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New Star's Lenders to Take Ownership

But can New Star keep its top fund managers?

Christopher J. Traulsen, CFA 4 December, 2008 | 11:36AM
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John Duffield's beleaguered New Star Asset management appears to have found a solution to at least some of its more pressing issues. The firm announced yesterday a plan that would give its lending syndicate 75% ownership in New Star, and also--critically in our view--attempt to lock in key fund managers.

New Star, whose assets under management had fallen to £13.9bn at 30 November amid poor performance from a number of is high profile funds, said the decline would "restrict its ability to service its debt in future." As part of the restructure, New Star proposes to de-list its shares. At the heart of the deal, the firm's lenders will convert £240mn (out of £260 million owed to them by New Star) and other borrowings into £94 million of convertible redeemable preference shares and enough

new ordinary shares to give the Banks 75% of New Star's fully diluted enlarged ordinary share capital (ex the preference shares). The preference shares carry a stiff annual rate of LIBOR +10%, which will come due on 30 June 2013.

So, the banks end up owing most of the firm, but the issue that is critical to owners of the firm's funds is manager retention. New Star's managers were tied to the firm in large part by significant equity stakes, the value of which has now dropped so far as to be insufficient to the task. New Star is attempting to address this in two ways. First, they are reserving £6 million of the convertible redeemable preference shares for a new incentive scheme. "Certain employees" will be granted "minimal cost" options on these shares. In addition, New Star will issue warrants on a new class of ordinary shares equal to 5% of the outstanding new ordinary share capital. The warrants will be used to incentivise key employees, and will vest over two years depending on profitability targets being obtained.

We will need more detail on the plan to arrive at a final judgment on its ability to keep key managers at the firm, but it appears to be a step in the right direction. New Star also needs to show that its new research structure--announced earlier this month when Stephen Whittaker departed--can deliver results. Aside from manager retention, another risk is that investor redemptions could become so strong as to interfere with day-to-day management of the funds or drive costs higher as a percentage of assets. We will continue to monitor the situation, but are encouraged by this latest step.

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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.