Market Report: Fears of debt-for-equity swap at Brixton
Tuesday 24 March 2009
A warning on debt and prospective covenant breaches put Brixton in focus last night, with City analysts spotlighting the risk to current shareholders as the commercial property landlord considers its options.
JP Morgan sounded the alarm, saying that "inaction is not an option" as a loan covenant breach is likely in June, while a bond covenant breach is possible in December.
Given the risks, a debt-for-equity swap seems the most likely option, the broker added, highlighting the potential risk to shareholders. A £300m swap could leave the valuation at 6p, it estimated, adding that a rescue equity injection by a private equity firm, for example, was also likely to be dilutive to current shareholders.
A successful rights issue may offer a way out – and possibly offer some upside to shareholders – but, given the number of equity raisings since the start of the year, investors may have little in the way of spare resources to fund the move and the company may struggle to find an underwriter willing to put up with the risks. At about £300m, any fundraising exercise would also far exceed the current market capitalisation.
A large disposals programme will also present problems in the current environment.
"At the [full-year] results, management said it is 'exploring all options' but refused to discuss any further," the broker said. "Brixton may overcome these obstacles, but in our view the risk is high that this may come at a large cost to current shareholders."
Given the various options, JP Morgan set an 18p target on the stock, which closed at 23.75p, up 0.25p.
In the wider property sector, British Land was downgraded to "neutral" from "buy" at UBS, which said the stock, which was 2.75p ahead at 378p, now reflected the security provided by the company's rights issue. The broker nonetheless upped its target price to 370p from 335p – a premium to its forecast low point net asset value of 356p per share.
"The slight premium reflects our view that the dividend yield and earnings yield of 6.7 per cent and 8.5 per cent respectively will be deemed attractive," UBS added.
Overall, sentiment was strong. The London market drew strength from an early rally on Wall Street, where investors welcomed the US Treasury's plans to relieve American banks of the toxic assets that are currently straining balance sheets across the sector.
The measures sparked hopes of recovery, boosting the FTSE 100 by 2.8 per cent or 109.9 points to 3,952.8. The FTSE 250 was also strong, gaining 1.8 per cent or 118.8 points to 6,391.2.
Traders, although relieved by the reaction, nonetheless characterised the bounce as a bear market rally, arguing that the market was still vulnerable and may pare gains in forthcoming sessions as investors digest the details, and the likely impact, of the new plans.
For now, the buoyant mood took HSBC – which was also said to be benefiting from some short covering – to 417.75p, up 12.6 per cent or 46.7p, and Lloyds Banking Group to 61.5p, up 11.2 per cent or 6.2p.
Barclays was 15.7 per cent or 16.5p heavier at 121.5p. Credit Suisse, whose analysts met with the lender's chief executive and finance director last week, said any decision on the bank's participation in the Government's asset protection scheme was still "several weeks away".
Life insurers rallied, too, as investors, relieved by the recent better-than-forecast results from Prudential, continued to make the most of the current depressed valuations.
As a result, the Pru was 4.6 per cent or 15.5p ahead at 348.25p, while Aviva gained 10.9 per cent or 26p to 264p. Old Mutual which, like HSBC, was also said to drawing steam from a round of short covering, was the strongest, advancing to 51.3p, up 17.1 per cent or 7.5p.
Legal & General was 4.9 per cent or 2.1p heavier at 44.9p amid a growing feeling that, instead of recapitalising, the company was more likely to safeguard its capital buffers by announcing a dividend cut with its full-year results, which are due tomorrow.
On the downside, defensives were pushed on the back foot as investors poured money into financial issues, with AstraZeneca retreating to 2275p, down 11p.
Elsewhere, firmer metals prices underpinned gains in the heavily weighted mining sector, where Rio Tinto gained 13 per cent or 264p to 2292p and Lonmin, which began trading on the FTSE 100, climbed to 1,530p, up almost 12 per cent, or 163p.
Redrow rose by 4.5 per cent or 6.25p to 142.75p as short sellers abandoned their downside bets. Barratt Developments was among the best performers, closing at 89.25p with gains of 10.5 per cent or 8.5p.
Among smaller companies, short sellers were also said to be closing their positions in Cattles, the troubled doorstep lender, which jumped to 3.15p, up 44.5 per cent or 0.97p.
Mecom, the European media group, was less fortunate, falling to 5.6p, down 6.6 per cent or 0.4p, after saying that it was considering a possible equity fundraising.
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