VTY Vistry Group Plc

Some of the U.K.'s house builders could follow commercial property companies and seek additional capital to shore up their balance sheets as their covenants are in danger of being breached.

The near-certainty of large land write-downs and questions about capitalizing of deferred tax assets have raised the issue of whether house builders can remain within loan-to-value covenants.

Persimmon PLC (PSN.LN) is the most likely to ask for capital to deal with its GBP600 million debt, analysts say. It is currently renegotiating a debt refinancing as its covenants are expected to be breached this year, according to analysts.

"A rights issue would be in keeping with management style as Persimmon had five rights issues between 1986 and 1996," said Liberum Capital analyst Charlie Campbell.

He added that a rights issue would be an appropriate way for management to broaden its options, as its choices currently are constrained by the need to pay down debt.

A Persimmon spokesman was not immediately available for comment. The company is due to announce full-year results March 3.

A rights issue won't mean that Persimmon will be able to end its debt-refinancing negotiations. "We believe that Persimmon's holders would not be happy if the rights issue is seen as an alternative to debt refinancing, and would expect Persimmon to succeed in refinancing the debt before raising new equity," said Campbell.

He said that other house builders are unlikely to come to the market in the short term. Berkeley Group PLC (BKG.LN) and Bellway PLC (BWY.LN) have access to cash or bank debt and don't need to tap markets for cash.

Redrow PLC (RDW.LN), Taylor Wimpey PLC (TW.LN) and Barratt Developments PLC (BDEV.LN) do not have sufficiently high capitalization to support rights issues, while it is too early for Bovis Homes PLC (BVS.LN), Campbell said.

But Barratt, which, according to analysts, could remain in compliance with covenants, doesn't have to be close to a breach to tap into the market preemptively.

"Rather than be pushed by a covenant breach into an emergency equity issue, we consider it is logical for Barratt to tap the market preemptively as covenants are expected to be breached this year," said KBC Peel Hunt analyst Robin Hardy.

A spokeswoman for Barratt Developments declined to comment.

The general sentiment among analysts and investors is that that companies should not put off seeking more capital as cash reserves might run out quickly.

Analysts believe that the U.K. property companies will be fighting for capital this year, and the sooner companies ask for extra capital the better.

According to KBC Peel Hunt, Barratt doesn't have to ask for much. "Even a fairly modest equity issue would transform the finances, lessen the risk profile and set Barratt up far better for the eventual recovery," Hardy added.

Barratt has been trying to cut its debt and, according to analysts. Barratt's debt stood at GBP1.42 billion at the half year to Dec. 31.

But Hardy warned that even after another 18 months of aggressive debt reduction, Barratt will still have debts of around GBP700 million to GBP900 million at June, 2010, before any new capital-raising.

The company warned in January that it will have to make further write-downs and expects no recovery in the housing market as long as poor buyer confidence and restricted access to mortgage financing continue to impact housing sales.

Last week, commercial property companies Hammerson PLC (HMSO.LN) and British Land Co. PLC (BLND.LN) announced rights issues of GBP584.2 million and GBP740 million, respectively. Land Securities PLC (LAND.LN) Monday confirmed it is considering a rights issue. Analysts believe the company will ask the market for up to GBP750 million in coming weeks.

 
   Company Web site: www.barratthomes.co.uk 
                     www.persimmonhomes.com 
 
   -By Anita Likus, Dow Jones Newswires; +44 20 7842 9407; anita.likus@dowjones.com 
 

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