By By Mark Kleinman, City Editor
One of Britain's biggest providers of identity theft insurance is in talks about a financial restructuring that could involve its lenders taking a significant stake in the company.
I have learnt that CPP Group is holding discussions about a possible debt-for-equity swap in an attempt to safeguard its future following a mis-selling scandal that saw it hit with a multimillion pound fine by the City regulator.
The talks come ahead of a deadline at the end of this month for CPP to secure new terms with its creditors.
Under one scenario being negotiated with its lenders, which are led by Barclays, Royal Bank of Scotland and Santander UK, the three banks would exchange debt for an undisclosed proportion of CPP's shares.
Another proposal would involve Hamish Ogston, the entrepreneur who founded CPP and floated it on the stock market in 2010, participating in the refinancing by injecting new funds into the company. Mr Ogston already owns a 57% stake in CPP and could emerge from the refinancing discussions with a larger shareholding, according to insiders.
Among the issues which is at the centre of the conversations is whether any new shares held by Mr Ogston or any other new investor would rank alongside those of the company's existing shareholders. Other business partners of CPP, such as HSBC, could also wind up with an equity stake in the credit card insurer.
Mr Ogston's stake in CPP was worth about £16.5m at Tuesday's closing share price of 17.25p. The company's share price has slumped by more than 80% during the last 12 months.
The banks and CPP have been in talks about the restructuring for more than six months. People close to CPP said that unless a solvent solution could be achieved through a scheme of arrangement that would ring-fence compensation for customers, the Financial Services Compensation Scheme was likely to be forced to step in.
Such an outcome would anger industry members which were not responsible for selling CPP's products. The company markets itself as a "life assistance" provider which sells cover for mobile phone theft, offers access to airport lounges and provides a secure key storage service.
"There is an urgency about the talks which reflects the fact that CPP's debt facilities mature at the end of March," said one person involved in the talks.
Although modest by comparison with the mis-selling of payment protection insurance (PPI) and interest rate hedging products, the CPP episode is likely to cost the company and its banking partners as much as £200m.
CPP, which stands for Card Protection Plan, was fined £10.5m by the Financial Services Authority for selling insurance to hundreds of thousands of customers who were already covered by existing policies.
In December, the company said in a statement to the Stock Exchange that it remained in talks with the FSA and its business partners about the structure for offering compensation.
"These discussions continue to include consideration of the use of a solvent Scheme of Arrangement as a vehicle for providing redress. The amount of redress which will require to be paid to customers is uncertain. The Group expects to materially increase the provision it has made for customer redress and associated costs in light of current estimates."
CPP, which employs about 1,000 people at its headquarters in York, sold a relatively small proportion of its policies directly to consumers. The vast majority were sold by bank,s which acted as 'introducers' and which will have to fork out for the bulk of the eventual compensation bill.
The board of CPP has also considered selling the whole company as part of its review of options to preserve its future. However, discussions about a takeover by the US company Affinion Group ended without agreement in November.
Last month, CPP confirmed that RBS had notified it that the bank would not renew its contract for providing mobile phone insurance, while restrictions imposed by the FSA will have an adverse impact on CPP's revenues.
A CPP spokesman declined to comment on Tuesday.
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