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Barratt's financial results under scrutiny

Barratt risks breaching its banking covenants because its worst case scenario estimates of conditions in the housing market are not dire enough.

Barratt wrote down £151 million of its landbank and refinanced its debt in July based on a worst case scenario of a 25 per cent slump in house prices. But analysts now question whether the property crash might be deeper than expected.

The house builder’s half-year results reported last week were initially welcomed by the City, but a number of analysts have since been revisiting the figures and questioning Barratt’s forecasts.

With a net debt of £1.65 billion, largely as a result of the £2.2 billion acquisition of Wilson Bowden last year, bosses renegotiated a new debt facility with its lenders on 9 July.

While the deal has come at a significantly increased cost of about 9.75 per cent - more than two percentage points higher than the previous arrangement - it appears to have reduced Barratt’s financing risks.

As part of securing the banking covenant, Barratt has factored in an “Armageddon” scenario of house prices dropping 25 per cent.

But analysts at Dresdner Kleinwort and Bernstein say house prices could drop even further. Bruno Paulson at Bernstein believes prices could fall by up to 35 per cent with the extent of the drop depending on the depth of any recession.

Alastair Stewart of Dresdner Kleinwort said: “Our reading of the Book of Revelation is that the housing market will perform somewhat worse than under that outcome. We believe, once again, that Barratt’s worst case isn’t worse enough. We see further writedowns and risk of breaching these covenants.”

Had Barratt used the same formula as rival Redrow, which aimed at marking land to market values, to calculate its own write downs, the final figure would have been closer to 10 times the £151 million it posted.

RBS analysts William Jones and John Messenger described the writedown - which accounts for 4.5 per cent of the house builder’s total landbank - as “a great surprise, particularly when taken against those of Redrow and Taylor Wimpey”.

The RBS analysts said that the relatively small writedown “left the group open to significant land writedown risk at future testing points”. They added: “We think investors should note that the market value of the group’s Ł3.3 billion landbank will have seen a more significant negative impact in the period.”

A spokesman for Barratt said the company does not comment on analysts’ assessments.

Financial figures

Barratt Developments’ latest full- year results reveal that profits fell by 68 per cent for the 12 months to 30 June.

Pre-tax profits dropped to £137.3 million from £424.8 million in 2007.

Revenue edged up by 16.7 per cent to £3.5 billion from £3 billion the previous year.

The group said forward sales at the end of June were £698 million, compared with £1.4 billion in 2007. By the end of August forward sales had increased to £783 million.

Net borrowings stood at £1.65 billion, up from £1.3 billion the previous year, but down by £86.1 million since 31 December 2007.

Meanwhile, Barratt owned and controlled 78,700 plots of land totalling 4.2 years’ supply at current completion rates.

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