Investment Management Blog - Montague Capital

Barratt Developments becomes the latest UK housebuilder to add to the UK’s dole queues, laying off 1,200 of its 6,700 workforce yesterday.  But the market was too busy celebrating the company’s successful renegotiation of its banking facilities to notice.  The shares have now risen 72% in the last two days, a savage bear squeeze by anybody’s standards, but small comfort to anyone unlucky enough to have been in them at the all-time high on January 1^st 2007, since when they have fallen just under 95%.  The price is also still well below the level last time (20^th June) Barratt reached a “solution” to its banking problems.  In fact, it hasn’t solved its problems.  Barratt’s banks have realised that they hadn’t a snowball’s chance of seeing a penny of the £400m that should have been repaid in April 2008 and that the future of the remaining £1.3bn of lending might also be in doubt.  They have extended the deadline to 2011, sensible given that they are in no fit state to take hits like this at the moment, nor would they want to sow fears that other builders are in as big a mess (even though we all know they are).  The banks have replaced interest-cover criteria with cashflow criteria, but all this comes at an unspecified price of a higher interest rate, perhaps as much as 10%.  (Isn’t it curious how, when the Bank of England has cut rates, the banks manage to raise what they charge individuals, households and companies alike?  So much for the utility of monetary easing.)  Barratt has just won a little more time to try to scrape the cash together.  Its sales are down 43% y/y over the last six months and cancellations are running at 34%.  Banks just aren’t lending the mortgage cash necessary to make either of those go away and won’t be doing so either for the foreseeable future.  Even Barratt is now forced to admit that the current downturn could last for up to five years. 

Special Liquidity Scheme  

Showing a full understanding of their role in the “financial compact” that is the Special Liquidity Scheme, the banks have already begun to lobby for an extension of the SLS beyond October (which Mervyn King has already hinted he is considering) and a relaxation of its terms.  We have to admire the sheer brass neck of these guys.  The authorities are obliged to rustle up some mechanism to replace the greedy shambles that was the wholesale money market so that the banks can pad their profit margins.  When will the economy see any of the potential benefit?  Not this side of hell freezing over.  If we are to avoid a repeat of this shabby affair in the future, something has to be done to impose the discipline on the banking sector it feels unable and unwilling to provide for itself.  Credit-rating company Experian’s FY08Q1 results yesterday saw no short-term recovery in the UK’s financial services markets.  There is a sliver of growth in its credit checking business, but, joining the dots, only enough to support the banks in their decisions not to lend.  It’s a tiny statistic, but it’s a helpful one to watch for the first sign of dawn.  Such a shame that the time is about 5pm on a December afternoon.  According to HBOS, UK house prices fell 2% in June and 6.1% y/y.  But with each passing day it is getting harder to believe the bank’s mantra that “A strong labour market, low interest rates and a shortage of new houses underpin housing valuations”.  The construction industry shows clearly which way employment prospects are heading and inflation leaves no scope for the Bank to cut interest rates until data on the real economy is far worse than it is.  “Unaligned” economists, that is those not working for banks, housebuilders, estate agents or the RICS, are now pencilling in a fall of 35% peak-to-trough for UK housing.  We’re not there yet, and until we are the banks’ attitude to risk is not going to change for the better.