David Prosser: New Star no longer shines so brightly

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The Independent Online

Outlook: There are two ways to read yesterday's announcement from New Star that it has renegotiated its £236m debt at the cost of an additional 1.5 percentage points of interest each year, landing it with an extra £22m annual payment. Optimists will take heart from the categorical rejection of rumours doing the rounds in recent months that the asset manager was close to breaching its banking covenants. And the 9.25 per cent that New Star's creditors will henceforth receive is not generous compared to the cost of some financial service companies' debts (one imagines that Barclays, for example, would fancy a bit of that).

That New Star has had to take this step further underlines anxieties about the level of debt at the asset manager. It is, after all, an industry in which any level of debt on the balance sheet is relatively unusual.

John Duffield, New Star's founder and chairman, deserves his reputation as one of the great entrepreneurs of the fund management industry, having built not one but two highly valuable businesses. But Mr Duffield, who has until recently not put a foot wrong at New Star or his previous venture, Jupiter, does suddenly seem to be stumbling.

After all, the only reason that New Star has debt on its books was the decision last year to return capital – £1.25 a share, no less – to investors, which involved the business taking on a credit facility of up to £300m. In hindsight, that now looks to have been a mistake, though Mr Duffield could not have been expected to foresee the credit crisis and its devastating effects on stock markets and investor confidence.

More worrying though, has been the marked dip in the investment performance of many of New Star's funds. Mr Duffield's managers seem to have had even less foresight than their boss, remaining in financials, rather than switching to commodity stocks, for far too long. As a result, rather too many New Star funds are now underperforming their peer groups.

New Star's staff, 60 of whom are to lose their jobs, are already feeling the pain, as are its shareholders, who have seen the company's value collapse. The group's debt is not repayable until 2013 but, with additional interest costs to pay and no sign of an end to the bear market, Mr Duffield needs to apply his formidable willpower to putting New Star back on track as quickly as he can.

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