New Star Asset Management, the embattled fund manager, admitted today that it had renegotiated its banking covenants after plunging markets wiped £3.9 billion off the value of its assets since the end of June.

New Star's chairman, John Duffield, said today: "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."

Analysts speculated today that New Star might be forced into a rights issue and raise fresh capital from existing investors.

Sarah Spikes at Arden Partners 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."

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

Analysts at Arden said in late September that a fall in the FTSE 100 below 4,400 would mean that New Star would have to renegotiate its banking covenants and that the cost of servicing its debt would rise by 1.5 per cent.

New Star moved quickly, with sources stressing that the index would have to remain below 4,400 for a full 12 months before its covenants came under pressure. Even then it would add only £1 million to New Star's £238 million debt burden, they said.

Today, New Star stressed that it had never breached its banking covenants. It said the new interest rate would be 1.5 per cent higher and its debt would be redeemed in a lump sum in June 2013.

New Star also disclosed that its assets under management had fallen from £19.8 billion at the end of June to £16.7 billion at the end of September, and had slumped further in recent weeks to stand at £14.3 billion yesterday.

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

Mutual fund redemptions have speeded up in recent weeks, as retail investors have taken fright at market volatility, it said.

New Star also embarked on a £20 million a year cost-cutting programme and restructuring of its business today, which has also been hit by a spate of client departures in the third quarter.

New Star said it would sub-let surplus premises it owns as part of moves designed to save more than £10 million.

The firm did not go into further detail about how it would save the additional £10 million but it is likely to be forced to lay off some of its staff.

New Star is famed for its "star" fund manager culture, which offers rich rewards for the best performers.

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

Shares gained 3.5p to 3.15p in early deals.

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