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Mike Goodman

April 2009

Countrywide loss as 'market is shot to pieces'...

I CAN understand why investors in Castle HoldCo4, the holding company of Countrywide, devised the debt-into-equity Scheme of Arrangement which was first announced in mid-February, and why it has gathered overwhelming support.

Castle HoldCo4 revealed its 2008 results to investors last month. There was an operating loss of £47 million in 2008, compared with a profit of £85 million the previous year.

The Scheme of Arrangement would cut annual interest charges from £40 million to £17 million. On the basis of the 2008 report, therefore, Countrywide reported a £87 million loss when trading losses and interest charges are added up.

Cutting the interest charges to £17 million would have reduced the net loss to £64 million on this basis.

The 2008 results also show Castle HoldCo4 suffered a one-off “exceptional item” amounting to £462 million, mostly made up of a “goodwill impairment” charge.

This represents the estimated fall in the value of the group’s “goodwill and intangible assets” amid the credit crunch.

It’s something of an accounting adjustment but it reduced the paper value of the company to less than its borrowings.

Net assets of Countrywide plc, as a public company, stood at £51.4 million at the end of 2006. A year later, net liabilities for Castle HoldCo4 were £9.4 million. By the end of 2008, net liabilities had risen to £611 million.

The board noted that on the basis of a subdued housing market, the group would need additional finance by early 2010.

This provides yet another reason — perhaps the strongest — for converting debt into equity. The Scheme will cut outstanding debt of Castle HoldCo4 to £175 million.

The February Scheme has since been modified to involve raising an extra £37.5 million in shares, in addition to the £75 million already announced.

This raises the question of whether the debt-into-equity scheme has so diluted the interests of bondholders that they have little or no chance of recouping all their losses.

This is almost certainly the case with bondholders who bought at the issue price. But a number of financial institutions bought Castle HoldCo4 bonds at well below issue price, so perhaps they have a chance of making a profit should the market turn round.

Indeed, the debt-into-equity plans were put forward after two financial institutions, Jon Moulton’s Alchemy Fund and Los Angeles based Oaktree Capital, built up substantial stakes in Castle HoldCo4 debt securities. Both specialise in buying distressed debt where they see future returns.

The plan is also supported by Apollo LLP, the US buyout firm, and hedge fund Polygon, the original backers of the £1 billion buyout of Countrywide in May 2007.

It’s nearly a year — early May 2008 — since we quoted Countrywide chairman Harry Hill on our front page describing the housing market as “shot to pieces” and the 2008 Castle HoldCo 4 results suggest this was an understatement.

The estate agency division saw sales crash 47 per cent from 95,000 to 50,510.

The Castle HoldCo4 report notes that nationally, housing transactions fell 59 per cent to 512,000. This was 38 per cent below the low point of the last recession during 1991/2.

Figures for the third quarter of 2008 reflected a housing market of only 325,000 transactions per year.

Clearly, the market has since recovered from this low point, but Countrywide believes rising unemployment presents “a real threat to the timing of any market recovery”.

Group revenues fell 35 per cent compared with 2007 to £413 million, while the group staff head count fell 24 per cent to 7,600 at the end of last year as the group made tens of millions of pounds worth of economies.

All together, £41 million was stripped from costs in 2008, equivalent to annual cost savings of £72 million.

As Countrywide chief executive Grenville Turner remarked before Christmas, the management was not just sitting back and allowing the business to deteriorate.

Only one division, lettings, showed profit growth, with a 24 per cent rise to £11 million, on revenues up 17 per cent to £53 million.

Surveying, financial services and conveyancing all saw profits fall.

How write downs hit LSL and Savills

WRITE DOWNS also affected results from LSL Property Services and Savills, but City analysts seem to have looked at the underlying figures and liked them and both groups’ share prices have held up well during recent stock market fluctuations.

LSL made an underlying group operating profit of £18.2 million, just under half the £37.2 million of 2007.

But after exceptional costs of £8.2 million, due to reorganisation and redundancies and “amortisation of intangible assets”, there was a pre-tax loss of £4.8 million against a pre-tax profit of £22.3 million in 2007. Shareholders will not receive a final dividend.

Group revenue fell 26 per cent to £162 million but operating costs fell 21 per cent to £144 million, as the group started cutting estate agency branches from autumn 2007.

As might be expected, the estate agency business which includes Your Move and Reeds Rains plunged into an £8.4 million operating loss, compared with a £13 million profit in 2007. The number of exchanges slumped in line with the market. Surveying showed an eight per cent rise in profit to £28.6 million, supported by the contracts won in 2007.

LSL’s strategy of developing “non-transactional business” paid off as lettings showed higher turnover and profit while management and auctions of repossessions proved a “counter cyclical source of growth”, according to chief executive Simon Embley.

All together, non-exchange income rose 17 per cent to £29.2 million. “However, growth of these businesses do not make up for losses elsewhere, so we took £40 million costs out of the business,” added Mr Embley.

On the balance sheet side, LSL’s borrowings rose marginally in 2008 from £48.7 million to £49.2 million while the £75 million bank facility is extended to July 2011. However, net cash inflow fell to only £3.2 million in 2008 compared with £28.4 million in 2007. LSL management do not expect an early revival of the housing market, and nor do City analysts. But they seem to be reassured that LSL has the financial muscle to see it through the present slump.

Savills also suffered from a write down as group profits slumped from a record pre-tax profit of £85.9 million in 2007 to a £7.7 million loss. This figure included a £46 million write down on the value of businesses acquired.

Excluding this one-off, the group made an underlying £33 million pre-tax profit compared with £85.5 million in 2007. Total revenues fell from £650 million to £585 million.

Pre-tax profits of Savills’ residential division slumped to £2.8 million in 2008, a fall of 84 per cent on the £17.3 million made during the boom year of 2007.

Savills, which deals mostly with the middle to top end of the UK residential market, estimate that prices nationwide fell 16 per cent, but with a steeper decline of 18 per cent for prime London property as City bonuses dried up.

Jeremy Helsby, the group chief executive, said 2008 was a “year of two halves” as conditions deteriorated during the second half. However, enquiries have now increased, fuelled by foreign buyers, tempted by the weakness of sterling.

Profits from residential agency only accounted for 10 per cent of Savills’ total profits, with the rest coming from commercial agency, particularly management of investment property and valuations.

Now some good news

RIGHTMOVE’S full year results were better than the City expected.

Pre-tax profits rose from £27.1 million to £38.2 million, while revenues increased 31 per cent from £56.7 million to £74 million. Earnings per share rose 27 per cent from 15.16p to 22.49p.

Shareholders are to receive a 7p final dividend making a 10p total for the year, a 25 per cent increase.

Rightmove estimated that a fifth of estate agencies went out of business last year with up to 300 of its website subscribers leaving every month, but the rate of fall has since halved.

However, average revenue per advertiser rose 26 per cent to £307 per month, and the holiday home and letting website businesses expanded.

Stephen Shipperley collects £35,000 a year as a non-executive director of Rightmove, but in his main job as chief executive of Connells, he has waived his bonus, as have other Connell directors. He said it has been a tough year for staff, so the directors should feel some of the pain as well.

Skipton Building Society, owners of Connells, netted a £22.3 million profit from Connells’ sale of Rightmove shares last year, the society’s accounts reveal.

Connells made £10.4 million trading profit in 2008, compared with £59.7 million in 2007.

David Cutter, chief executive of the Skipton, said the fact Connells made a profit at all was “remarkable” given the state of the housing market. I would not disagree.