Bankers open way for Gateway rescue

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The Independent Online
THE 70 banks and institutions with exposure to Isosceles, the heavily-borrowed Gateway supermarkets group, have reached agreement in principle on a refinancing.

The agreement gives Isosceles a reprieve from its creditors, who only a month ago were considering pulling the plug on the company. The mezzanine financiers, owed almost pounds 300m, have won an important concession from the ordinary shareholders and are to be given warrants over some of the equity. It is also thought that some of their interest may be repaid.

Isosceles will be able to accelerate its store conversion programme after the banks, owed a further pounds 1.1bn, tentatively agreed to relax loan covenants governing capital expenditure. However, it is understood no new money is being injected.

According to one source involved in the negotiations, which have been supervised by SG Warburg, Isosceles' adviser and lead bank, 'in essence the deal is done'.

Formal agreement could still be two weeks away while the negotiators return to the credit committees of their institutions for approval. One reluctant player among the 70 institutions - spread across three classes of capital - could still jeopardise it. Most of the argument has been between the shareholders and the mezzanine holders.

Gateway, bought for pounds 2.1bn in 1989 in Britain's biggest leveraged buyout, is the fifth-largest supermarket group with annual sales of pounds 3bn and about 7 per cent of the market.

While rivals such as Sainsbury and the Argyll-owned Safeway have forged ahead with rising volumes and margins and new store openings, Gateway has been stuck in a rut, devoting most of its operating profit to paying Isosceles' interest bill.

Under its chief executive, Bob Willett, Gateway has achieved strong sales increases in stores it has converted to the Food Giant, Somerfield and, more recently, Solo formats. However, volumes have continued their decline in the core Gateway supermarkets.

Isosceles hopes to announce the new arrangements when it reports its annual results later this month. These are expected to show an operating profit, before interest payments, of about pounds 170m in the year to April. According to one source, the present loan covenants limit Isosceles to capital spending of about pounds 100m a year. After the relaxation it will have more headroom and more flexibility.

Under the Gateway recovery plan, a flotation has been provisionally timed for the end of next year.

The largest shareholders are Wasserstein Perella, the United States investment bank, Great Atlantic & Pacific Tea Co, CINVen, Mercury Asset Management and 3i, which last week wrote down its pounds 45m equity investment in Isosceles to zero. 3i is also a holder of pounds 28.6m of mezzanine finance.

(Photograph omitted)