Interserve agrees debt deal, faces vote to replace board

An agreement over the key commercial terms of a plan to cut the construction and support services group's £625m-plus of debt has been agreed with all of Interserve's lenders, bonding providers and pension trustee.

A debt for equity swap is expected to cut pro forma net debt to circa £275m via the issue of around £480m of new shares.

Existing shareholders will be given a vote on whether to accept the deleveraging plan and the right to subscribe at the strike price. The new equity will initially placed with existing lenders and then subject to full claw back by existing shareholders via a placing and open offer.

With a market valuation well below £20m, this deal will result in a 97.5% dilution of capital for existing shareholders, as had been roughly hinted at when the broad idea of the deal was outlined in December.

As LSE rules require a 25% free float, analysts said to remain as a listed business Interserve will need a number of City institutions to subscribe at strike, or future placings.

Some £350m of existing debt will be loaded up into the RMD Kwikform division, which will remain part of the consolidated group but will be non-recourse to the rest of Interserve and have maturities extended to 2023. Of this debt, £169m will be cash-pay and £181m will be converted into a subordinated non-cash pay debt instrument.

Therefore, excluding RMDK, Interserve will have a pro forma net cash position of circa £60m.

White said it was a "significant step forward in our plans to strengthen the balance sheet" and that the board believes the agreement "will secure a strong future for Interserve".

She said the proposal has the support of both financial stakeholders and the government and its successful implementation "is critical to the Interserve Group's future and all of its stakeholders", alongside the 'Fit for Growth' transformation programme.

COLTRANE TAKES STEPS

The company also revealed that it has received a letter from Coltrane Master Fund, a hedge fund operated by Coltrane Asset Management and owner of a stake above 5%, requisitioning a general meeting of shareholders, where it proposed vote to remove directors Glyn Barker, Mark Whiteling, Russell King, Anne Fahy, Nick Salmon, Gareth Edwards, Dougie Sutherland and Nicholas Pollard.

Coltrane, which continues to support White as CEO and does not seek her removal, proposed that David Frauman, restructuring lawyer and former chairman of Afren, and Stuart Ross be appointed as directors of the company.

Interserve said it was consulting with its advisers and will update its shareholders with regard to the timing of the general meeting in due course.

Shares in the London-listed outfit, down more than 97% since the start of 2016, were up almost 11% to 14.57p on Wednesday morning.

Broker Liberum said that debt is non-recourse to the rest of the group "will please the government" and noted that leverage will be less than 1x on the cash-pay element and circa 2x in total, which compares to the company’s target of 1.5x by year-end.

"We do not know the cost of the debt. However, the statement notes that bonding remains available and there is an additional £75m facility with a 2022 maturity."

Liberum felt it was "an intelligent deal which seeks to secure the future of the business, whilst providing some return to the banks" but if the deal is blocked, as seen at Mouchel, "we believe that there may be no value at all in the existing equity".