Gateway takes on pounds 500m debt as restructuring is agreed: Supermarket group ring-fenced from parent in novel deal

BANKS and investors in Isosceles, the troubled Gateway supermarkets group, have agreed to a restructuring deal that leaves them with an exposure of pounds 923m to an entity which has no claim on any assets and no guarantee of any income.

Under the novel refinancing, costing pounds 20m in advisory fees, Gateway has been assigned pounds 500m of debt, which it believes it can comfortably service, and has been ring-fenced from its parent Isosceles.

Gateway, which revealed bold plans to expand its Food Giant discount chain, will have no liability for the pounds 923m of senior debt, deep discount bonds and preference shares left in Isosceles.

However, under its business plan Gateway can pay dividends to its parent and has a pounds 20m payment pencilled in for year one. No principal repayments on its own debt are due until 1998. Bankers to Isosceles, which include Midland and Bank of Scotland, have no claim over Gateway assets.

David Simons, the chief executive of Isosceles, said: 'We really have got an unfettered opportunity to develop the business. I was adamant that this time we would end up with a restructuring which wasn't a sticking-plaster job.' This is the third restructuring for the group since the ill-fated leveraged buyout of 1989, when an ambitious management team borrowed pounds 2.5bn to buy Gateway.

Agreement has been reached in principle and Isosceles hopes the deal will be completed by the end of May. However, the 38 banks to the group have yet to approve the deal formally.

The deal gives Gateway the breathing space and cash to try to tackle its dismal trading. Like-for-like sales are falling at the rate of 6 per cent.

Capital spending of pounds 100m in each of the next two years will go towards installing scanning equipment, improving shabby stores and rolling out more Food Giant outlets.

Mr Simons said he planned to double the number of Food Giants - typically 20,000 sq ft sheds offering 7,000 lines - to more than 40 over the next three years. Six Gateway stores will be converted to mini-Food Giants this summer. Mr Simons has identified 100 more candidates if the format works.

He also said he planned to shave two percentage points off the gross margin at Gateway.

Job losses are likely once Coopers & Lybrand completes its study of Gateway in about a month 'I do expect to increase our productivity at head office and store level,' said Mr Simons. 'That is likely to mean job cuts.'

Isosceles will have six classes of paper. Senior lenders will be assigned 10 per cent of the equity and a range of preference shares, deep discount bonds and senior debt. Mezzanine debt holders will be assigned 45 per cent of the equity and a mixture of lower-ranking preference shares and senior debt. Existing shareholders will be diluted to 45 per cent.