A consortium of banks that loaned GBP300m to New Star Asset Management just before the credit crunch erupted is to take control of the company in a debt-for-equity swap that will see the asset manager, founded in 2001 by John Duffield, delist from the London Stock Exchange. The deal is scheduled to be completed early in the new year.

HBOS, Lloyds TSB, Royal Bank of Scotland, HSBC and National Australia Bank will own 75 per cent of New Star's enlarged fully diluted ordinary share capital and GBP94m out of GBP100m of new convertible redeemable preference shares as part of a restructuring that will see GBP240m of its GBP260m of gross debt converted into equity.

Taking into account the convertible preference shares, the banks could end up owning 95 per cent of New Star, which was worth GBP500m at the height of the boom but whose market capitalisation fell to just GBP13m on December 3, following confusion after the UK Listing Authority denied the company's request to suspend trading in its shares.

New Star was undone by its borrowing early last year of GBP300m to finance a return of capital to shareholders, including the company's management and portfolio managers. The preference share issue includes GBP6m covered by options offered to staff as part of a new incentive package for fund managers. The latter received most of their remuneration in share awards and options, which have been wiped out by the collapse in New Star's market value.

The company says that as the credit crisis deepened since September, various New Star clients have signalled concern about its level of debt in the face of a possibly prolonged economic downturn, exacerbated by the recent unrelated temporary suspension of dealing in its International Property Fund. The New Star board blames board the reporting requirements and public scrutiny incumbent upon a listed company for aggravating investor fears.

The company also acknowledges that the steep fall in financial markets in recent months has resulted in a significant decline in New Star's assets under management and revenues. The fall in assets from a peak of GBP25bn in July 2007 to GBP13.9 billion at the end of November will reduce New Star's operating profits would have restricted its ability to service its debt in future.

The board says the proposed new capital structure aims to eliminate any negative impact of New Star's debt on its business, while retaining some potential value for shareholders, and will enable New Star to focus on restructuring the business, improving its investment performance and maintaining its client service.

Under the proposed deal with the banks, the preference shares will entitle the holders to an annual dividend of 10 per cent above Libor which will begin accruing six months following the issue, but which will not be payable until June 30, 2013.

The preference shares, together with the accrued dividend entitlement, must be redeemed on that date (or earlier out of the net proceeds of any disposal) unless New Star decides to convert the outstanding preference shares into ordinary shares, which would bring the banks' stake to as much as 95 per cent of the share capital.

No dividends will be paid on ordinary shares unless all accrued dividends on the preference shares have been paid first, without the consent of their holders. The balance of GBP20m of the current gross debt will also be repayable in June 2013. However, New Star does currently have cash in hand of GBP30m.

To attract and retain key employees, New Star and the banks have agreed on a senior management incentive scheme comprising warrants over a new class of ordinary shares representing 5 per cent of the fully diluted ordinary share capital, which will vest over the next two years subject to profit targets, in addition to the options GBP6m in preference shares granted to certain employees.

'The board recognised the concerns of our clients regarding the level of our debt during these difficult times,' says New Stat chairman Duffield. 'We have therefore taken this radical step to address these concerns completely and with one stroke. 'We are now free to focus all our attention on improving our investment performance.

'Our existing share-based bonus scheme will be replaced by a new scheme to ensure that our key people are locked in. The cost of this restructuring is regrettably a substantial dilution for ordinary shareholders, including me. However in current market conditions, we have to recognise that there is no other option to ensure the stability of the business.'