This morning has seen the suspension of shares in New Star Asset Management as the group battles mounting debts and announces advanced talks with its bankers. The group is said to have debts in the region of £230 million and while ongoing talks with the banks are said to be constructive, the group requested that the London stock exchange suspended the shares to fend off further selling pressure.
The company had requested a suspension when the shares were 14p although this was initially declined by the stock exchange and the shares remained trading until a further fall to 5.8p at which point they were suspended. This represents a 97% fall from the £4.50 high reached just 18 months ago when the company was very much in demand by investors. The company is dominated by major shareholder John Duffield who has a history few others in the city can compete with which saw his management company attract serious investment when it was started only a few years ago.
The property crisis
Even though the company still has a £14.3 billion of assets under management, this is a serious reduction from the £19.8 billion at the end of June. The company’s main flagship fund is the International Property Fund which has been severely impacted by the property crisis around the world which has spooked many investors. Indeed the first signs of trouble came last week when the International Property Fund was suspended which meant that investors were unable to sell their shares and the company was able to avoid a serious fire sale of assets to cover redemptions.
Chief investment officer Steven Whittaker was also axed from his post even though he is regarded as one of the most successful fund managers of his generation and was pivotal to the early success of New Star Asset Management. The suspension of the property fund offers the company a small window of opportunity during which they will try to introduce an orderly sale of some assets and possibly increase liquidity from third parties to avoid a total fire sale of assets.
The future of New Star Asset Management
Those close to the situation and are suggesting that even if the group is able to renegotiate its substantial debt mountain and survived the ongoing property and stock market turmoil, it could well become a tasty morsel from any of its competitors who will be more than happy to take on £14 billion of investment assets at rock bottom prices.
However, John Duffield isn’t likely to sit back and watch his empire dismantled by third parties and even though his company is down and out at the moment he is still very influential within the city and has friends in very high place. He is not afraid to court controversy either as shown by his decision to leave his former employer and set up his own business which became New Star Asset Management.
Property shares in general
The property sector of the stock market has been under serious pressure of late with asset values falling further and further and debt increasing at an alarming rate. Many companies have also seen pressure on their rental income with those tenants still active often unable to afford the traditional annual or biannual increases and many tenants actually going out of business. Rental income is a vital element of any property company as this is what is used to pay down often excessive debt levels which are backed by property assets.
The double whammy of falling rental of income and falling asset values has pushed a number of companies and property funds towards their banking covenant limits and the following months should see more and more companies announce refinancing discussions with their prime lenders. Whether these lenders will be in the mood to extend credit or look to extrapolate as much money in the short term as possible remains to be seen. Whatever the situation, the property sector is set to feel the pain of the UK slowdown more acutely than many.
Property prices
Many of the property companies and property funds on the stock market are purely retail and business property plays and a fire sale of substantial assets is sure to have an impact upon the sector as a whole. This is a sector which is already under pressure with many retail outlets going under over the last few months (in excess of 1000 over the last six months) leaving many landlords with empty units and severely reduced rental income.
Even though there have been a limited number of companies stepping forward to take up some of these empty units, the new rental agreements are very often on lower rates than those of more recent tenants. This not only reduces income in the short term but also pulls back the rental base for the medium and longer term pushing landlords into a catch-up scenario.
Interest rates
Traditionally interest rates have been very closely linked to the property market although this current slowdown is like nothing the vast majority of people have ever seen before. Until the banks are able and willing to release more of their liquidity to the open market, a reduction in competition has seen the likes of New Star Asset Management having to take on a 1.5 percentage increase in borrowing rates in order to secure additional funding just a few weeks ago, prior to the ongoing banking discussions.
Until the sector stabilises at best we are set to see more and more property companies and property funds come under severe pressure as investors continue to flee the sector in their droves. At some point those companies and investors who are cash rich will no doubt start to pick up these distressed assets which can offer great value looking towards the longer-term. There has also been substantial interest from overseas property investors as sterling continues to fall and overseas currencies in general are now buying more pounds than ever before.
Conclusion
The New Star Asset Management situation is a reflection of the overall sector at this point in time and the ongoing battle between companies and their banking partners to secure their long-term futures. Historic property asset values are being discounted as they often bear no relation to the figures which would be raised in a fire sale. The longer this anomaly between quoted asset values and actual market values continues, the more pressure companies will feel and the more investors will start to panic.