Gearing Liquidity and Risk · Investment Trusts

The amount borrowed is only part of the risk. The date debt must be repaid, the interest basis and the lender’s conditions can determine whether a trust has room to wait through a difficult market.

Map the obligations

Create a maturity table showing outstanding debt, repayment dates, fixed or floating interest and available facilities. Distinguish committed funding from a facility that may not remain available. Include material obligations in underlying entities where relevant.

Two trusts can each report 15% borrowing but face very different situations. One may have spread maturities over several years. Another may need to refinance most borrowing within months. The headline ratio conceals the timing difference.

Stress the interest bill

A £40 million floating rate borrowing at 4% costs £1.6 million annually before fees. At 6%, the same principal costs £2.4 million. The £800,000 difference must be covered by income, cash or asset sales in the simplified scenario.

Fixed rate debt can delay that change until refinancing, but may bring other constraints or early repayment costs. Read the agreement and financial statement notes rather than assuming fixed means permanently cheap.

Assess the available room

Covenants can relate to asset cover, net assets or other measures. Calculate headroom using the stated definition and consider what a portfolio decline would do to it. A covenant breach can matter even if interest is still being paid.

Ask how management would respond if refinancing became expensive or unavailable. Possible responses might include lower investment exposure, asset sales or reduced distributions, each with consequences for remaining shareholders.

Try it yourself

A £25 million borrowing reprices from 3% to 5%. What is the annual increase in interest before fees?

Show the worked answer

The increase is 2% of £25 million, or £500,000 annually.

Further reading

Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. This guide focuses on listed investment companies commonly called investment trusts in the UK. Product terms, access and tax treatment vary by jurisdiction.

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