The FSA has sent a questionnaire to every investment trust group, asking them to provide details of ...
The FSA has sent a questionnaire to every investment trust group, asking them to provide details of their levels of bank borrowing and what proportion of their holdings are in income and split cap shares.
According to the FSA, this is part of an overall scheme to assess the market impact of the events of 11 September and the uncertainties it has caused.
The FSA denies this is a particular focus on split caps, which, as highly geared vehicles, are at risk if the market falls even further.
As equity holdings shrink, it raises a split's gearing levels as a proportion of its NAV, so prolonged underperformance may encourage banks to call in some of the debt.
Paul Glover, investment trust analyst at Collins Stewart, said that at the moment, there are around a dozen split-caps in breach of their banking covenant and another dozen about 10% away from being so.
'This may not be as bad as it seems however as a number of trusts have cash offsets that allow them to remain within their permitted covenant ratio,' he said.
Daniel Godfrey, director general of the AITC, said the trade body has been talking to the FSA since the beginning of the year in regard to the risks attached to splits. He said: 'We have been talking about the fact that a number of splits have been restructuring recently to take them away from breaking covenant levels, and assessing the risks to the sector if the market goes down again. Those also at risk would be the highly geared funds and those with high levels of holdings in other split trusts.'
Andrew Watkins, head of investment trusts at Jupiter, said it is hard to tell the number of splits that have breached their covenants because the trusts are not obliged to say they have done so.
He said it is only clear that a split cannot pay back its bank debt when it makes an announcement that it is reconstructings Watkins added: 'Although there have been a number of reconstructions, this is a better choice than winding the trusts up. It must be regarded from the shareholders' point of view, and restoring the cover and protection of the split is better for them than ending it altogether.'
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