UPDATE 3-Interserve strikes rescue deal by handing control to lenders

Interserve has struck a rescue deal that will see lenders take control of the company by swapping millions of pounds worth of debt for new shares, giving the troubled outsourcing group a chance of survival. Racing to avert a collapse like that of peer Carillion, Interserve said on Wednesday it would cut debt by more than half to about 275 million pounds after creditors wrote off loans in return for new equity worth 97.5 percent of the share capital.

Existing shareholders, who saw the company lose 90 percent of its value in 2018, will largely be wiped out. A remaining 350 million pounds of debt has been allocated to its profitable building materials business RMDK, which has been ringfenced in a move agreed with lenders and government.

Chief Executive Debbie White said the deal was "critical" to the group's future and all of its stakeholders. "This proposal has been achieved following a long period of intensive negotiation and has the support of our financial stakeholders and government," she said.

Interserve is one of Britain's biggest outsourcing and construction companies, employing 75,000 globally to deliver contracts including cleaning hospitals and serving school meals. "We welcome the announcement that Interserve has made this morning and recognise it is a key milestone for the company in delivering the long-term recovery plan that it set out in 2018," a Cabinet Office spokesman told Reuters.

Interserve's high level of debt had come under intense scrutiny after peer Carillion collapsed last year under a weight of debt and pension dues, forcing the government to step in to guarantee services. That led to a parliamentary inquiry into the extent to which private companies should be running essential services.

Interserve, which had more than 600 million pounds ($776.34 million) in debt, was forced in December to ask to defer a debt payment after it said in November that it was struggling with project delays and a weak construction market. 'VIRTUALLY WORTHLESS'

Media reports have suggested that the group looked at handing the RMDK unit to its lenders but the Financial Times reported that the government opposed the move because it would "leave the remaining business virtually worthless", making it difficult to keep awarding it contracts. RMDK has been valued by analysts at up to 300 million pounds.

Interserve, which maintains eight out of 10 of Britain's busiest railway stations and cleans 2,490 London Underground carriages every evening, now has a market value of around 20 million pounds, down from a peak of over a billion pounds in 2014. Its shares were up 13 percent at 1115 GMT.

"We believe that this is an intelligent deal which seeks to secure the future of the business, whilst providing some return to the banks," Liberum analyst Joe Brent said. Before Wednesday's plan was announced, Interserve's combined credit score - which measures how likely a company is to default in the next year on a scale of 100 (very unlikely) to 1 (highly likely) - was "1", Refinitiv Eikon data showed.

Interserve said it was also "actively preparing" alternative plans to ensure the proposed deal can be implemented in the event that shareholders shoot it down. Interserve said in a separate statement that Coltrane Master Fund, L.P., which holds a more than five percent stake in the firm, had called for eight of the company's directors to be removed.

Coltrane continues to support Chief Executive Debbie White, it added. ($1 = 0.7729 pounds)

(Reporting by Noor Zainab Hussain, Arathy S Nair and Pushkala Aripaka in Bengaluru; Editing by Arun Koyyur, Patrick Graham and Jan Harvey)

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