Good morning, it's Paul here.

Markets remain grim. I've been taken aback by the speed & severity of recent falls in many small caps. Market timing isn't my thing, and I take a long-term view. So it's really just business as usual from my point of view, painful though it is.

Interserve (LON:IRV)

Share price: 12.8p (down 48% today)
No. shares: 149.7m
Market cap: £19.2m

Deleveraging plan

This yet another outsourcing group to run into trouble. The share price has been in freefall recently, with a further plunge of 48% today on news of major dilution on the way for shareholders.

Today it says;

Interserve and its lenders are engaged in constructive discussions regarding the agreement and implementation of a deleveraging plan which would deliver a strong balance sheet with Interserve targeting leverage of approximately 1.5x net debt/EBITDA.

These discussions also involve proposals to amend the Group's current financing agreements, including the extension of the maturity dates and repayment profiles of the existing facilities.

What's interesting about that, is that it echos a comment I made in one of last week's SCVRs, that banks are reducing credit in difficult sectors. In the previous few years, banks seemed comfortable with debt up to about 3 times EBITDA. Note above that they are seeking a reduction to only 1.5x EBITDA for Interserve.

Maybe at some point, the banks might realise that using a multiple of EBITDA really isn't very sensible at all. It's the wrong measure. Bank debt surely be based on a measure which accurately shows how it can be paid off - free cashflow would make sense as the starting point.

Here's the dilution coming;

Although the form of the deleveraging plan remains to be finalised, it is likely to involve the conversion of a substantial proportion of the Group's external borrowings into new equity, an element of which may be sold to existing shareholders and potentially other investors.

If implemented in this form, the deleveraging plan could result in material dilution for current Interserve shareholders.

A debt for equity swap usually all but wipes out existing shareholders, but that depends on how brutal the lender wants to be, as they're now calling the shots (debt ranks ahead of equity).

The one glimmer of hope is that existing investors (and potentially others)…

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