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Estate agent shocker

• Robert Peston
• 22 May 08, 12:57 PM

Britain's largest estate agent, , has toggled.

Or to translate, it has stopped paying interest in cash on 拢100m of debt and is instead rolling it up.

It's a sign of the tsunami that's hit Britain's estate agents that Countrywide - which has about 8% of the British residential market - has decided to conserve as much cash as it can.

However, under the extraordinarily favourable borrowing terms negotiated by Countrywide's private-equity owner, of the US, when buying this business for more than 拢1bn a year ago, Countrywide is quite within its rights to stop paying this interest in cash - and there's nothing its lenders can do but wince.

In fact clever old Countrywide has also just drawn down a further 拢100m odd from a bunch of banks under a revolving credit facility it negotiated at the time of the buyout.

It's done this not because it is strapped for cash right now but as insurance against the risk that its cash-flow from operations will be insufficient to pay its residual interest over the coming few years.

Yes, you read that correctly. A bunch of banks have lent to Countrywide to allow it to make interest payments to another bunch of lenders.

This would be financial commonsense only in Wonderland.

And I have to ask what was on the mind of banks and other financial institutions when they financed Countrywide's buyout.

It was a deal done at the very peak of irrational exuberance about private equity last summer. The buyer, Apollo, obtained the most astonishingly favourable terms from lenders - including the absence of the normal covenants that allow lenders to take control of a business when the going gets tough.

In the case of Countrywide, it seems there would literally have to be Armageddon for the lenders to have any real power. Apparently a fall in the volume of house sales this year of over a third, which is what the Council of Mortgage lenders expects for this year and is in line with Countrywide's own estimates, does not represent Armageddon.

The boss of Countrywide, , tells me that - having drawn on the revolving facility and toggled the 拢100m floating rate note - Countrywide has enough readies to pay interest on its residual 拢640m of cash-interest-paying debt for three years, even if the housing market remains flat for as long as that (which he says he doesn't expect).

But don't be fooled into thinking all that debt is worth what it was when the deal was done. Some 拢370m of senior secured untoggled notes is being priced by traders at 61p in the pound, implying a fall in value of almost 拢150m.

The toggled debt is priced at 54p in the pound, so there's another 拢46m of mark-to-market loss. And a further 拢170m of unsecured debt has lost around 拢90m of value, on the same measure.

So there's nudging 拢300m in aggregate of mark-to-market losses for Countywide's lenders - which is fairly disturbing for a deal that's less than a year old.

It would be interesting to know whether the investment banks that advised on the deal, , and , kept any of the lovely debt for themselves, when they trousered the transaction fees. If so, they'll be part of the sorehead brigade that's woken up after the end of the buyout party.

As for the thousands of agents employed in Countrywide's 1,100 residential offices, they have reason to take comfort from bankers' pain.

If it weren't for the way that Apollo screwed this mind-boggling deal out of the lenders - if Countrywide hadn't been able to suspend cash-interest payments and borrow to pay interest - the prospects for this business and their jobs would be a good deal worse (though in view of the mess in their market, that's probably not a reason to be too cheerful).

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