By  on December 30, 2008

LONDON — Baugur Group’s estimated $2 billion of debt — which the Icelandic investment company has been struggling with following the collapse of the country’s banking system — appears to be staying within Iceland’s borders.

Baugur said Monday that it has “been in talks with its relationship banks regarding the restructuring of the company, with the aim of maximizing the long-term value of its assets and [to] dispel any uncertainty regarding the future.”

Baugur’s retail assets cover a large chunk of the U.K. high street, including stakes in House of Fraser, French Connection, All Saints and Hamleys, alongside shareholdings in Saks Fifth Avenue, Matthew Williamson and PPQ. As recently as October, Arcadia Group owner Sir Philip Green had been in talks to buy Baugur’s debts.

Baugur also denied British press reports Monday that suggested the company is in talks with the Icelandic government to take a stake in its various U.K. retail investments. “Baugur would like to clarify that no discussions are taking place with regard to the acquisition of a stake in Baugur’s assets by theIcelandic government,” the company said.

A report in London’s Financial Times Monday said the Icelandic government — which effectively controls the country’s banks, with which Baugur holds debt — is in talks to undertake a debt-for-equity swap with Baugur. However, sources close to the Icelandic government said Baugur’s debts are held with Old Landsbanki, one of the Icelandic banks set up following the financial crisis to manage the country’s debts. The source said if Baugur did negotiate a debt-for-equity swap, it would be with Old Landsbanki and its creditors, rather than the Icelandic government.

A spokesman for Iceland’s government declined to comment Monday.

If Baugur does negotiate a debt-for-equity swap with its Icelandic relationship banks, the shareholdings in Baugur’s retail investments would not change, a source close to the company said. Instead, the relationship banks would hold a stake in Baugur itself rather than in Baugur’s assets, the source said.

Meanwhile, the company continues to sell some of its assets. Baugur last week sold the Whittard of Chelsea tea and coffee retailer to Epic, a London-based private equity group, for an undisclosed sum after the chain was placed into administration — the U.K. equivalent of Chapter 11. Ernst & Young, which was appointed administrator, said the company had “been experiencing trading difficulties because of uncertain economic conditions.”

Whittard is among a number of retailers struggling on the high street — Woolworths, the 99-year-old general retail chain, and MFI, a furniture retailer, were placed into administration last month. Woolworths failed to find a buyer and is closing at the end of the year.

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