Interserve lenders to sweeten terms of £500m rescue

Lenders to Interserve, the heavily indebted government contractor, are to sweeten the terms of a £500m rescue package even as the company’s largest shareholder sets out a rival restructuring plan.

Sky News has learnt that the lenders, which include hedge funds such as Angelo Gordon and Davidson Kempner, are in talks about doubling the proportion of Interserve's equity that would be owned by its existing shareholders.

Sources close to the company said that under the new terms, Interserve's current shareholders would own 5% of the business, rather than the 2.5% outlined in an initial proposal earlier this month.

Aberdeen Standard Investments, which owns about 6% of the outsourcer, is among the investors said to be willing to support the revised terms of the debt-for-equity swap.

The original plan drew an angry response from Interserve's biggest investor, Coltrane, which has called for an extraordinary general meeting to remove the entire board apart from Debbie White, the chief executive.

Insiders said on Friday that Coltrane had submitted an alternative proposal to Interserve's board which included a £75m rights issue to be fully underwritten by the US-based hedge fund.

Under Coltrane's proposal, which would include a major equitisation of Interserve's debts, creditors would own 65% of Interserve, the funds raised in the rights issue would equate to 25% of the equity, while existing shareholders would own 10%.

One source said that if executed, the Coltrane proposal would leave Interserve with lower net debt than under Interserve's plan.

"It would have a more robust balance sheet, which would be better for all stakeholders," a source familiar with Coltrane's proposal insisted.

The submission of a revised rescue plan and the lenders' plan to tweak the terms of the deal will intensify a battle over Interserve's future.

Next week, the company is expected to publish a formal prospectus outlining the lenders' revised proposal.

Insiders have warned that if Coltrane and a sufficient number of other shareholders vote against the proposal, the lenders are likely to take control of Interserve anyway through a pre-pack administration.

Sky News revealed last week that the outsourcer was facing a double financial bombshell in the form of a provision that would trigger an immediate £66m repayment to lenders if its refinancing is not approved by investors.

Interserve, which employs 45,000 people in the UK, would also be required to repay tens of millions of pounds if Mark Whiteling, its chief financial officer, is removed from the board.

An outline agreement with lenders comprises the issue of £480m of new shares to creditors, with extensions to its debt facilities in order to provide Debbie White, its chief executive, time to execute her transformation plan.

Interserve's troubles have intensified just over a year after the collapse of Carillion , and amid enormous anxiety in Whitehall about the fate of myriad public sector contracts held by the business.

The company generates more than two-thirds of its revenue from the government.

Interserve is one of the biggest private sector employers in areas such as office-cleaning, while it also cleans the London Underground, and maintains British Army bases around the world.

Like other outsourcers, Interserve has been left financially troubled by depleted margins on major contracts and a disastrous foray into the waste-to-energy sector.

Its troubles have seen its shares collapse by 86% over the last year amid fears that it might not survive, and that a rescue deal would heavily dilute existing investors' interests.

The company now has a market value of less than £16m, meaning its equity value is dwarfed by its debts.

The Cabinet Office has insisted that it does not view the company as a replica of Carillion and continues to have confidence in it.

The crisis surrounding Interserve's finances has persisted for more than a year, with the company initially blaming economic uncertainty and weak government spending for a massive profit warning in the autumn of 2017.