Premier Foods launches £353m cash call

Premier Foods, maker of Ambrosia custard, Mr Kipling cakes and Oxo stock cubes, has said it will not fully repair a the £1bn deficit in its pension scheme for 18 years, despite raising £353m from shareholders in a deeply discounted rights issue.

Fresh funds from shareholders will instead contribute to paying down the ailing group's bank loans, some of which are thought to have been acquired by distressed debt investors. Also going to repay bank loans will be proceeds from a £475m new bond issue. Total existing debt to be repaid is £886m.

The radical restructuring, which includes a new £300m revolving debt facility, follows two years of rapid asset disposals which have seen Premier jettison Hartley's jam, Sun-Pat peanut butter and Branston pickle. Sell-off proceeds of £370m went to pay down bank debt, while not a penny went to the pension scheme. Premier has also agreed to sell a majority stake in the struggling Hovis bread business to a US investment firm, as part of efforts to repair its balance sheet.

Premier's pension scheme, the largest outside the FTSE 100, has 60,000 members. In recent years trustees have twice already handed major concessions to Premier management in the hope of setting the business on the path back to a sustainable financial model.

Pension scheme payment holidays and deferrals, combined with a mounting deficit, have seen Premier's obligations piling up. Yesterday the company confirmed its 2013 pension deficit – calculated every three years – had reached £1.06bn. The latest refinancing deal, however, will see Premier's pension repair schedule — agreed only two years ago – torn up and replaced with a new plan that will reduce and spread out deficit contributions over 18 years.

This is well over the 10-year repair plan limit the Pensions Regulator typically presses companies to agree to, and is longer than the then-controversial 17-year programme agreed by BT in 2010.

It is understood the complex restructuring deal, which must win the approval of shareholders at a meeting on 20 March, has yet to be approved by the Pensions Regulator. The regulator is responsible for monitoring deals that require concessions from pension trustees.

The Pensions Regulator is responsible for looking out for the interests of the Pension Protection Fund, the official lifeboat scheme which takes over the liabilities of pension schemes in the event of a company collapse.

Independent pensions expert John Ralfe has repeatedly expressed concern that pensions regulators are allowing Premier to be stripped of assets, with proceeds going solely to its banks. The resulting diminished business is left with outsized pension obligations which are no longer appropriate. "This is a defining moment for the Pensions Regulator. If it does approve this further concession, surely it shows it has no real powers to protect UK pension schemes."

Nevertheless, with shareholders prepared to put fresh capital into the business, the Pension Regulator is expected to be under intense pressure to wave the latest deal through. According to Ralfe: "If the fund raising cannot be completed, this would have serious consequences for the company's future."

In return for concessions, Premier pension schemes are expected to receive some security, the details of which are unclear.

Chief executive Gavin Darby, a former Vodafone and Coca-Cola executive who joined a year ago, said the plan was "transformational" for the group. "This new capital structure will liberate Premier Foods from its past. Following the announcement to simplify the group through the Hovis joint venture, we are now focused on growing a high quality branded grocery business."