Quarterly High Income has outstanding bank debt of £36.9m with little chance of recovery
A number of distressed split-capital investment trusts are being kept alive by their banks despite having little or no chance of recovery just so the lender can avoid crystallising a loss.
The belief is that simply shutting down the distressed trusts will damage both the reputations and balance sheets of the lenders as any debt write-off would come straight off the banks' bottom line due to what is being perceived as inadequate provisioning for the loans.
By allowing the trusts to continue running, often with no management or directors' fees being paid, the banks can liquidate the portfolios over time at much lower expense than appointing an official liquidator.
However, even unpaid split-cap directors require PI insurance, for which premiums have rocketed in the wake of the sector's implosion. These burgeoning expenses could force banks to wind up some distressed splits against their preference.
Ron Solomon, split-capital trust specialist with Close Wins, said banks prefer to wait and see if conditions improve or take money out of the trust periodically as the portfolio is liquidated piecemeal, rather than face the prospect of a definite loss.
He added: 'I suspect no bank has actually taken a hit so far, because as long as the loss isn't crystallised, and the person in control can say to their superiors they are working the problem out and the bank will get its money back over a period, they won't take the issue any further.
'But if they have to write off an investment of say £30m, suddenly it's a problem the bank hierarchy will want to look at.'
Boards and trust managers prefer to maintain the trusts even if it means forgoing directors' or management fees to avoid the ignominy of failure.
'Directors don't particularly want to be directors of companies that go belly-up,' Solomon said. 'There is a big difference as far as your CV is concerned between being a director on a trust that goes into insolvent liquidation and one that goes into solvent liquidation.'
One trust still open despite having little hope of recovery is the Morley-managed Quarterly High Income split cap, which invested in other splits. With bank debt of £36.9m still outstanding and assets of just £8.9m, its creditors have allowed it to operate under a 'standstill agreement' since late 2002. This agreement has relaxed many of the covenants on the debt while the trust's management and creditors assess its likely future.
In its annual report for the 12 months to 31 December 2002, the board said the likelihood of any return to holders of its ordinary or zero dividend preference shares is 'very remote'.
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