Debt for equity with New Star Asset Management

HBOS, HSBC, Lloyds TSB, National Australia Bank and RBS have agreed a debt for equity swap with New Star Asset Management, which will see the banks write off £240m of debt, in exchange for a majority equity stake in the listed UK asset management business. The deal has been agreed by banks and by the board of New Star, but will require shareholder consent to be executed.

Under the agreement, the banks will convert £240m of a total £260m of outstanding debt into a 75% stake in New Star, and receive £94m of a £100m issue of new convertible redeemable preference shares, paying an annual dividend of 10% over Libor. The restructuring calls for New Star to be delisted. If the restructuring is agreed, New Star will have a £30m cash balance and just £20m of outstanding debt.

While New Star was solvent prior to the restructuring, the asset manager had faced redemptions and struggled to win new investors given the level of debt in the business. According to outgoing CEO John Duffield, the level of disclosure which its listed status demanded also caused problems.

The banks that are set to become the company’s main shareholders have agreed to a senior management incentive scheme, comprised of warrants over a new class of ordinary shares, representing 5% of share capital. These will vest over the next two years, subject to profit targets. An addition £6m of preference shares will be granted to employees.