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Companies In 'limbo' Over Toxic Debts

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Companies whose debt is declared "toxic" and is placed in the Asset Protection Scheme (APS) have been described as the "forgotten victims" of the bank rescue because they are trapped in a "restructuring limbo", unable to reconstruct their balance sheets to invest in growth and jobs.

Private equity houses claim to have been contacted by directors who want to write down some of their debt and inject equity into the business, but cannot negotiate with their lenders because of confusion and inertia over the APS. Regulatory officials have warned that the "hole in the system" threatens to slow economic recovery.

The taxpayer-backed APS was set up earlier this year to insure £325bn of Royal Bank of Scotland's bad loans and £260bn at Lloyds Banking Group to improve their capital strength and encourage them to start lending again.

However, Jon Moulton, the managing partner of Alchemy Partners, said: "Companies are staggering on with ridiculous levels of debt, paying the interest and with no means of capital expenditure. If you're in RBS or Lloyds, it's just another level of uncertainty."

Another senior private equity executive added: "We are getting calls from chief executives saying we need to restructure our balance sheet. . . but it's clear the banks and the Treasury are ignoring the problem. It's total restructuring limbo."

The problem is Lloyds and RBS are responsible for managing companies' debt, but the two banks will only bear the first 10pc of any loss under the APS, after which the taxpayer picks up the bill. As a result, private equity operators say, any negotiation has to be with both Treasury and the banks.

In addition, the Treasury is setting up an Asset Protection Agency (APA) to protect the taxpayers' interests and ensure the banks do not offload debt cut-price. The Treasury yesterday named Jeremy Bennett, a former Credit Suisse banker, acting chief executive of the APA. He has indicated he does not want to be considered for the £140,000-a-year job on an ongoing basis.

According to the private equity executive, the APS has created a system "where no one is incentivised to manage a portfolio to help companies de-lever [reduce their debts]". He added: "What we're seeing is the banks agreeing covenant resets, which means companies just struggle on paying interest but can't invest in machinery or jobs."

One senior regulatory official said this was one of the main problems of the APS and that companies with tens of billions of debt may be affected, possibly delaying an economic recovery as businesses simply "limp on".

Despite six months of negotiations, the APS is still not finalised, which has added to the sense of "limbo". It is thought the Treasury will not seek disclosure of the individual companies whose debts are declared "toxic", potentially complicating restructurings for any company with debt from RBS or Lloyds.

However, bank insiders said that, in many cases, companies would rather delay a restructuring until the economy has improved and that private equity has a vested interest in attempting to take equity stakes in companies at distressed prices, potentially at the taxpayers' expense.

I thought PE was all about leverage, not reducing debts.

No wonder RBS and Lloyds are going to do well in the near future the taxpayer will soon be picking up the bulk of the losses.

Although I am beginning to wonder whether the APS was just more spin and bluff from Brown. We'll announce a rescue scheme and hope to god that somehow the economy recovers and it's not needed. Clearly that isn't going to happen and Labour may now have a huge problem it's announced a plan that it can't possible afford and is now delaying the signing of it.

The bankers need it, but the taxpayer can't afford it, being on the hook for 90% of the losses is going to be very expensive in deed for the UK taxpayer.

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