Jeremy Warner's Outlook: Barratt makes the most of a botched job

The dividend has gone, the shares have lost more than 90 per cent of their value and sales have halved, but let's be thankful for small mercies – at least Barratt Developments hasn't gone bust, or not yet anyway.

This mix of announcements seemed to count as good news yesterday, with the shares rebounding nearly a quarter. Unfortunately, the apparently spectacular size of the recovery is just an optical illusion. When the share price is as low as that of Barratt Developments, it requires a movement of only a few pence to count as a big percentage gain.

Still, on another calamitous day for housing market data, Mark Clare, the chief executive, had some reason to smile. He's convinced his bankers both to roll over £400m of debt for three years and to relax lending covenants to a degree that ought to allow him to weather the downturn.

Yet it comes at quite a price. Costs are being slashed, with the loss of more than 1,000 jobs and virtually all development not already underway is being shelved. Assuming the company can sell 14,000 houses over the next year, cash generation will exceed the £600m already committed to land purchases by some £100m. These forward commitments to buy plots fall to just £200m the year after, so again, assuming the 14,000 target is met, cash generation then rises to £500m.

If all goes according to plan, then, Barratt Developments will soon be making significant inroads into its £1.66bn debt mountain. Crisis averted? Not quite. Private house sales are currently running at half the level of a year ago. If that persists, or with a worsening mortgage famine, deteriorates further, Barratt will struggle to make 14,000 sales, even including bulk sales at wholesale prices to housing associations and to buy-to-let landlords.

The relatively limited £85m land write-off announced yesterday will also look inadequate. This figure assumes a fall of 10 per cent in house prices this calender year. Already this estimate looks a done deal, with most outside forecasters expecting something similar next year. Further writedowns therefore look inevitable.

Mr Clare's mistake was the top-of- the-market £2.2bn price he paid last year for Wilson Bowden. The deal had some strategic rationale but saddled the company with an extra £900m of debt. As Mr Clare points out, in the credit-fuelled climate of the time, he was being urged to take on even more of it to avoid use of precious equity. If he had listened, he would be toast. As it is, his situation remains critical. As for the equity, it's been turned from the precious into basest metal. Are the shares now low enough to tempt private equity? For the price of a £300m cheque, you could buy £2.1bn of net assets. Unfortunately, you'd also have to refinance the company's £1.6bn of debt, which even for the big private equity funds with cash to burn would in these markets be quite a challenge.

Shares in Barratt Developments are now worth less than in the last housing crash of the early 1990s. Having ascended the heights, they have been marched, like the Grand Old Duke of York, all the way down again. For all the evidence of meltdown in the housing market, investing in the finished bricks and mortar product has been an infinitely more profitable use of capital than building the stuff.