2nd UPDATE: UK Banks Take Stock Of Businesses Taken On In Crisis

U.K. banks are taking stock of troubled companies they took over when private equity owners were unable to meet debt repayments on large loan packages taken out to finance leveraged buyouts during the boom.

Lloyds Banking Group (LYG), Royal Bank of Scotland Group PLC (RBS), HSBC Holdings PLC (HBC) and Barclays PLC (BCS) all own of hundreds of companies via debt-for-equity swaps, the preferred option to writing-off their investment when performance turned sour.

Having nurtured these companies back to health via restructurings and operational support, the banks are taking very different views of their continuing roles as owners. Some are looking to get their money back and boost their balance sheets in the face of increased capital regulatory requirements. Others are keen to capitalize on their improving businesses and are injecting more capital and in some cases inviting private equity firms to invest and become additional shareholders.

Whatever the strategy, private equity firms are eyeing the pipeline of fresh opportunities. Buyout experts say that the selling banks sense that pricing expectations are more equally matched than before, while the would-be owners among the banks want to capitalize on companies that have been turned around and are poised for growth.

"Banks will sell some assets, but will also continue to own some exciting companies that can't be allowed to stagnate. Many will need substantial investment capex to maximize their potential--in these circumstances the bank may look to partner with other investors," said David Whileman, Partner at 3i Group PLC (III.LN) U.K.

"The good companies with this new investment can pursue more opportunities, yielding more money for the taxpayer once the banks' stakes are finally sold," he added.

Lloyds, which is 41% state-owned, falls firmly within the former camp and is currently inviting banks to pitch for the mandate to sell Garden Centre Group, one of the U.K.'s largest garden center companies. It is also expected to put high street hardware retailer Robert Dyas on the block later this year or next.

It took control of both companies via debt-for-equity swaps a few years ago, and the pace of sales is likely to reflect the strategy of the bank's new chief executive, Antonio Horta-Osorio, according to experts.

"Banks are not traditional long-term holders, but the new chief executive may well be accelerating the pace of sales--he would rather not have the exposure," said Michael McDonagh, private equity partner at KPMG.

Since his appointment in March, Horta-Osorio has already expedited the sale of the bank's retail branch network and recently said that the bank is making "substantial progress" in the strategy he set out in June, which includes shedding international operations and cutting costs by GBP1.5 billion within three years.

By contrast RBS, which is 83%-owned by the U.K. government, is keen to remain an owner if it sees upside in a company's growth.

"We are definitely at the more active end of the spectrum," said John Davison, global head of RBS's Strategic Investment Group, which handles all aspects of the equity positions that the bank takes through debt-for-equity swaps and new money investments in restructuring situations. SIG has 320-350 companies in its stable.

Just last month, the bank wrote off all its debt and took control of Fairline Boats, the luxury yacht and powerboat-maker owned by 3i Group.

"We have put in additional capital together with Better Capital and are working together on an operational turnaround of the business," Davison said.

Similarly, RBS has recently taken control of Sweden's largest shopping center operator, Centrum Kompaniet as part of a restructuring originally triggered by the collapse of Lehman Brothers, which was an equity holder alongside majority owner Boultbee. RBS was senior lender to Boultbee in its leveraged buyout of Centrum Kompaniet in 2007. RBS subsequently paid Boultbee a nominal sum for its shares, writing off the bank's debt, Boultbee Chairman Steven Boultbee Brooks told Dow Jones Newswires.

The 10 shopping centers are valued at around EUR800 million and RBS is widely expected to put the retail properties back on the market in the short term or at least invite other shareholders in.

It has also taken some through to successful exits. For example, it recently floated U.S. luggage maker Samsonite International S.A (1910.HK) in a $1.25 billion IPO in Hong Kong. RBS had become joint owner with CVC Capital Partners in 2009 after the crisis hit performance, forcing CVC to inject more capital while the bank swapped some of its $1.43 billion buyout debt for equity.

And in May, RBS sold Heath Lambert, the Lloyd's insurance broker, to Arthur J Gallagher & Co. (AJG), one of the world's largest insurance brokers for GBP97 million. RBS had become joint owner with other investors after various debt for equity deals and restructurings--the bank originally invested in the business in 2005.

HSBC's ownership via debt-equity-swaps includes camera chain Jessops, which it took over in 2009, while Barclays Ventures took control of U.K. health and fitness chain Total Fitness of in a debt-for-equity deal from LGV Capital last November.

Representatives for HSBC and Barclays declined to comment for this article.

-By Marietta Cauchi, Dow Jones Newswires; +44 207 842 9241; marietta.cauchi@dowjones.com

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