Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 580-599)



  580. They also have another two things, or some of them have another two things. Some of them have cross-funding and a lot of them have had assets in the information technology field, which—

  (Mr Fishwick) Can I just take that?

  581. Mr Gilbert nods and you disagree?

  (Mr Gilbert) No, I defer to my colleague. He is more expert.
  (Mr Fishwick) I would like to answer the question. I was pilloried for not answering questions last time. Very few of the split capital investment trusts were ever invested in technology. There were only four or five of that 135. I do not know where this misconception has come from on technology. Technology could halve again and it would make no difference to the split capital sector. It is not an issue. Cross-holdings or investment in other split capital trusts is not an issue either. All that damage has been done; that has occurred in those 19. That is finished. The problems going forward are different problems. The problems are in equities and if European equities do not rise, the trusts will get into trouble. They will not get into trouble because of cross-holdings because they are down to nil virtually. They will not get into trouble because of technology because there is none. Other things will get them into trouble. I think it is naive to say that if stock markets fall and you have got a lot of debt, you will survive. It is just common sense that you will not.

  582. So it is down to borrowing against market conditions.

  (Mr Fishwick) Yes.

  583. Mr Fishwick, why does that not then apply to the rest of the investment trust sector?

  (Mr Fishwick) It is very, very simple. It is about the amount of borrowing you have. If you have £100—

  584. Go on, Mr Fishwick. You are answering my question.

  (Mr Fishwick) Obviously everyone else understands the answer. If you have £100 of assets and £50 of bank debt now and the market falls by 25 per cent, you will survive.

  585. Mr Fishwick, the point I am trying to make is about confidence. You have highlighted confidence.

  (Mr Fishwick) Yes.

  586. When I take you through what has caused the 35 to be candidates for death, you say there is nothing different about their borrowings. Why are you so confident that none of the rest of the investments trusts have borrowings that will lead to the same fate? Why only these 35? You are so confident about these 35 but not about the rest?

  (Mr Fishwick) Because I have got the data.

  587. The data you gave us five minutes before the meeting?

  (Mr Fishwick) Yes, and we apologised for that because it is not our data.

  588. So in your data that you have had time to analyse none of the rest of the investment trusts have borrowings that would lead to them coming into this dangerous category?

  (Mr Gilbert) Unless markets fall.
  (Mr Fishwick) Or unless something hits you left field that you do not see.

  589. It falls further?

  (Mr Fishwick) Yes. There could be something that comes left field. It might be a fund that is invested in Europe and Europe halves again, completely collapses, the currency falls into disarray and it could hit you left field. What is interesting is that the ones which are most geared are not necessarily the ones that get knocked over because if the assets fall faster in another sector that you have, you are in trouble.

Mr Cousins

  590. Mr Fishwick, did the bankers or the auditors of any of your trusts that you were involved with that have now collapsed ever approach you with that very simple point you have now put to the Committee?

  (Mr Fishwick) Oh, very much so. We were in constant dialogue on a weekly basis with the bank—auditors, no. I do not know if you have ever borrowed money from banks seriously. They spend an awful lot of time looking after it. What you do with the bank is provide to them a daily covenant. You tell them every day how much assets you have against debt and they are aware of it and there are levels. The minute you get to those levels, they are on the phone. One of the reasons I did not attend last time was because I was in a difficult syndicate meeting with the banks, trying to repay money for one of our funds. The banks are completely on top of it. They do not lend you money without taking care. So these trusts are actually supervised and watched by more than any other investment medium anywhere.

Mr Tyrie

  591. I want to ask one or two simple questions. First of all, roughly when did splits get into borrowing heavily from banks?

  (Mr Fishwick) They started to borrow heavily when there was a huge differential in the cost of borrowing and the cost of zeros, roughly when interest rates got down to about 6 per cent and zeros were still costing you about 8.5 to 9 per cent. That is when it began.

  592. Which is roughly when? I do not need exact dates. I am not going to bring you back next week and say you told me a year out.

  (Mr Fishwick) I think early 1999.

  593. About 1999?

  (Mr Fishwick) Yes.

  594. Am I right in thinking that because banks are higher up the debt hierarchy, it was the calling in of the money from the banks that led to the collapse of many of these splits and that therefore effectively it is that new aspect of splits which is the chief single ingredient in the collapse?

  (Mr Fishwick) I think it is one of the ingredients. I would not like to sit down here and try and attempt to put the blame on anyone else or on the banks but banks, when they perceive that their loans may not get repaid, it is their job—

  595. I am talking about the design. I am not talking about apportioning blame.

  (Mr Fishwick) You have got a falling asset. If the assets did not fall, it did not matter if—

  596. We have been through all that endlessly. If you buy something and the price goes up, then it is a great buy. I am only interested in the structure. If it is the case that when you started borrowing from banks you had created what was really quite a different form of financial vehicle from the one that split trusts with zeros had always been historically, to what extent did you alert people that there had been this change in character of the vehicle?

  (Mr Fishwick) If you read every prospectus that has ever been published, the situation with regard to the banks' position is very clearly stated; it has to be.

  597. In retrospect, do you think that it was legitimate to have carried on describing splits with high levels of bank borrowing as low risk?

  (Mr Fishwick) I do not believe anyone that I am aware of described splits as low risk. They described portions of them, slices of them maybe, but they never described the whole company as that.

  598. Are we not dealing with two quite different animals here? We are dealing with traditional splits which were much lower risk, which historically had been low risk, which had not borrowed from banks, which could not be brought down by banks calling in their money on the one hand, pre-1999, and post-1999 a completely different animal, an animal that looked outwardly like a split but actually had a key, fundamental potential weakness in the event of a downturn in the market which the pre-1999 splits did not have, which was that they were borrowing from banks which could call the money in and effectively, as you put it, the break costs virtually destroyed these trusts. Is that not the case?

  (Mr Fishwick) It is part right actually, but not totally because—

  599. I will accept "part right".

  (Mr Fishwick) Can I try and help you with the answer because I think it is a very, very good question. I think it is one of the key questions I have heard in the last year. It is right at the heart of the matter, quite frankly: should the sector have said that it has changed dramatically with the introduction of bank debt? It is a very, very good question. It is directed at me but it could be directed at anyone in the sector, the listing authorities. Should we have said it has changed? It is a problem. However, all the trusts—

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