3i writes off Isosceles 28m pounds

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THE venture capital group 3i has written off a pounds 28m loan to Isosceles, the troubled Gateway supermarkets group, which is in the throes of a third refinancing.

The write-off, which accounts for nearly 40 per cent of a record pounds 76m fall in 3i's net asset value in its latest half-year, indicates that the loans are seen as worthless. 3i is the first lender to admit it has done this.

When the last Isosceles crisis was coming to a head in July, 3i was also the first investment group to admit that it had written off its equity shareholding.

But five months later, after 3i has extended the same treatment to debt, at least one large investor in Isosceles, the US firm Wasserstein Perella, is still putting a valuation on the equity.

The write-down is of so-called mezzanine finance, which in a liquidation would rank between equity and the better-secured bank debt. Standard Chartered Bank, which has almost pounds 100m of mezzanine finance at risk, has not as yet followed 3i with a full write-off. The other main holder is GE Capital Corporation.

The latest negotiations over the future of Gateway are thought likely to lead to a swap of bank debt for new equity, to reduce the company's pounds 1.1bn bank debt mountain. But this would probably leave holders of the mezzanine debt out in the cold.

The Isosceles write-off was the largest chunk of a pounds 73m fall in the value of 3i's investments in the six months to 30 September. There was also an pounds 11m fall in the value of French equity investments, and a pounds 30m fall in the UK equity portfolio.

3i has structured itself as an investment trust, and on that basis its net assets per share fell 6.4 per cent to pounds 1.188bn, which is thought to be the largest fall, at least since the 1974 market crash.

It is thought that the 8 per cent stock market rise since September has more than reversed the fall in the value of 3i's investments.

Surprisingly, 3i found dividend income robust, rising nealy pounds 2m to pounds 44.4m, which it said underlined the resilience of the business in the recession.

While new investment has fallen from pounds 283m in the previous half-year to pounds 200m, 3i is still managing to find some start-up businesses to finance.

There was a sharp rise in business opportunities for a few months during the last winter, but this vanished in the spring, apart from a brief period after the general election.

3i said the economic outlook remained uncertain and it would 'inevitably be some time before we see a significant improvement in corporate earnings'. Investment activity is expected to fall again in the second half of the financial year.

A flotation of 3i remains a possibility, but the group's shareholders - the clearing banks and the Bank of England - have put off a decision to some time next year.