Premier Foods is expected to announce a shares issue to raise about £400m this week, say city experts.

The food giant has provisionally scheduled its full-year trading update for this week and is expected to use this to announce the measures it will take to reduce its debt.

The company paid its lenders £5m to delay a crucial test on its banking covenants by three months, from 31 December to 31 March. However, CEO Robert Schofield said Premier would ha ve passed the test had it been carried out in December. Speculation on how Premier would reduce its debt initially centred on selling off key brands or raising money through private equity, but issuing new shares is now seen as the favoured option.

"Following several major rights issues by leading companies in other sectors (such as Rio Tinto), it's now seen as more viable ," said one financial source.