Sell the rumour, buy the fact | FT Alphaville

Sell the rumour, buy the fact

That at least appears to be the way to play UK rights issues.

Mining company Xstrata and Cookson, the engineer, have both enjoyed extremely positive responses (in share price terms) to their respective cash calls – and so too has Hammerson.

Shares in the property company were up 6.5% at 423p on Monday after it announced plans to raise £584m via a 7-for-5 issue at a deeply discounted price of 150p. (Hammerson also released year-end figures on Monday, showing a net asset value of £10.36).

Make no mistake, the is a highly dilutive cash call that the company was forced to make because (a) it could not sell assets and (b) was therefore in danger of breaching two of its more restrictive covenants – a debt to equity covenant of 150 per cent and interest cover of 1.25 times.

In the event that the Company is unable to execute disposals and that the market value of the Groups’ property portfolio continues to decline, there is a risk that the Company could breach its gearing covenant in the future. The Board has therefore evaluated the option of seeking to renegotiate the Company’s financial covenants both in its bank facilities and bonds. However, in current debt market conditions, any renegotiation would be difficult to achieve, particularly in relation to our bonds, and would also result in significantly increased financing costs.

And the outlook is pretty bleak.

In the light of the continuing uncertainty in financial and real estate markets, the Directors believe it is likely there has been a decline in the value of the Portfolio in January 2009 and that continued deterioration in these markets may lead to further declines. The Company is currently marketing certain properties for sale and, against this background, it is possible that if sales are completed the amounts realised will be below the values at 31 December 2008.

Nonetheless, the market has welcomed the news. True, this may have something to do with the fact that Hammerson is one of the most shorted companies in the FTSE 100, with around 22% of its stock on loan.

But institutional investors seem to be rewarding companies that are repairing their balance sheets and putting to bed concerns about covenants and refinancings.

Management at British Land, Land Securities and Liberty International will have been watching the reaction to Hammerson’s cash call very closely.

Related Link:
Cash Calls set to sweep property sector –