Isosceles plans to swap pounds 600m debt for equity

Isosceles, the debt-laden supermarkets group, is to propose a two-stage refinancing package to bankers owed more than pounds 1.2bn.

The plan will involve a debt- for-equity swap of about pounds 600m in the next few weeks and an injection of new money in 1995.

It is intended to reassure bankers, who fear that Isosceles will ask for over pounds 500m of fresh funds in the refinancing.

Hill Samuel, which is masterminding the refinancing, has been concerned that some banks have been trying to sell their loans on the secondary debt markets.

Bank of America is believed to have agreed to sell its pounds 32m loan to a group of US investors for around pounds 16m.

Two other American banks are also thought to be trying to sell their loans, while a fourth is believed to have sold part of its loan.

The transactions are complicated by a strict agreement - imposed by the Midland as lead banker - that new owners do not have the normal bankers' rights to wind up the company if loans are transferred.

David Simons, the Isosceles chief executive, is very close to putting his business plan to the banks. He says speculation that the group needs a capital injection of up to pounds 500m is 'absolutely ludicrous'.

With principal and interest repayments frozen until May, the group is temporarily cash positive.

But unless the planned debt- for-equity swap is very large, it will again be badly squeezed by its debt obligations.

The plan will propose that about pounds 600m of debt is converted into equity and to slim down the operation to the bare minimum to allow profits to recover.

About 80 per cent of the pounds 318m of mezzanine debt and a third of the pounds 968m of senior debt is likely to be swapped into equity.

Mindful that the group is falling behind on investment relative to its competitors such as Tesco, Sainsbury and Safeway, the business plan is expected to propose a further refinancing - Isosceles' fourth - in two years' time. This would raise over pounds 500m of new money from outside investors.

Mr Simons last week sacked two Gateway directors and announced the merger of the back-of-shop systems of the Gateway and Somerfield chains.

He said: 'The concept was flawed. You ended up with duplication of effort and no significant improvement in accountability. Frankly it was a waste of resources.'

More redundancies are expected when OC&C, the strategic arm of Coopers & Lybrand, completes its analysis in two to three months. Food Giant, the discount operation, will continue as a stand-alone business.

Mr Simons admits morale is low at the Bristol headquarters. He spent much of Friday making a video explaining the new strategy, which will go out to store managers tomorrow.

He acknowledged there could be some store closures. Most of the grocery groups have contacted him about store acquisitions.

'It's a bit like vultures circling above Gateway House. But I was not brought in to break the business up.'

There would be strong demand for some of the stores. Kwik Save, Iceland Frozen Foods and some overseas discounters would be interested in some of the smaller sites. Asda, bolstered by a pounds 347m rights issue, could be interested in the Somerfield chain.

But many of the Gateway sites are unattractive. Moreover, they are overvalued in the books, so any disposal would force the group to make substantial write-downs.

(Photograph omitted)