Framlington dividend axed after asset plunge

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The Independent Online

Investors in the split capital investment trust industry experienced further misery yesterday when two trusts were forced to take drastic action as a result of a plunge in the value of their assets.

Investors in the split capital investment trust industry experienced further misery yesterday when two trusts were forced to take drastic action as a result of a plunge in the value of their assets.

Framlington Split Income Trust announced that it would not pay a dividend to shareholders because its assets have fallen dramatically. The statement came after the trust had said in June that it would pay a dividend of 0.75p. Its shares slumped 63 per cent to 7.75p.

Framlington has gone back on the undertaking because its assets have fallen below a key threshold. According to section 265 of the Companies Act, investment companies are supposed to have assets that cover liabilities by more than 150 per cent.

The Framlington trust, which invests heavily in the troubled split capital sector, did have coverage of 160 per cent when it said it would pay its dividend, but assets have now fallen below 150 per cent. It also announced that it has sold some of its portfolio in order to repay £4m of its debt to banks.

Paul Branigan, a senior fund manager at Framlington, said: "We could have reduced bank debt to the point that we could have paid a dividend, but the Companies Act is there for good reasons and there is no point doing somersaults to pay the dividend."

Mr Branigan said the trust's management thought further reduction of liabilities and keeping a substantial cash holding was "paramount".

Separately, Geared Income Investment Trust plc suspended its shares because the split capital trust owes banks more than its assets are worth.

BFS, which manages the fund, asked regulators to halt trading after the shares were left all but worthless, trading at 0.25p. They have fallen 99 per cent in the past 12 months.

Geared Income said in March that the trust had breached its banking covenants and it was in talks with Bank of Scotland and Lloyds TSB about its future.

Tony Reid, the chief executive of BFS, said the company asked for the shares to be suspended in the trust because it was "without asset value".

"This is very disappointing because Geared Income was originally BFS's flagship fund," Mr Reid said.

The trust, which is invested entirely in other splits, attempted to reassure investors that it would not be forced into a liquidation immediately, saying: "The group continues to have the support of the banks."

But Mr Reid added that it was "entirely up to the banks" to decide whether they wanted to foreclose on the trusts. Banks that have lent to split caps, so called because they are made up of both income and growth shares, have so far been reluctant to foreclose because that would mean crystalising massive losses in the current falling markets.

Split capital trusts, many of which are highly geared, are under pressure as stocks fall for a third straight year, prompting them to cancel dividends and break lending agreements.

Aberdeen Asset Management, a major player in the split cap sector, said on Friday its Media & Income Trust had appointed receivers to wind up the fund after the value of its assets fell below the amount of its debt.

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