CREWE: Connaught, the financially troubled social housing group, is in emergency talks with its lenders about a possible debt-for-equity swap.

Connaught creditors, which include Travis Perkins, have also been in discussion with the company.

Talks are continuing with a consortium of Connaught's banks, led by Royal Bank of Scotland. One of the options is a debt-for-equity swap where the banks take control of the business in return for keeping it afloat and writing off their loans.

Connaught earlier secured a short-term £15m overdraft facility that will see it through to the end of this month. This eased concerns by creditors, which include Travis Perkins, over the company's liquidity. But the company has warned it has probably breached the terms of its loan covenants, which would entitle its banks to seize control.

There is speculation that the company could run out of cash within weeks unless it secures new funding. Chairman Sir Roy Gardner and his new management team are also considering whether to shore up the balance sheet by selling one of its three businesses: maintaining social housing, health and safety consultancy and environmental services.

Shares have plunged by more than 85% in less than a month after two profit warnings. The share price is expected to fall further this week, with figures from dataexplorers.com showing that more than 3.5% of the company's stock was on loan to short sellers last week.

The situation deteriorated on Friday after Connaught warned it will make a "material" operating loss for this financial year, including "significant write downs" and provisions against future losses from contracts.