Lloyd's managing agent Trenwick is set to undergo a management buy-out (MBO) from its US parent company.

It follows the announcement that Trenwick's US holding company has been downgraded from C to D by ratings agency AM Best.

Market sources say that, although the US holding company is in severe financial difficulty, the UK operation has performed well and its management is anxious to preserve the business.

A Lloyd's underwriter said: "Michael Watson [Trenwick's UK chairman and chief executive] has done a fantastic job at Trenwick and he's determined to not let the UK operation wither.

"I expect to see some MBO activity at Trenwick very soon."

A source close to Trenwick denied that an MBO was imminent, but did say that the UK operation was looking for new investors.

"It's true that Trenwick's UK operation is looking for alternative sources of finance other than the Trenwick Group.

"But whether this will take the form of an MBO remains to be seen," he said.

Last week, ratings agency AM Best downgraded the debt rating of Trenwick's US holding company, Trenwick America Corporation, from C to D.

"These ratings actions follow the company's announcement that it defaulted on senior notes due on 1 April 2003," said AM Best.