Split capital trusts crisis deepens as Quilter is suspended

The Split capital investment trust industry was plunged into fresh turmoil yesterday when Quilter Global Enhanced Income Trust was forced to suspend its shares because it has run out of money.

Quilter was last night locked in talks with its banker, Bank of Scotland. The fund may now be run down to pay off bank debt or the bank may appoint receivers. The fund has assets of £26m and bank debts and other costs of £24.5m. In addition it is obliged to pay dividends on preference and ordinary shares.

It is possible that Bank of Scotland will grant Quilter, which is owned by the investment bank Morgan Stanley, another loan. But this is unlikely as Quilter was already forced on Tuesday to say that credit it had arranged at the beginning of the year had fallen through because its assets' value had fallen so far that it could not service the debt.

One person familiar with the situation said: "The company was in pretty dire straits since 11 September and now it has reached the end of the road."

Shares in Quilter's Global Enhanced fund have slumped by 93 per cent in the last 12 months and were suspended at 2p. The fund epitomises many of the fears circling in the investment trust industry about the soundness of split caps, which were designed for investors to pursue either growth or value.

It was launched with high amounts of gearing in March 2000 when the FTSE 100 was over 6000 and, as a fund of investment trusts, held 65 per cent of its assets in other split caps.

It is understood that as well as suffering from a decline in the markets, the fund has breached its banking covenants because income from dividends on cross-holdings has been slashed.

The problems Quilter has run into are likely to have negative consequences for funds which are invested in it. These include Aberdeen Asset Management, which is highly exposed to the split capital industry and holds 30 per cent of the Quilter Enhanced Income fund in various funds it manages.

Gary Marshall, Aberdeen's marketing director said: "Exposure to any one fund is pretty limited and as Quilter's shares had already fallen to 2p, the difference between that and nil doesn't make much difference."

The Financial Services Authority is investigating cross-holdings in split cap funds, known as the "magic circle".

Separately Exeter Investment warned that pre-tax profit for the second half of the year would be "substantially below" the first half due to tough conditions in the investment trust sector. John Wynne, finance director, said the firm had been hit by reduced fee income as investments in split caps had fallen in value. Exeter's shares fell 17 per cent to 252.5p.