New Star Asset Management, the struggling fund manager, renegotiated its banking covenants yesterday in a move that added £3.5 million to its debt bill and spurred speculation that it could be pushed into an emergency rights issue.

New Star, led by John Duffield, its colourful chairman, also embarked on a £20 million-a-year cost-cutting programme that is likely to lead to the loss of 50 to 60 jobs.

The fund manager, which currently employs about 380 staff, said it was restructuring its business in order to trade its way through the forthcoming recession.

It admitted that at Thursday's closing prices, assets under management had slumped by £5.5 billion to £14.3 billion since the end of June as turmoil hit the stock markets and investors rushed to redeem capital. Plunging stock markets accounted for £3.9 billion of the £5.5 billion drop.

Mr Duffield said: “The fall in markets since the summer and increased redemptions across the asset-management sector have had a significant impact on our business.

“Our banks understand our position and are supportive. We are taking further action to cut our costs significantly”.

Job cuts will save about £10 million a year, while New Star will also sublet some of its unused commercial property space to raise another £10 million annually.

Redundancies are bound to hit members of Mr Duffield's “star” fund-manager culture, which offers rich rewards for the best performers.

Staff are encouraged to be entrepreneurial and Mr Duffield is renowned for making a millionaire out of one of his secretaries, Stella, when the company listed its shares several years ago.

The relaxing of New Star's covenant arrangements comes just over a month after executive sources at the firm insisted it was under no pressure to modify terms despite sharp falls in the stock market.

Having briefed analysts that it would breach covenants if the FTSE100 fell below 4,400, executive sources said last month that the index would have to remain beneath that for a full 12 months before covenants came under pressure.

Even then it would add just £1 million to debt repayments, they said.

Yesterday's reworked covenants increase New Star's interest rate by 1.5percent to 9.25percent and means annual repayments on its £236 million debt pile increase to about £21.8 million.

Sarah Spikes at Arden Partners, who had forecast the covenant changes, said: “A renegotiation of the covenants looked inevitable months ago. We can't rule out an emergency rights issue at some point in the future.”

As well as market movements, it had suffered net fund outflows of £523 million, including £155 million from hedge fund investors, the fund manager said.

Redemption from mutual fund investors had gathered pace in recent weeks, as retail investors took fright at market volatility, it said.

Mr Duffield said that the “exceptional risk aversion among investors may persist for some time”.

New Star declined to comment on any possible rights issue, although it is understood that no plans have been drawn up for consideration.

The company has in recent weeks been approached by potential private equity buyers, including Hellman & Friedman, the San Francisco firm that owns Gartmore Investment Management. Talks were extremely informal and no concrete proposals were discussed.

New Star shares rose to 31p during the day's trading, but closed unchanged at 28p.

Times Recommends

• Gazprom brands Ukraine 'a barbarian' in gas row
• Services sector raises fears over UK jobless
• Retailers surge as profits survive sales plunge