Up to 20 split caps 'in danger of breaching banking covenants'

Up to 20 split capital investment trusts may be on the verge of breaching their lending agreements with banks, threatening to wipe out the value of investors' holdings and weaken the whole investment trust industry.

The problem could also damage the reputation of a number of blue chip names such as Aberdeen Asset Management and Jupiter Asset Management, which are involved with split capital trusts.

Split caps are vehicles which allow investors to hold shares for a variety of purposes. The funds, which are invested in the stock market, offer shares for income or shares for growth, mainly known as zero dividend preference shares.

Concern is heightening about the trusts, which are usually highly geared, as the fall in the stock market in the last month has heightened pressure on their already depressed asset values. If share prices fall further, a number of funds may see their level of assets dip below the allowed level in relation to their debts.

Bestinvest, a brokerage, has identified a number of funds which it believes may be on the verge of breaching their banking covenants. These include six split caps managed by Aberdeen Asset Management, such as its European Monthly Income Fund and its Technology & Income Fund. Last month Jupiter breached its covenant to Royal Bank of Scotland on its Investment Trust of Investment Trusts and had to raise fresh equity to restore its ratio of assets to debt to the specified level. Aberdeen yesterday was unable to comment because, a spokesman said, senior people were locked in meetings to discuss the trusts.

Jason Hollands, deputy managing director of Bestinvest, said: "Trusts are flailing around trying to raise money but in the next three weeks or so we could well see one trust break its covenant and then it will be like a pack of cards."

Fears about the soundness of the sector surround the fact that many trusts invest in each other – the so-called "magic circle" – which means that if one goes bust, others may follow. In such a situation, banks would be first in line to recoup their investments followed by holders of zero shares.

This problem was first highlighted by Rupert Walker, a bond portfolio manager at Govett Investments, who was this week dismissed after he alerted the press to the problem.

One banker close to the split caps industry said he was watching the situation closely but was confident that most trusts were within their covenants. He predicted that some of the smaller trusts would be forced to merge while others would have to release new equity.