A CONSORTIUM of banks, including RBS, is to own up to one of the most disastrous lending decisions of the debt-fuelled deal boom. It will lead to writing off more than £800m of loans to Four Seasons, Britain's biggest nursing-home chain.
Four Seasons is expected to announce early this week that 30 banks have agreed to convert about half its £1.6 billion of debts into shares. The decision will safeguard 20,000 jobs at the company, which runs 330 homes with 16,000 beds.
The debt-for-equity swap is a sharp reminder of the rash lending decisions made by banks at the height of the bull market. Dozens of other companies that were bought and sold during 2006 and 2007 are facing the same problem, but few are as big as Four Seasons.
The state-controlled Royal Bank of Scotland is the biggest loser. It will write off more than £300m and own just under 40% of the care group. Other institutions to lose money include Fortis, Nationwide, Marathon Asset Management and Cheyne Capital.
RBS led a consortium of 30 banks that lent about £1.5 billion to Three Delta, a privateequity fund backed by Qatari sovereign wealth funds and headed by Paul Taylor, to buy Four Seasons in 2006.
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A year later, it became clear the business was unable to cope with its debt mountain and faced the threat of bankruptcy. The banks had financed the deal on aggressive profit targets that were not achieved.
Three Delta, which later led an ill-fated takeover attempt for J Sainsbury, invested only £100m of equity in the deal. The rest came from the banks.
Four Seasons has been in refinancing talks for a year. During this time it has met monthly payments on its £600m bond, which will remain unaffected, as well as other borrowings of £800m. But an additional loan facility of £300m, which carried interest rates of at least 15%, has been rolled up.
The management team, led by Geoff Westmore, chairman, and Pete Calveley, chief executive, has been incentivised to stay on and will own 3% to 5% of the company. Calveley said: "This refinancing draws a line under our past and allows us to get on and run the company."
Paul Saper of LCS International, the healthcare analyst, said: "These are challenging times for the industry and this is a respected management team but it is going to be hard to push through price increases. The company will have to run hard to stand still."
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While the banks face a £800m write-off, the companies that bought and sold Four Seasons during the boom have pocketed a mint. Alchemy sold the business to Allianz, which later sold it to Three Delta.
One banker said: "It was a case of passing the parcel and someone would eventually end up holding it when the music stopped." RBS tried to merge Four Seasons with the Priory Group, the psychiatric care provider, which it also owns, but it proved impossible to agree terms.
Four Seasons has been advised by Talbot Hughes Mc-Killop, the restructuring specialist, and Macfarlanes, the law firm. Final negotiations could conclude as early as tomorrow. Analysts say it will not be the last such deal as companies struggle to meet their interest bills and are forced to renegotiate loan agreements with banks.