/ LONG-TERM DEBT /
RVIVORS
that the interest rate you agree upon for that debt will not be such good value in the future . While it is a bet that has backfired spectacularly for a number of investment trusts in the past , many are now taking advantage of rock-bottom interest rates to secure cheap long-term debt .
SIGNIFICANT IMPROVEMENT Witan has arranged the longest financing agreement at 37 years , paying a 2.74 per cent rate on the £ 30m debt , according to data from Numis . City of London has secured a 32- year £ 50m arrangement at 2.94 per cent and Merchants £ 35m for 35 years at 2.96 per cent .
More recently , in March , Foreign & Colonial took on £ 75m in debt – equivalent to 2.1 per cent of its assets – for 30 years at 2.92 per cent . This represents a significant improvement on long-term debt it has taken out in the past .
Paul Niven , manager of Foreign & Colonial , says :
“ An 11.25 per cent debenture seemed like a good idea when the base rate was 13 per cent but , with the benefit of hindsight , I ’ m not sure we made sufficient excess return to warrant that borrowing decision .”
As a result of maturing debt and refinancing , F & C has seen the weighted average cost of its debt drop from 7.1 per cent at the end of 2013 to just 2.5 per cent today . The trust currently has £ 260m of gearing , equivalent to 7.2 per cent of assets . This ranges from £ 50m at 1.12 per cent due to mature this year , to $ 80m at 4 per cent maturing next year , with the longest debt
– worth £ 50m – set to mature in 2031 . Niven says he is looking for further longterm debt opportunities while rates remain attractive .
MILLSTONE The average interest rate paid on borrowings at the City of London Investment Trust currently stands at 8.8 per cent , owing to some legacy debt . One debenture at 10.25 per cent is due to mature in 2020 , and another at 8.5 per cent will end in 2021 , with manager Job Curtis saying he will be pleased to see the back of them . “ They have been a bit of a millstone ,” he adds . “ I was involved in the decision to take on the 8.5 per cent debenture in 1997 [ but ] it was the prevailing rate at the time .”
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