Nick Greenwood, head of investment trusts at broker Christows, is warning that share prices across t...
Nick Greenwood, head of investment trusts at broker Christows, is warning that share prices across the split capital investment trust sector have gone off a cliff since mid-February and now threaten the covenants in place between many such trusts and their bankers.
According to a selection of 10 shares from the sector, including ordinary and zero dividend preference shares, prices have dropped by up to 70% in some cases just in the past few weeks.
Greenwood says there are a number of factors explaining this trend.
"At this time of the year, there are plenty of retail investors selling to establish tax losses. Market makers do not want to take those shares onto their books as demand for these securities is virtually nil. Therefore they are attempting to duck by either slashing prices to make their bids unattractive or selling immediately to other market makers or both. This has created a vicious downward cycle."
"There is anecdotal evidence which suggests that trades of as little as £500 have triggered multi-million pound falls in the market values of individual trusts. Additionally there is a concern about the deathly silence surrounding the reconstruction of cornerstone split on split funds such as Quarterly High Income and Geared Income."
If the situation continues it could lead to some big problems for the sector, Greenwood adds, particularly as covenants come under increasing pressure, although it is hard to predict exactly what their reaction might be.
"A liquidation solution cannot be in their interests as a firesale would yield vastly lower prices than exist even today."
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