Trusts capitalise on low rates to refinance debt

Trusts capitalise on low rates to refinance debt

Investment trusts have taken the opportunity presented by low interest rates to refinance the debt they hold. 

In an update to the market yesterday (August 12), Andrew Bell, chief executive of the £2.2bn Witan investment trust confirmed he has secured a £50m borrowing facility for the trust, with the annual interest rate fixed at 2.39 per cent until 2051.

Mr Bell said: “This is the lowest issuing yield in the sector in living memory for such a long maturity and well below expected investment returns from equities.

"In the long-term the board anticipates that locking in such a low yield will be of considerable benefit to shareholders.”

Unlike unit trusts, investment trusts can borrow money to make investments. This benefits clients if the fund manager can achieve a return on the borrowed money which then goes to shareholders. 

However, if the trust makes a return lower than the rate of interest on the borrowed money, then investors' capital would be used to repay the debt.

Mr Bell’s actions at Witan mirror those deployed by the board of the Merchants Investment Trust and the Brunner Investment Trust.   

The board of the Merchants trust announced at the start of July that it has renegotiated the existing debt pile, with the prevailing interest rate environment allowing it to repay old debt with a new loan, and consequently halve the overall cost of debt from 6 per cent to 3 per cent.  

The board of the £638m trust believes this would amount to cost savings of £2.9m a year.

Simon Fraser, chairman of the trust, said: “ The refinancing of the company’s long-term debt – introducing a balance of short-, medium-, and long-term debt enables the board to manage gearing more proactively. 

"This will not only lower the cost of debt in a significant way and benefit performance, it will help us carry on our legacy, so we can continue to build on our 37 consecutive years of dividend growth.

"This refinancing supports Merchants’ objective of delivering an above average level of income and income growth, together with long term growth of capital, through a policy of investing mainly in higher yielding large UK companies.”

Lucy McDonald, chief investment officer for global equities at Allianz and manager of the Brunner Investment Trust, refinanced long-term debt in 2019 as part of a wider plan to reshape the types of investment in the trust, while maintaining the dividends.

The refinancing cut the cost of debt on the trust from 9 per cent to 3 per cent, with the extra cash being used to fund the dividend, while Ms McDonald sells some of the slower growing income stocks she owns and replaces them with technology companies she believes have greater growth potential.