Venture capital group writes off 45m pounds Isosceles investment

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The Independent Online
THE VENTURE capital group 3i has written off its pounds 45m equity investment in Isosceles, the highly leveraged Gateway supermarkets company, believing the 9.9 per cent stake to be worthless.

The write-off comes as talks on restructuring Isosceles reach crunch point. The group has privately warned its bankers it expects to breach its loan covenants next week.

Standard Chartered, GE Capital and 3i are pushing for better treatment of the mezzanine debt, an Isosceles liability of almost pounds 300m which ranks higher than the pounds 400m of equity but beneath the pounds 1.1bn of senior debt. But the ordinary shareholders and the banks are pulling in different directions, making the three-way talks highly complex, especially since some of the protagonists have more than one class of capital.

As both an equity investor and a mezzanine provider, 3i says its mezzanine debt is worth 100p in the pound. While the equity has been written down to zero, the debt was valued at pounds 28.6m in the accounts for 31 March and 3i's chief executive Ewen Macpherson said yesterday that the valuation still held.

Standard Chartered, which has almost pounds 100m at risk, is thought to be pressing hard for Isosceles to resume paying interest on the mezzanine. Rolled up interest is now close to pounds 40m.

Some senior debt holders, which include Midland Bank, Bank of Scotland, Bank of Nova Scotia and Chemical Bank, believe the mezzanine is worthless on a pessimistic valuation of the company. They want to ensure their loans are safe. Isosceles, led by Alistair Mitchell-Innes, chief executive, is pushing for a relaxation of the loan covenants and postponement of some debt repayments.

Although Isosceles has had some success with its Food Giant and Somerfield formats, the core Gateway stores continue to lose sales. The prospect of raising cash from asset disposals is receding.

A summer flotation of Wellworth, the Ulster supermarket chain, looks less viable following the problems with the recent Telegraph and MFI share issues.

Isosceles has repeatedly had to scotch false rumours that its suppliers, which at any time are owed about pounds 300m, have refused to give credit to Gateway.

One source closely involved with negotiations said progress was now being made in the talks, which are being led by the agent bank S G Warburg.

However, according to a senior debt holder, there is 'squabbling between the the mezzanine holders and the ordinary shareholders'. He said that although the equity was almost certainly worthless it still had 'an irritation value'.

A spokesman for Isosceles, which is due to report its annual results later this month, said: 'We are making positive steps towards reaching an agreement.'

The 3i write-off casts serious doubt on the value of the other institutions' Isosceles shareholdings. The largest of these is the US investment house Wasserstein Perella which has invested about dollars 350m for its 40 per cent stake.

In May, Mercury Asset Management, a subsidiary of S G Warburg, made a provision against its Isosceles holding. Other ordinary shareholders include the US grocery group Great Atlantic & Pacific Tea Company and CINVen, part of the coal industry pension fund.

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