Mouchel warns of covenant breach

Mouchel has been forced to change the terms of its banking covenants to avoid a possible breach.

In a statement to the City this morning, the consultant said: “There was a scheduled compliance test at the end of January and whilst it remains our view that we will be compliant with our banking covenants, the headroom for the fixed charge cover covenant is below the level we would like.”

The fixed charge cover relates to its ability to make payments that it is committed to each month including rent and other fixed costs.

The company is fending off a bid from engineering firm VT Group, which had an offer of 260p per share before Christmas rebuffed.

Building revealed last month that VT was waiting for signs of financial weakness in order to strengthen its position.

One analyst confirmed this morning: “This weakens the hand of the Mouchel management team. It is a further black mark in the box against them.”

Mouchel’s share price was down 2% in early trading.

Mouchel’s overall borrowing at the end of its financial year on 31 July 2009 was £180.7m, which left it with headroom of £9.3m. At a trading update on 11 December the company said borrowing would be above the figure at its half-year on 31 January, owing to weak trading in Dubai, where it has a joint venture with troubled developer Nakheel.

In March it will come under further pressure when the facility falls to £180m.

According to two sources close to VT, which has an estimated war chest of £350m, the firm is hoping its bargaining position will strengthen if Mouchel comes under financial pressure.

One said: “VT is well aware of Mouchel’s financial position and will make it sweat until it is ready to move.”

A second source close to the bid team added: “If there is trouble on the debt facility, shareholders would not be impressed and it would heap pressure on the management to sell to VT.”