Premier Foods, the owner of the Hovis and Mr Kipling brands, is pushing lenders to sanction a ground-breaking rights issue in return for relaxing banking covenants on its £1.8 billion debt mountain.

Premier, Britain's biggest food manufacturer, presented plans to its banking syndicate last week to sell about 40 per cent of the company to private equity and hedge fund investors and to simultaneously launch a rights issue to existing shareholders to raise a total of £300 million to pay down its debt.

Sources close to the negotiations said that the banking syndicate, which is led by Lloyds TSB and Royal Bank of Scotland, responded favourably to the presentation and that the capital-raising was on track to close by the beginning of March.

Premier wants the banks to agree to relax its interest-cover covenant — which stipulates that earnings must be sufficiently high to cover interest payments — in return for an agreement to pay down its debt.

However, the company will also have to pay significantly more interest to secure the new package.

Premier, whose market value is about £270million, is trying to raise between £250 million and £300 million.

The company paid £4.9 million to postpone a test of its banking covenants from December 31 last year to March 31, but desperately needs to secure a deal by then to avoid breaching its loan terms.

The food group is heavily indebted but is a viable and profitable business and is expected to say in an update tomorrow that trading has been good.

The company's products, which include Campbell's soups, Angel Delight and Branston Pickle, are seen as recession-proof and therefore attractive to strategic investors.

Goldman Sachs, Premier's adviser, has sent out information memorandums to a number of private equity funds and hedge funds offering subscriptions to a share placing by it.

Blackstone, Lion Capital, Bain Capital and Permira are believed to be among interested potential buyers. Private equity bidders are expecting an update from Premier on the deal at the end of this month.

The share-placing, which would be completed alongside a rights issue underwritten by Goldman, is expected to give the new investors about 40 per cent of the company.

The exact structure of the deal is undecided but last month Premier promised that any deal would give full consideration to the rights of its existing shareholders.

However, analysts with JPMorgan gave a warning last week that the deal was likely to be a “dilutive equity-raising exercise”.

If the deal is completed, it will be the first example since the credit crunch of private equity taking a minority stake in a public company.

TPG offered to take a stake in Bradford & Bingley before it was nationalised but pulled out at the last minute.

Because debt for leveraged buyouts has dried up, private equity firms have been forced to look for other ways to invest their money.

Pipe — Private Investment in Public Equity — transactions, in which private equity houses take a minority stake in a company for a relatively short period and then sell it on when the markets improve, are a much-vaunted but little-used alternative for private equity investors.

Premier sounded out buyers for some of its assets last year but decided against selling star brands such as Mr Kipling because buyers' inability to raise debt has depressed selling prices.

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