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Time is running out for Wolseley, the world's biggest plumbing-equipment supplier, which has been clobbered by the collapse in housing markets on both sides of the Atlantic.
It has until the summer to choose between going cap in hand to shareholders for up to £600 million or negotiating a refinancing package with the banks. With the banks strapped for cash these days, the latter seems unlikely. Any delay could see the group breach its banking covenants.
Citigroup says a rights issue is the most likely scenario. The group needs to raise at least £350 million to avoid a breach of covenants, but £600 million would be ideal. That would offer comfort on covenant and give it some choices for when trading improves.
Refinancing is an expensive option, with the banks getting large upfront fees and high interest rates. The broker warns: "The impact of Wolseley following this route would lead to a significant reduction in 2010 earnings. Asset sales are unlikely, without cutting into the core, to provide enough cash."
Citi cut its forecasts sharply again to reflect the recent poor update and the ongoing weakness in trading conditions. But it now rates the shares a buy because it believes the group will go for a rights issue and says that, with a more robust balance sheet and a modest recovery in 2011, the stock looks far too cheap. It has raised its target from 310p to 325p.
There is a massive short position in the shares after a spate of profit warnings and a move to shed thousands of jobs. The shares were today squeezed 10¼p higher to 217¼p as the bears moved to square up those positions.
Shares generally fell sharply, with City investors increasingly gloomy about the deteriorating economic outlook. They also continue to have niggling doubts about the US Treasury's $2 trillion bank rescue package. The FTSE 100 index mirrored their concerns with a loss of 37.23 at 4197.03.
Meanwhile, the cash calls on shareholders continue. Today, it was the turn of British Land, which replaced an early lead with a loss of 32¼p at 451p. It is asking for £740 million through a two-for-three issue at 225p. Rival Hammerson, which on Monday tapped shareholders for £580 million, fell 17¼p to 398p after UBS slashed its target price from 780p to 475p and Credit Suisse lowered its sights from 643p to 280p.
UBS says the extra cash provides scope for a further 24% fall in the value of its property portfolio before breaching its banking covenants. Other property developers to come under the hammer included Land Securities, down 40p at 645p, and Liberty International, 20½p lower at 368p.
The miners were another weak market with Rio Tinto plunging 244p to 1725p after agreeing for its biggest shareholder Chinalco to pump $19.5 billion into its coffers, increasing its stake to 19%. Anglo-Swiss mining giant Xstrata, which has already called upon shareholders for extra cash, fell 45½p to 710p. Other rights issues in the sector are expected. Losses were seen in Anglo American, 83p to 1294p, Antofagasta , 23¾p to 456p, and BHP Billiton, 63p to 1231p.
A profits warning left Guinness and Smirnoff drinks giant Diageo down 40p at 868p while third-quarter numbers from BT Group also failed to impress, leaving the shares 8.9p lower at 96.3p and making them among the worst blue-chip performers.
Housebuilders enjoyed a better day despite the continued gloomy backdrop for the property market. UBS has raised its target for Persimmon, up 10p at 332p, from 348p to 370p and repeated its buy rating. It says the recent trading update showed debt was lower than expected, and means the company will be able to refinance at a sensible premium to Libor. There were also gains for Bellway, up 14p at 632½p, and Berkeley, 8p dearer at 870½p.
Life assurer Prudential lost 15¾p to 332¾p ahead of its new full-year business report next week. It was followed by Legal & General, down 2.4p at 5 6.4p and Aviva, off 13½p at 366¼p.
