New Star Asset Management, John Duffield's embattled fund manager, has finally struck an agreement to resolve its crippling £240 million debt burden in a deal that cedes control to its bank lenders and leaves shareholders with virtually nothing.

If the agreement, brokered by Swiss bank UBS, goes through, New Star will be hauled off the stock market and handed to its five-strong banking syndicate, which is led by HBOS and Lloyds TSB.

The bank lenders, which also include Royal Bank of Scotland, HSBC and National Australia Bank, have agreed to tear up New Star's debt bill in exchange for being handed the vast bulk of a £100 million issue of convertible preference shares to be issued by the Group.

Deloitte, the consultancy, is understood to have advised the banks.

However, the fund manager's current shareholders, who include Mr Duffield, will see their stakes massively diluted. Mr Duffield, a legendary fund manager in the City, owns 7 per cent of the firm but his holding will be all-but worthless.

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

The deal, which still requires the approval of shareholders, is almost certain to mark the end of New Star's short life as a listed company. Shareholders will be expected to vote on the restructuring in mid-January. If they agree, the terms will be agreed by the end of that month.

Delisting the company will represent a huge disappoint for the 69-year-old veteran of investment markets, famous for holding court at his local restaurant in Knightsbridge, Signor Sassi.

Mr Duffield founded New Star in 2002, floated it to great fanfare in 2005, but ran into financial difficulties after racking up the debt burden in April last year to fund a £364 million return of capital to shareholders.

New Star’s share price has collapsed this year as investors have redeemed their capital and the funds have been buffeted by tumbling stock markets.

It admitted that its funds under management had fallen to just £13.9 billion as at the end of November, a drop of almost £1 billion a month since the end of June.

But removing the fund manager's debt burden also makes it far more likely that New Star will be sold to a predator. It is understood that the banks are prepared to sell their stakes, although a buyer would most likely wait for the restructuring to complete before making a move.

Aberdeen Asset Management, whose chief executive, Martin Gilbert, is an old friend of Mr Duffield, is understood to be interested in buying a debt-free New Star for its retail funds.

Hellman & Friedman, the owner of Gartmore, is thought likely to renew its interest. Neptune, a UK fund manager, indicated its interest in New Star assets. Banking sources said other buyers were waiting in the wings.

"Stability has been introduced to the business and the debt has gone. If someone comes in, they know what they are buying now."

Mr Duffield built New Star’s reputation around his team of star fund managers.

As part of today’s terms, Mr Duffield managed to keep back £6 million of the preference shares to use as an incentive to lock in the best staff. There were fears that a financial crisis at the group would lead them to head for the exit in droves.

New Star has agreed to pay annual interest on the preference shares of 10 per cent above Libor, the rate that London banks charge to lend to each other. There will be a six-month holiday on the coupon payments, which will be stored up until 2013, the date by which the original debt was due to be repaid.

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