Connaught crumbles: social housing group set to breach banking covenants

Shares in British social housing group Connaught (LON:CNT) collapsed this morning, dropping over 80% and wiping approximately £115m from its market value, after the company revealed that it will breach its banking covenants.

The company told investors that its net debt will significantly exceed £120m by its financial year end, 31 August 2010.

Connaught said it has identified an urgent requirement for additional funds, and it has entered into negotiations with its lenders to secure additional funding for its current and ongoing needs, and the discussions have “been constructive”.

The statement weighed a massive blow to the company’s share price, which has fallen in recent weeks. On the London Stock Exchange, the FTSE250 constituent has dropped over 80% this morning and shares were trading just above 20p per share at midday.

The company’s shares began 2010 at around 360p per share, and initially through the first half the company had achieved “strong growth” in each of its three divisions.

In its interim results in April, the company reported 17% revenue growth to £355m with adjusted pre-tax profits up 20% to £20.7m. Connaught closed the H1 with net debt of £97.5m. The company’s social housing division performed particularly well with revenues up 13% to £256m and it contributed £14.9m to the group’s overall operating profit.

Back then, in reference its outlook, Connaught said that “Government fiscal pressures will inevitably lead to more outsourcing opportunities after the election which ... we are increasingly well placed to deliver”.

However on 25 June, after a detailed analysis of its business, the lead-Up to and following the new government’s emergency budget, Connaught reported that 31 contracts in the Social Housing division had been deferred, negatively impacting 2010 revenues by around £80 and earnings (EBITDA) by £13m.

“If this were to continue we anticipate a reduction of revenue by £120m and EBITA by £16m for financial year 2011.  As a result we expect a one-off impact to our cash conversion rate, reducing to around 40% this financial year”, Connaught stated in June.

On 25 June, in the wake of the announcement, Connaught’s share price fell from 320p to 215p, the shares continued to slide the following week and they ended the month at just over 105p.

Today, the company said it is undertaking a review of its current trading and the implications on its full year financial performance. A number of appointments have been made to strengthen the management team.

Former British Energy and Atkins finance director, Stephen Billingham, has been hired to help with financial and funding matters. Roger Wood, former British Gas and AA Managing Director, will chair a Steering Committee, which will be responsible for Connaught's operational efficiency programme and delivery of significant cost savings. Michael Young, Centrica’s former corporate affairs director and former director of corporate policy and communications at Compass Group, will be advising on communication and review management processes.

Additionally, Connaught’s current business development director has assumed the full operational role of acting chief executive of the Social Housing business.

"These are challenging times for Connaught ... we welcome the constructive discussions with our lenders”, Connaught chairman Sir Roy Gardner commented. “We continue to place great importance on the solid relationship we have built with our supply chain and customers and the continuing support we receive from our employees."