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Mr Howard Covington
Chief Executive
New Star Asset Management Ltd
1 Knightsbridge Green
4th December 2008

Dear Mr Covington,

I’m at a loss to understand several actions of New Star Asset Management Ltd’s management over the last 18 months. Namely the following:

1. Why did New Star leverage the balance sheet through a cash distribution of GBP 363 million, resulting in greater risk for shareholders, when your own leading indicator pointed to increased risk of an economic slowdown or even a recession?

‘..New Star’s leading indicator of global monetary conditions turning negative. This indicator ……has turned negative before the 10 downswings within the G7 since 1965- either economic growth slowdowns or full-blown recessions’   (John Jay- Director, New Star Asset Management, Newsletter ‘Investment Star January 2007’).

2. Why did New Stars directors not address the cost issue earlier, in view of the concerns over corporate indebtedness expressed by your own fund managers?

Jamie Allsop, Hidden value Fund Manager: ‘Companies with high levels of debt or leverage are going to find it difficult as interest rates rise further’

Richard Lewis, New Star European Leaders Fund Manager: ‘Higher bond yields and tightening credit markets are posing a challenge to financials and highly indebted companies, and the fund has being avoiding them’.

Theodora Zemek, Fixed Interest Fund Manager:‘The fund … was structured to reflect awareness that the economic cycle was maturing. Positions were, therefore, taken in more senior bonds issued by companies with reliable earnings and balance sheets that were not aggressively leveraged’. (All quotes are from the July 2007 New Star newsletter ‘Investment Star July 2007’)

3. Why did New Star Management fail to explain to shareholders the risks to the business of falling revenues and a high level of debt? The issue of a high level of debt within the business wasn’t highlighted by management until November 14th.

29th August 2008 John Duffield, Chairman, says in the Interim Results to June 30th:

“As expected, the first half of 2008 was a difficult period for New Star. The trading environment remains difficult and we do not expect conditions to improve in the immediate future.

“We remain confident that through a combination of investment performance, marketing and service we can return over the medium term to generating significant value for our shareholders. We believe the long-term outlook for our company is good.” [my bold]

No comment on debt at New Star except this: ‘As we signalled in January, we intend to continue using our cashflow principally to reduce further our net debt, which had been reduced to £241 million by the end of June.’ (Source- Company website)

14th November 2008. Interim Management Statement [debt issue moves up the agenda]

‘New Star has agreed with its bank syndicate that the financial covenants in respect of its debt should be amended to better accommodate the current unsettled trading environment. This amendment has immediate effect. As a consequence of the amendment the interest rate on New Star’s debt has increased by 1.5%. The debt remains repayable in a single payment in June 2013. New Star has not at any time been in breach of its financial covenants.’

‘Our banks understand our position and are supportive.'( Source- Company website)

21st November 2008. Company announcement on Reorganisation [only a week after Interim Management Statement debt issue now top of the agenda]

‘We announced in our interim management statement that we had successfully negotiated with our banks to amend our banking covenants. This was an important and positive step forward for our company. Following that announcement we are moving swiftly to restructure our fund management activities in response to the bear market and to specific areas of underperformance’. [this relates to fund performance, not something that can be changed overnight, but will take months and years to resurrect]

3rd December 2008. Company announces Capital Restructuring

‘New Star announces a proposed Restructuring that will result in £240 million of its £260 million of gross debt being converted into equity .

New Star currently has £30 million of cash so that, if the Restructuring were effective today, New Star would be left with net cash.

New Star’s bank syndicate will own 75% of New Star’s enlarged 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 intends to de-list as part of the Restructuring’ [sorry shareholders, you’ve been screwed]

4. Mr Covington, why on September 9th 2008 did you sell 2 million shares at 100.6651p, more than 40% of your holding, leaving you with 2.8m shares (Source: London Stock Exchange, Digitallook). Do you think Mr Duffields statement of August 29th (above) was overly bullish, and not reflecting the true risks at New Star Asset Management?

I look forward to your response.


Simon Winfield


This is the man who called the Stagecoach (SGC 140p) share price absolutely right. Yes, that’s right, the CFO Martin Griffiths.

Since July 24th (see copy of note below) Stagecoach shares have halved in price, and are down 37% relative to the FTSE 100.

Following the recent results (‘Stagecoach to cut jobs as recession looms’– Bloomberg) I am closing my negative call with a 51% absolute return.

Can I point out to shareholders that on October 29th the company announced in their Trading Statement that ‘the outlook for the Group remains positive’ (Source Stagecoach Group website).

I might be so bold to suggest that Mr Griffiths ‘outlook’ expectation must have differed substantially from the markets interpretation of a ‘positive outlook’, and that Stagecoach failed to acknowledge and relay this difference to the market in an appropriate way. Why else would Stagecoach’s share price be down 32% since the October 29th Trading Statement?

But Griffiths’ real skill was selling shares on the realisation that things couldn’t get any better. People switching to public transport, fuel prices starting to come down, premium valuation due to ‘non cyclicality’ of the business.

Addendum Friday December 5th: Stagecoach yesterday announced two share purchases by directors as follows:

Non exec Sir George Mathewson (of Scottish banking fame) bought 35,000 shares at 139.39p on December 4th, initiating a holding.

CEO Brian Souter bought 2.085m shares at 138.96p on December 3rd, taking his holding to 106 million shares.

These purchases do not yet warrant a positive view on the stock, as in % terms Souters is too small as a proprtion of his existing position, and Mathewsons position as a proportion of his net wealth must be assumed to be very small. Note of July 24th 2008:

Stagecoach – CFO Griffiths thinks it’s time to take profits

Martin Griffiths, CFO of Stagecoach (SGC 275p) is taking his money off the table.

As at the beginning of June he held Executive Share Options over 479,000 shares, with varying exercise periods, starting in June and December 2006 and December 2007, and extending mostly to June 2010, with some as far out as December 2011 (Annual report).

Griffiths exercised all 479,000 between 26th of June and 8th July this year, which cost him £365k.

He sold all of them them on the same dates, realising £1379k, a net £1m in his pocket.

Why do I think this significant?

  • He had another 2-3 years before he needed to exercise these options, but chose to exercise and sell now.
  • This 479,000 shares is the total amount in his Executive Share Option pot*. Griffiths today owns less than 20,000 shares.
  • When exercising options, directors usually sell sufficient to pay the tax man and hold on to the rest. Not in Griffiths case. He has exercised and sold the lot.

Griffiths behaviour and the subsequent risk profile of his remaining ‘Plan’ shares indicates to me that the risks to the Stagecoach shares outweigh the medium term returns. So I’d follow Griffiths and take some money off the table too.’

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December 2008