The retail investment business’ proposed restructuring will see £240 million of its £260 million of gross debt being converted into equity.

The move means that New Star’s bank syndicate will own 75 per cent of it’s fully diluted ordinary share capital and £94 million out of £100 million of new convertible redeemable preference shares to be issued by New Star.

New Star says that the restructure will “leave it able to concentrate on its investment performance and client service as an unlisted company.”

“As the credit crisis has deepened since September, a number of New Star’s clients have signalled their concerns about its level of debt in the face of a possibly prolonged economic downturn.

“These concerns have been exacerbated by the recent, but unrelated, temporary suspension of dealing in its International Property Fund. The Board believes that the reporting requirements and public scrutiny that are part of being a listed company have served to magnify these concerns,” said New Star in a statement.

The new preference shares will entitle the holders to an annual dividend of 10 per cent. above LIBOR which will start accruing 6 months following issue, but the dividend will not be payable until 30 June 2013, and, until the new preference shares are fully paid, no dividends will be owed to ordinary shareholders.

During the restructure, in an attempt to “attract and retain key employees”, New Star has agreed on a senior management incentive scheme comprising warrants over a new class of ordinary shares representing 5 per cent of the fully diluted ordinary share capital.

“The Board recognised the concerns of our clients regarding the level of our debt during these difficult times. We have therefore taken this radical step to address these concerns completely and with one stroke,” explained John Duffield, chairman of New Star.

“We are now free to focus all our attention on improving our investment performance. Our existing share-based bonus scheme will be replaced by a new scheme to ensure that our key people are locked in.

“The cost of this restructuring is regrettably a substantial dilution for ordinary shareholders, including me. However in current market conditions, we have to recognise that there is no other option to ensure the stability of the business,” he said.

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