Further subprime blow as RBS faces losing £500m on Cattles

Published on Sunday 22 March 2009 20:05

ROYAL Bank of Scotland risks losing between £400 million and £500m on its exposure to Cattles, the subprime doorstep lender, struggling under £2.4 billion of debt, it has emerged.

Cattles has virtually collapsed following revelations of big losses in 2008 and accounting irregularities regarding bad debts for 2007. Senior staff have been suspended, and external accountants Deloitte called in.

RBS, as head of a 22-bank consortium of lenders to the company, stands to lose most, analysts said yesterday. Other lenders include Lloyds Banking Group, Barclays and HSBC.

One subprime industry executive said: "The problem for RBS and the other banks is that Cattles has a 3bn loan book, but not 2.4bn in cash.

"If a subprime business like Cattles is seen to be going under, ie via the banks calling in loans, then the recovery of the loan book is going to be less than if it was to remain a going concern."

He added: "Put bluntly, the people who Cattles lend to are not overly worried about their credit scores.

"Their motivation to repay comes down to getting a new loan from the provider. That is going to be weaker if Cattles is seen as likely to fail."

Industry analysts also questioned whether RBS would be seeking a debt-for-equity swap as a way out of its exposure.

One said: "Cattles's shares are virtually worth nothing now." The shares closed at 2.1p on Friday.

It is understood that another option is for the banks to allow Cattles to renegotiate its banking covenants and gradually run down the book.

Alternatively, RBS and its banking partners may allow Cattles to refinance but allow the company to retain enough cash in the hope that it will eventually trade out of difficulties as general collection rates have improve.

One source familiar with the matter said: "I would not think pulling the plug on the business is the best option without the banks biting off their nose to spite their face."

Neither RBS nor Cattles were available for comment yesterday.