Bank seeks to offload debt in Connaught

By TOM BAWDEN
Updated: 17:33 EST, 4 August 2010

Lloyds  Banking Group is in talks to sell its debt in Connaught for a fraction of its face value, dealing a further blow to confidence in the beleaguered council house maintenance firm.

The black horse bank is understood to be one of several lenders looking to offload their Connaught loans on the cheap amid growing expectations that creditors will be forced into a so-called debt for equity swap.

Barclays, another member of Connaught's lending syndicate, has already sold its entire exposure of £19million for a meagre 37 per cent of its face value.

On the cheap: Lloyds is looking to follow Barclays in selling its debt in Connaught for a fraction of its face value

Shortly after the stock market opened yesterday, trading in Connaught's shares was suspended for five minutes.

News of the Barclays loan sale had spooked investors, causing the shares to dive around 8 per cent. However, the stock recovered slightly to end the day 1.36p, or 4 per cent, lower at 32p. 

Other banks in the company's lending consortium are also thought to be sounding out buyers for their debt.

One banker close to the situation said: 'I know of two other banks that are looking to do a similar thing to Barclays. The thinking is that "the debt may well end up as equity and do we want that?".'

This would see banks agreeing to drop a portion of the loans in return for ownership of the company - a prospect which most banks baulk at, since they would rather not be involved in the day-to-day running of an ailing business.

Instead, the banks are keen to sell their debts to specialist hedge funds that buy 'distressed debt' in companies, in the hope of taking control of them and turning them around.

Connaught's shares have lost more than 90 per cent of their value since the company issued a profits warning on June 25, blaming government austerity measures for its woes.

Since then, Connaught has experienced a cashflow crisis which has left it unable to repay its debts and is in negotiations with its lenders to restructure its debts.

Connaught won a reprieve last week as its lenders agreed to postpone its loan repayments in July and August and extended the company an additional £15million of financing.

However, with debts of about £200million, a cashflow crisis and a market capitalisation of barely £40million, Connaught is scrambling to restructure its debts in the face of mounting impatience among its lenders.