New Star Asset Management, the embattled fund manager founded by John Duffield, finally struck an agreement to resolve its crippling £240 million debt burden last night, with a deal under which he cedes control to bankers and leaves shareholders with virtually nothing.

If last night's agreement, brokered by UBS, the Swiss bank, goes through, New Star will be delisted from the stock market and handed to a five-strong banking syndicate, 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 the bulk of £100 million in convertible preference shares to be issued by the fund manager.

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

The deal was announced after the London stock market closed last night and after New Star shares had fallen a further 30 per cent to 4¾p. Once the deal goes through, the ordinary shares will be worthless.

Mr Duffield said: “In current market conditions, we have to recognise that there is no other option to ensure the stability of the business.”

The rescue 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 deal will be sealed by the end of that month.

Delisting the company will represent a huge disappointment for Mr Duffield, a colourful 69-year-old veteran of investment markets. 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 yesterday that its funds under management had fallen to only £13.9 billion at the end of November, a drop of almost £1 billion a month since the end of June. 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, where Martin Gilbert, the chief executive, 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 American private equity firm that owns Gartmore, is thought likely to renew its interest. Neptune, another British fund manager, indicated its interest in New Star assets yesterday. Banking sources said that other buyers were waiting in the wings.

Mr Duffield built New Star's reputation around his team of star fund managers. As part of yesterday's deal, he kept back £6 million of the preference shares to use as an incentive to lock in the best staff, after 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 at which London banks lend to each other. There will be a six-month holiday on the interest payable, which will be stored up until 2013, the date by which the original debt was due to be repaid.

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