Interesting news in yesterday's Times - Crest Nicholson, one of the UK’s largest house builders, might be in a danger of breaching one of its banking covenants. The reports suggest that the group might not meet a covenant which measures the amount of cash available to cover interest costs on its debt.

A few thoughts occurred to me about this story. We are told that all is well at Crest, there’s no news here until the covenant is tested in April, and any breach should only occur in what the CEO has described as “a pretty severe situation”. But then short of an actual payment default, a covenant breach is of sufficient gravity to get your lender out of bed in the morning. So, pretty serious stuff in the world of lending. 

Financial covenants are standard provisions in commercial loans. If tripped, they are intended to provide lenders with an early warning of potential distress. Which brings me to my next point - a national house builder in distress? 

The Labour government is supposed to be getting Britain building again. Surely the road is paved with gold for housebuilders especially FTSE 250 companies such as Crest. But whilst there’s common agreement that we need more homes, there’s some debate around whether it will happen given planning rules etc. and how quickly we might hit the government’s lofty targets. Building homes is one thing; selling them is quite another. Affordability is likely to remain a challenge in a climate of higher interest rates (or at least higher than we Brits had got used to…) and raised inflation, and despite pressure by the government on lenders to relax lending criteria.

And building houses is not for the faint-hearted. It’s notoriously expensive to get them up before any cash comes in from plot sales and with rising labour and building costs, it’s no surprise that construction remains one of the biggest sectors impacted by insolvencies according to the latest statistics published by the Insolvency Service. Indeed, the construction industry experienced more insolvencies in the 12 months to November 2024 than any other industry in the UK – more than retail, more than catering, more than manufacturing.

And that brings me to my final point. One of the main reasons why Crest could be in trouble? Fire safety costs ballooned it seems to £249.3m for the year, deflating revenues as the company sought to put funds aside to resolve cladding issues associated with high-rise buildings which the Government has focused on accelerating. In discussions with developers, we regularly hear that compliance with regulations puts a huge strain on resources. And this challenge is not going away as developers get to grips with the Building Safety Act 2022. 

It sounds like Crest has enough goodwill in the bank with its lenders to navigate any covenant challenges by requesting a covenant reset if necessary. But it will be a slight black mark on its record sheet – akin to a minor on your driving test if you will – and one which its lenders will be monitoring carefully in the months ahead.