Market Report: WPP weighed down by worries over TNS

The world's second-biggest advertising and marketing company, WPP, saw its share value fall by more than 4 per cent yesterday after brokers warned that its credit rating, dividend policy and shares buy-back programme might be at risk after it completes the acquisition of the market research group Taylor Nelson Sofres.

"As WPP is already at the limit of its leverage comfort zone heading into this downturn (post-TNS), we expect the reduced share buy-back to be cancelled, the dividend to remain flat and the credit rating to be downgraded," said analysts at Cazenove.

They also highlighted the prospect of WPP breaching its debt covenant next year, saying: "As debt increases and interest costs rise, we believe WPP's headroom to covenants will narrow significantly in 2009 to only 12 per cent. In addition, we estimate that if organic revenue decline accelerated to 9 per cent, the group could breach its debt covenant in 2009."

Shares in WPP, which will release its third-quarter trading statement on Thursday, fell by 13.5p to 310.25p.

Overall, the FTSE 100 fell by 30.77 points to 3,852.59. A better-than-expected start on Wall Street boosted the benchmark index, which pared its losses after hitting a low of 3,665.21, a fall of 218.15 points, in early trading. The FTSE 250 also bounced back after big falls in the morning to close down 104.89 points at 5,688.67.

Mining stocks tracked lower metals prices and Xstrata fell 68.5p to 709p, down 8.8 per cent. Citigroup warned that mining shares were unlikely to recover before the new year, saying: "The UK metals and mining sector continues to face short-term headwinds from falling commodity consumption, a rising US dollar and an aggressive unwind of momentum money together with negative earnings revisions." It estimated that the median return on invested capital for the sector was likely to shrink from about 27 per cent over the past three years to about 15 per cent by 2011.

In the oil and gas sector, Credit Suisse advised investors to switch to BP, which fell 2p to 438p on weaker oil prices, from Royal Dutch Shell, which was down 12p at 1460p. "Third-quarter results [due later this week] are likely to be relatively weak," it said. "Shell has historically attained lower exploration and production earnings per barrel than its peers. This becomes more of an issue at a lower oil price."

Among the banks, HSBC fell by 4.7 per cent, or 33p, to 663p as investors sold their shares amid fresh fears for the financial health of emerging economies. Similar concerns weighed on Standard Chartered, which fell 10.3 per cent, or 78p, to 680p ahead of today's third-quarter update. It was also saddled with a bearish assessment from Citigroup, which said the banking group needed to raise about $5bn in fresh capital. "This would take the core Tier 1 [capital] ratio from 6.1 per cent at the first half of 2008 to 7.6 per cent on a pro-forma basis, in line with HSBC but still below the Asian bank average of 10.5 per cent," Citi said, slashing its target price for the stock to 750p from 1300p. It added: "Stronger capital ratios are likely to be necessary given slowing Asian economies and the recent rapid growth of the wholesale loan book." Standard's UK-focused peers HBOS, which rose 1.1p to 61p, and Lloyds TSB, up 4.1p at 169.9p, benefited from reports that their proposed merger was on track despite the turmoil in the equity markets. "They are also benefiting from the change in focus to banks with more Asian and Latin American exposure," said one trader.

On the FTSE 250, mid-cap retail stocks bounced back after a round of bargain-hunting sparked a short squeeze that sent DSG International up by 18.4 per cent, or 4p, to 25.75p, and Debenhams up 12.4 per cent, or 3p, to 27.25p. DSG was also the focus of vague takeover rumours, which were played down by traders.

On the downside, pub companies weakened after figures from the British Beer and Pub Association revealed that total sales fell by 7.2 per cent in the third quarter of the year. Beer sales in pubs, bars and restaurants were down 8.1 per cent, while those in shops and supermarkets fell by 6 per cent – their first decline since the second quarter of 2007. As a result, JD Wetherspoon fell 11p to to 220p, Punch Taverns was down 6p at 112.5p and Marston's was down 13.25p at 85.25p.

The computer games publisher SCI Entertainment gained 11.1 per cent to close at 20p after it said it had agreed to Warner Brothers raising its stake in the business to 29.9 per cent next month. Until now, Warner, which increased its holding to about 16 per cent earlier this month, had to clear every purchase of shares until the end of January 2009 with the SCI board.