One of the ironies of this financial crisis is that if you have run a business prudently and are debt free but desperately short of working capital then you are all alone when seeking financing. Usually in the parallel lending shark-pool world of private equity.

In contrast companies that went wild at the top with expansion debt have effectively handcuffed themselves to conventional lenders.

Bankers, of course, are known as chaps who keep offering umbrellas when the sun shines; and snatch them back when the storm breaks. Sharing the shelter is not, generally, part of the deal. But between taking a soaking and tolerating a companion most of them are prepared to modify terms.

UK house builder Barratt plc is a decent enough example of this. The firm bought a rival, Wilson Bowden, for over £2bn last year by taking on a short-term credit facility of £600m. Barratt was worth close to £4bn at the time.

The firm now finds itself with circa £1.9bn of debt to service as its central markets collapse. Moreover, Barratt’s shares have declined over 95% to give the company a market value of under £300m. It is tough to raise more money than the worth of one’s assets.

But the good news is that with so much debt Barratt, as far as its lenders are concerned, has become the well-worn euphemism “a long term investment”. This is reflected in the nature of the deal – a refinancing – which aims to give the company an extra 2 years to find £400m.

Barratt made its acquisition in a bid to catch the UK’s largest builder, Persimmon plc. Everyone involved in the deal, as one might expect, thought it was a grand idea. Money was cheap and house prices had not declined for over a decade. Extrapolating that experience forward seemed the obvious forecast.

Now the rescue is en route. However, there is a slight issue: it is/will be based on assumptions about the length of a housing downturn. These guesses will be visible in the degree to which builders fiddle (with) the asset write-downs they should be making to reflect the state of the housing market. Taylor Wimpey plc has already begun this painful process.

The trend shows that property-sector managements have been persistently overly optimistic on this count. Not that analysts seem to be taking the hint. In May Panmure thought this yet Barratt today is at 63p/share. Worsening conditions (as they are) will imperil this rescue and risk showering further troubles upon the banks.

A final point which stretches beyond the property sector. Barratt carry £817m of goodwill relating to the Wilson Bowden purchase. Since IFRS was introduced in the UK in 2005 goodwill is no longer written down mechanically. It must be ‘judged’ impaired; and inevitably this is a difficult task done in hindsight - for who can judge impairment meaningfully in fast changing times?

£817m was over 35% of the buy price. That is a lot of value to put on the upmarket Wilson Bowden trade name; or its supposed superior ROA earnings potential; or whatever else is within the figure. Barratt are not alone in having paid handsomely for acquisitions. But where/if buyers have managed, in easy money times and contrary to prudence, to incorporate goodwill into any of their financing arrangements there will be trouble; and the incentive to under impair will be strong.

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