Another split capital trust runs into financial problems

The board of the distressed split capital investment trust Geared Income has written to shareholders to tell them that under stringent new arrangements with its bankers, any income it makes will be used to repay debt rather than pay dividends to investors.

The board of the distressed split capital investment trust Geared Income has written to shareholders to tell them that under stringent new arrangements with its bankers, any income it makes will be used to repay debt rather than pay dividends to investors.

Despite the fact that there is no prospect of a return for existing or new shareholders until further notice, the trust is continuing to trade on the Stock Exchange.

This is in contrast with another trust, Quilter Global Enhanced Income, which last week suspended its shares amid rumours it had gone bust. Quilter's bankers, Bank of Scotland, may agree to more emergency financing but it is more likely that the bank will call in receivers.

Geared Income, which holds around 80 per cent of its investments in other split caps and is managed by BFS Investment, has come in for criticism for the way it has handled the situation.

The board alerted the Stock Exchange on 8 March that it had broken banking covenants and said it had suspended dividends and would use "surplus income" to pay banks and holders of loan notes.

Nigel Sidebottom, a BFS director, said: "The circular is not saying anything new. It is the details behind the RNS [Regulatory News Service] announcement, which we put out first because we wanted to let investors know quickly what was happening."

But analysts feel that the details of the deal withBank of Scotland and Lloyds TSB were market-sensitive and should also have been announced to the Stock Exchange as well as to shareholders through a circular that was sent on 29 March.

One analyst said: "If I had been thinking about making an opportunistic buy of Geared Income on the basis of the Stock Exchange announcement, I would have felt fairly uncomfortable with the details of the agreements with the banks which only emerged in the circular because they are much more stringent."

Geared Income, which has seen the value of its assets collapse by 60 per cent in the last year, says in the circular that BoS and Lloyds are clamping down on the types of investment they are prepared to count as assets.

No longer valid are investments in other split caps which are themselves heavily cross held within the industry. By not allowing Geared Income to use these as assets, it has substantially increased its level of debt.