Market Report: New fears over funding hit Taylor Wimpey

Taylor Wimpey lost more than 37 per cent of its value last night amid speculation that funding problems may force the troubled housebuilder into a debt-for-equity swap.

The housing market slowdown has forced the company into talks to renegotiate the terms governing the debt burdening its balance sheet. Taylor Wimpey expects to have a revised covenant package in place early next year, but last night analysts said that, given the sharp falls in its share price, the company might have to move faster or possibly resort to a debt-for-equity swap that threatens to leave the stock "valueless".

"The positive is that Taylor Wimpey is too big to fail, and its lenders will not let it go bust. But it looks like it might have to swap some debt for equity instead," said one analyst who did not want to be named.

Rachael Waring, analyst at Panmure Gordon, also warned: "Taylor Wimpey needs to move fast on its funding issues. It will test covenants on 1 January and it is likely to breach them. That is not a good place to be in and it must get something ready on funding before its interim results in February," she said.

The concerns were accompanied by a bearish sector note from Credit Suisse, which highlighted the grim state of the housing market. The broker also reduced its target price for Taylor Wimpey to 10p from 70p, saying: "We see no grounds for optimism in the underlying housing market – we believe the trading outlook for 2009 is extremely poor."

In the wider sector, Barratt Developments was down 15.32 per cent or 8.5p at 47p, Bellway lost 4.43 per cent or 22.75p to 490.25p, and Redrow was down 2.61 per cent or 5p to 186.75p. Taylor Wimpey was the weakest, losing 37.14 per cent or 2.6p to 4.4p.

The FTSE 100 was up 18.29 points at 4,171.25 and the FTSE 250 rose 43.44 to 5,832.99. The banking sector, reassured by the Citigroup rescue and a new US Federal Reserve initiative to deal with toxic mortgage-backed securities, continued to support the benchmark index. Standard Chartered was the strongest on the Footsie, rising 15.86 per cent or 115p to 840p after its rights issue calmed nerves about the state of its balance sheet.

Elsewhere, mining issues were in focus after BHP Billiton walked away from its bid for the rival Rio Tinto, which retreated 36.73 per cent or 900p to 1,550p. BHP, up 7.24 per cent or 71p at 1,051p, said the recent collapse in commodities prices, anti-trust requirements and the prospective levels of debt at the combined group had weighed against the deal. Reacting to the news, analysts highlighted the hurdle posed by the amount of debt Rio took on when it acquired Alcan, the Canadian aluminium producer, and the EU's desire to temper the combined group's dominance in the iron ore market.

Michael Rawlinson, mining analyst at Liberum Capital, said the saga (BHP unveiled its bid last November) had dented the credibility of management at both companies. "The Rio board have been shown to have bought Alcan at the top [of the market] and been too sluggish in disposing of their assets. BHPB under new CEO Marius Kloppers I think has misjudged the ferocity of the anti-trust process," he said.

Weakness in the wider sector was mitigated by a firm start on Wall Street. As a result, Eurasian Natural Resources Corporation, which touched an early low of 227.5p, closed up 2.25p at 259.25p and Xstrata, which earlier fell back to 733.5p, ended up 27p at 835p.

Food retailers were on the back foot after Morgan Stanley, mindful of the threat of price deflation, issued a round of downgrades. WM Morrison, which was moved to "equal weight" with a 265p target from "overweight" with a 300p target, was down 8.5p at 246.25p, while J Sainsbury, whose target was cut to 290p from 345p, lost 1.25p to 295.5p.

A "sell" note from Royal Bank of Scotland depressed the construction materials group Wolseley 10.5p to 287.25p. The broker said the group needed to raise £750m in fresh capital to weather the economic headwinds in the US, the UK and in the Nordic region.

Among the mid-caps, Logica lost 7p to 65p after Société Générale said there was a risk that the IT group may have to raise capital to augment its finances.

On the upside, Homeserve rebounded from the losses inspired by its recent interim results, gaining 83p to 950p. Analysts remained cautious, however, with UBS moving the stock to "neutral" from "buy", citing a lack of near-term catalysts to mitigate the economic headwinds bearing down on the group.

Among smaller companies, there was speculation Hertford International, whose shares were suspended last week pending the completion of a circular detailing its proposed acquisition of Cheque Exchange from Provident Financial, was set to resume trading today.