New Star's creditors have taken control of 75% of the business in a debt for equity swap aimed at securing the future of the business.

The four banks, which loaned the embattled asset manager some £260 million partly to fund a special dividend in 2007, will control both 75% of its ordinary share capital as well as a further £94 million worth of convertible zero preference shares.

In an announcement revealing the move the group also said that its assets under management have shrunk to £13.9 billion as of the end of November. It had some £16.7 billion of assets at the end of September and £19.8 billion at the end of June.

The plan also intends to lock-in existing fund managers by providing some £6 million of new preference shares. In addition to this some 5% of the ordinary share capital is also to be allocated to lock-in senior staff.

The banks will be entitled to a 10% coupon above LIBOR on the preference shares which will start accruing six months after issue but will not pay out until June 2013. The preference share element of the deal could make it tougher for the banking syndicate to sell on its stake in coming months to potential suitors, indicating that the banks may be sanguine about the need to retain the stake for some time.

In its announcement the firm said that the credit crunch has left many of its key clients concerned over its level of debt, forcing it into the move. It said the forced suspension of its International Property fund has exacerbated investor unease.

The deal leaves the company with some £20 million of debt which also has to be repaid by June 2013.

New Star executive chairman John Duffield said: 'The Board recognised the concerns of our clients regarding the level of our debt during these difficult times. We have therefore taken this radical step to
address these concerns completely and with one stroke.

'We are now free to focus all our attention on improving our investment performance. Our existing share-based bonus scheme will be replaced by a new scheme to ensure that our key people are locked in.

'The cost of this restructuring is regrettably a substantial dilution for ordinary shareholders, including me. However in current market conditions, we have to recognise that there is no other option to ensure the stability of the business.'