Split-caps in covenant risk

Split-capital investment trusts could be in danger of breaching their covenants if stockmarkets continue to plummet

With the sector already under pressure, analysts have warned that further market falls will increase split-cap gearing levels, in many cases sending them over their bank&#39s agreed limits.

But Christows head of investment trusts Nick Greenwood believes banks are likely to be lenient to trusts under the circumstances, giving them the chance to raise new money or sell off assets. He also believes the split market will be prepared to deal with any further market falls.

Greenwood says: “The split market has been under pressure for a while so they will have speeded up reaction time. I think the banks will be accommodating. It is in their interests to relax covenants.”

Hargreaves Lansdown director of equity investment Alan Durrant believes it is too early to take a view on the whole sector. He says: “It is much too dangerous to be generalist. There are some splits that are already quite below their banking governance and could go bust but there are quite a few which are still looking strong. To take a sector-wide view is too generalist.”

Many conventional investment trusts are also trading at three-year lows, with some analysts calling this week a strong buying opportunity.

Durrant says: “These are the times when people can make a lot of money. People are selling stocks without thinking whether they need to be. People are panic selling.”