Xchanging could breach banking covenants - analyst

Xchanging could breach its banking covenants, analysts warn.

The IT and back office support firm is in turmoil after its chief executive David Andrews resigned yesterday, amid a £100m writedown in connection with its Cambridge Solutions business, bought in 2008 for £145m.

Analyst Matthew Earl, Matrix Group, said: “Aggressive accounting appears to have caught up with Xchanging. 2011 estimated earnings before interest and tax are now expected to be below our bearish projection of £55.5m, which, itself, was 24pc below consensus.

"There is further bad news. The group will write down £100m of goodwill relating to its Cambridge [Solutions] business and a further £12m of intangibles and other assets. In our October 2010 note, we suggested that a £127m writedown would be appropriate.

"However, we also cited the risk that a writedown of this magnitude would threaten to breach one of the group’s three banking covenants, which centres on minimum net worth. That risk remains, in our view.

“The dividend for 2010 will not be paid, although going forward the board will keep this policy under review.”