Outsourcer Interserve closes in on debt-for-equity rescue deal

The public sector outsourcing giant Interserve (Frankfurt: 860509 - news) is closing in on a rescue deal that will involve swapping hundreds of millions of pounds of debt for shares in the company.

Sky News has learnt that Interserve, which has been grappling with ways to avert a Carillion (Frankfurt: 924047 - news) -style collapse in recent months, could announce as soon as this week that it has reached an in-principle agreement with lenders about the restructuring.

If successfully concluded, such an agreement will provide enormous relief to government ministers desperate to salvage the future of the provider of myriad public sector contracts and the employer of 45,000 people in the UK.

It would also be a major fillip to Debbie White, Interserve's chief executive, whose Fit for Growth turnaround programme was bolstered last week by the disposal of a loss-making waste-to-energy project in Dunbar.

The debt-for-equity swap, which has been under discussion for several months, is likely to involve swapping around £300m of its borrowings - half its overall debts - for new shares, in line with the company's publicly stated debt targets.

However, City sources said that Ms White had concluded that an earlier proposal to hand Interserve's £250m building materials unit to its lenders was now unlikely to be pursued.

A mooted equity capital-raising was also being put on the back-burner for the time-being, they added.

While neither the company nor its advisers or lenders would discuss the restructuring this weekend, other stakeholders suggested that an announcement about the outline of a deal could come in the next few days.

They cautioned that a formal agreement had yet to be reached between the various parties.

Like other outsourcing groups, 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 85% over the last year amid fears that it might not survive, and that doing so would dilute existing investors' interests.

The company now has a market value of less than £20m, meaning its equity value is dwarfed by its debts.

The company is being advised by Lazard (Frankfurt: A0DQP8 - news) and Rothschild, while EY is working for the company's banking syndicate and Deloitte is advising the Cabinet Office on the situation.

The company previously said it was "working with its advisers to look at all options to deliver the optimum capital structure for the group to support its long-term sustainable development".‎

The restructuring is also expected to include amending its financing agreements by extending debt maturity dates and repayment profiles.

"Our lenders are supportive of the deleveraging plan which will underpin the long-term future of Interserve," Ms White said in December.

Interserve is one of the UK's biggest private sector employers in areas such as office-cleaning, while it also provides support to Britain's armed forces in Cyprus, Gibraltar and the Falkland Islands.

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.

It is the latest in a string of UK outsourcers to face material uncertainty over its finances, with Carillion's insolvency coming in the wake of rescue efforts at Capita (LSE: CPI.L - news) and Serco.