Direct Line ‘on track for separate listing this year’

Royal Bank of Scotland’s insurance arm Direct Line is planning to raise debt in a signal it is on track to be spun off and separately listed later this year, potentially returning cash to its taxpayer-backed parent.

The business, which was founded in 1985 and includes brands Churchill, Direct Line and Privilege as well as Green Flag breakdown service and operations in Germany and Italy, could be valued at near £3.2 billion, making it one of Britain’s biggest stock market listings in years.

Direct Line Group, the new name for RBS Insurance, has mandated RBS, Citigroup and HSBC to arrange meetings with fixed-income investors to sell subordinated debt. A benchmark deal could see between £250 million and £500m of debt sold.

Direct Line does not have any debt, but is expected to take some on as part of a reorganisation of its structure before its listing. It could return cash to RBS in the form of a dividend, or allow the parent group to reduce its own debt.

Direct Line finance director John Reizenstein said in October that he expected the insurer to pay RBS Group a dividend of between £500m and £1bn, funded in part by hybrid debt issuance.

RBS, which is 82 per cent owned by the taxpayer, wants to sell a minority stake in Direct Line in the second half of this year. European regulators have said it must sell a majority stake by the end of 2013 as payback for the bailout of RBS more than three years ago.

The bank tried to sell the business in 2008, but scrapped the sale when the financial crisis deepened and it failed to get offers near the £6bn it had hoped for.

RBS could make a gain on the insurance sale of £800m, analysts at Autonomous estimate.