Examination of Witnesses(Questions 580-599)|
TUESDAY 29 OCTOBER 2002
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
(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
(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
(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
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
587. The data you gave us five minutes before
(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.
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 bankauditors,
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.
591. I want to ask one or two simple questions.
First of all, roughly when did splits get into borrowing heavily
(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
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