Clock ticks for New Star

Financial experts have warned that New Star Asset Management has “days” to negotiate a debt-for-equity swap with its banks if it is to avoid potentially devastating outflows from their funds.

Shares in the London-listed group fell 50 per cent on Monday morning after it announced it was in talks with HBOS, Lloyds TSB, HSBC and RBS, which would leave the lenders owning a majority stake in the beleaguered fund manager.

Experts have warned, though, that if a deal is not wrapped up soon, there could be heavy outflows from the groups’ funds.

Mark Dampier, head of research at Hargreaves Lansdown, said: “People are clearly nervous and could start withdrawing money, which would be really serious.”

All current investors in New Star funds would see their money protected if the company were to fail. There are fears, though, that the group’s fund managers, whose bonuses are largely tied up in stock options, could leave if the share price continued to fall.

“There’s no risk [of] New Star fund investors losing their money,” said Gurjit Kambo, an analyst at Numis Securities. “But with the amount of uncertainty there is at the moment, I can’t imagine who would want to leave their money with the company. I wouldn’t.”

More than £530m ($786m) of assets were withdrawn from New Star funds between September 30 and November 13. Total funds under management were £14.3bn at that date.

The company asked for its shares to be suspended on Monday morning after issuing a short statement saying it was in “advanced and constructive talks” with its lenders. “A further announcement will be made as soon as possible,” it said.

But this request was refused by the Financial Services Authority, after the regulator rejected the company’s argument that its talks with banks had created a false market for investors.

The announcement of the talks follows a string of setbacks for the company, culminating in last week’s decision to suspend trading in its flagship European Property fund.

Martin Gilbert, an old friend of New Star’s founder John Duffield, moved to quash rumours that his company, Aberdeen Asset Management, would buy out the struggling asset manager. “We would not be prepared to take on debt in this market,” he said.