for fresh capital.

Bernstein analysts said that investors were essentially in a binary position, "as they face either (1) being wiped out through nationalisation, if the losses in the recession are high enough to require a further capital injection, or (2) significant upside if the company survives to reap the high returns the concentrated UK market offers in 'normal' times".

They reckon that current sector share prices assume a "nationalisation probability of 85-70 per cent".

At current depressed levels, Barclays – which continued to attract concern about its ability to raise government capital – is factoring in a 25 per cent chance of survival, while Royal Bank of Scotland is assuming a 20 per cent chance of remaining out of full state control, Bernstein said.

The former recorded its ninth consecutive session of losses, falling 13.51 per cent or 8p to 51.2p; while RBS retreated 0.1 per cent or 0.82p to 12.1p.

Elsewhere, property issues gave way after the ratings agency Fitch said the 2009 credit outlook for European commercial property companies is increasingly negative. Liberty International was the hardest hit, losing 12.38 per cent or 54.5p to 385.75p.

Hammerson was 5.88 per cent or 25.25p lower at 404.5p, and Land Securities fell 5.87 per cent or 39p to 625.5p.

On the upside, reports that Pfizer, the world's largest drugmaker by revenue, was in talks to acquire the rival Wyeth sparked hopes of consolidation activity in the pharma sector, which in turn drove up AstraZeneca 3.63 per cent or 101p to 2,881p.

The supermarket groups Sainsbury's – up 2.25p at 302.75p – and WM Morrison – up 5.75p at 258.5p – were supported by a positive JP Morgan sector review.

Renishaw was the weakest among the mid-caps, sliding 21.28 per cent or 93.25p to 345p after warning that profits in next week's interim update are likely to come in behind the year before.

Tullett Prebon,the inter-dealer money broker, rebounded from recent weakness, bouncing 12.27 per cent or 15.25p to 139.5p.

Easyjet swung to 305p, up 6.36 per cent or 18.25p, after Numis raised its target for the stock to 335p from 227p, saying that while there was a risk of a significant drop in European summer demand, the airline's "recent relative performance is encouraging and the decline in oil prices is a substantial benefit".

Among smaller companies, Avis Europe almost doubled, climbing 93.96 per cent or 2.49p to 5.14p, after someone traded 115 shares at 5.14p apiece in the closing auction.

The stock had been trading at around 2.59p in the minutes before entering the auction.

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