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Interserve sign on a construction site in London
Interserve has thousands of government contracts in the UK. Photograph: Jansos/Alamy
Interserve has thousands of government contracts in the UK. Photograph: Jansos/Alamy

Interserve lenders line up EY as administrator if shareholder talks fail

This article is more than 5 years old

Outsourcing firm is at centre of standoff over the terms of a financial restructuring plan

Lenders to the outsourcing firm Interserve have lined up EY to manage its administration if they cannot reach agreement with shareholders on the terms of a financial restructuring plan.

The emergence of EY as a potential administrator came as the largest shareholder in the company submitted new proposals, including a £75m rights issue, as a counter-offer to the solution put forward by lenders, which it called “an obscenity”.

The debt-laden business is at the centre of a tense standoff between lenders and key shareholders that will determine the future of the company, which employs 45,000 people in the UK.

Interserve, based in Reading, has thousands of government contracts. It is the largest provider of probation and offender rehabilitation services in England and Wales, and has contracts that range from hospital cleaning and school meals provision to maintaining military bases in the Falklands.

Two months ago the Labour party called for a temporary ban on the firm bidding for public contracts amid mounting concern it was facing a Carillion-style collapse. Interserve shares, which traded at 685p five years ago, are now changing hands at 13.5p.

Under the terms of a financial restructuring proposal, details of which are due to be published on Monday, lenders including hedge funds and the HSBC, RBS and BNP Paribas banks were expected to swap £480m of debt in exchange for all but 2.5% of the company’s shares.

The hedge funds Coltrane and Farringdon, which own about 34% of the firm, were expected to vote against the debt-for-equity swap, which would massively dilute their stakes. Their combined holdings are potentially sufficient to kill off the deal, which needs 50% support, depending on turnout and how other investors vote.

The lenders, according to a report by Sky News, may be prepared to revise the plan to give shareholders up to 5% of the business.

But the Guardian has obtained a counter-proposal sent by Coltrane to Interserve today.

Coltrane’s plan would hand only 65% of the company to creditors in exchange for £436m of debt, leaving shareholders with an improved 10% of the equity, plus the opportunity to participate in a 25% rights issue worth £75m. Coltrane would underwrite the rights issue.

According to the document containing the proposal, this would “reduce risk of further attempts by creditors to seize assets”. The firm’s net debt would be £243m, compared to £275m under lenders’ proposals.

A source close to Coltrane said: “The company is proposing to double the money of its hedge fund creditors whilst wiping out shareholders. This proposal stops that obscenity and brings borrowings below what the company has suggested with new money.”

Interserve said it was considering the proposal and was committed to a consensual solution.

Another senior source familiar with discussionssaid a team led by EY’s Hunter Kelly, who worked on the House of Fraser pre-pack administration, has been earmarked to reprise the role as a backup plan in case a deal cannot be reached.

The lenders could then cite a missed £67m debt repayment that fell due in February as a default trigger event, justifying a pre-pack administration – where a new owner is lined up to take control of the business immediately after it collapses. Shareholders would then be wiped out entirely, leaving the banks owning the business via a new holding company.

The lenders, however, are understood to be concerned about the potential damage the administration process could do to the business and would prefer to get Coltrane and Farringdon onside.A key risk of administration is that joint venture partners in the Middle East might then have the option to buy out Interserve at a discount, the source said.

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Another major issue is the “bonding” arrangements attached to some of Interserve’s contracts. These act like insurance, handing the company’s clients large payouts if it goes into administration.

Many of the banks that provided this insurance are the same as Interserve’s lenders, meaning that if they opt for administration, they could be costing themselves money.

The big shareholders are thought to be aware of the dilemma facing the banks, strengthening their resolve to hold out for a better deal.

Interserve declined to comment on whether EY had been put on standby as administrators but said the debt-for-equity swap “preserves maximum value for employees, pensioners, lenders, suppliers, customers and all shareholders”. EY also declined to comment.

More on this story

More on this story

  • Interserve goes into administration after rescue deal rejected

  • Interserve fights to keep contracts as rivals circle

  • Interserve: a calamity mostly created in the boardroom

  • Interserve could enter administration as it fights for restructuring

  • Back us or lose it all, Interserve chief warns shareholders

  • Interserve's largest shareholder issues rescue deal demand

  • Interserve's biggest shareholder says rescue plan is 'terrible'

  • Interserve needs a plan B given the rebellion over its current plan

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