Taylor Wimpey faces bankruptcy

Money Week points out the scenario for Taylor Wimpey, the UK house builder resulting from the top-of-the-market merger of Taylor Woodrow and George Wimpey, now that shareholders have rejected its rights offer:

We’ve been saying you should avoid investing in house builders for quite a while now.

It looks like the City has come around to our point of view with a vengeance.

Taylor Wimpey hasn’t been able to convince investors to give it the £500m it needs to shore up its balance sheet. The country’s biggest house builder by volume may face “collapse when covenants are tested in February,” said Dresdner Kleinwort analyst Alastair Stewart.

It was just one grim story among many from yesterday that all pointed to one thing. That Britain is facing one hell of a slump…

Taylor Wimpey shocked the market yesterday by warning that it hadn’t yet been able to raise money from investors. Its shares ended down nearly 42% as it said it could breach its covenants by February if cash isn’t forthcoming. The company is shutting down a third of its regional offices, cutting 900 jobs. It won’t be paying a first-half dividend.

But it’s also set to write down its land bank by £550m (that’s 11%), and it’s carrying £1.7bn in net debt. As the company delicately put it, if it can’t sort out the terms of its banking facilities: “in certain negative market scenarios we might breach one or more banking covenants at the first testing date in 2009.”

It’s hard to believe that the market will be positive enough to save Taylor Wimpey by then. Reservation levels are down 45% in the 26 weeks to June 26, compared to the same time last year; completions down by a third. No one is buying houses anymore. The group is also exposed to the U.S. and Spain. It’s hard to imagine a worse group of countries to be building in at the moment.

That doesn’t mean the company won’t be able to find a solution given time. The banks won’t be keen to shut down house builders, given their own hefty exposure to the sector. But these problems are by no means exclusive to Taylor Wimpey, although it is one of the most vulnerable.
–How bad will the recession get?, Money Week, 3 Jul 2008

This is the frightening scenario that many banks will soon face. Without additional funds many of these institutions would be effectively bankrupt.

Investors are getting tired of throwing their money down a rat hole as the credit crisis reveals these organizations to have badly misspent shareholder funds. The day of reckoning is coming for banks, house builders, brokers, the whole lot.

As Barclays’ fundraising shows, banks still have many options available. So that day of reckoning is nearer but it isn’t here yet. Question: what will it take?