Government confirms Rock bond plan
By Maggie Urry
Published: January 21 2008 08:40 | Last updated: January 21 2008 08:40
The UK government is insisting on “an appropriate share in potential upside equity returns” from Northern Rock as part of its plan for a private-sector solution to the crisis which has engulfed the mortgage bank.
On Monday it confirmed details of the plan worked out by Goldman Sachs, which is advising the government, ahead of an afternoon statement in parliament by Alistair Darling, chancellor of the exchequer.
Under the proposal, a buyer of the stricken bank would be required to put in additional capital, on top of a proposed issue of bonds to cover repayment of the approximately £25bn ($49bn) of loans the Treasury and Bank of England have made to the bank. It would also have to pay fees to the government in return for its assistance.
The Financial Services Authority, the third leg of the UK’s tripartite financial regulatory framework, would have to be satisfied that the rescued bank would have sufficient capital to cope with “a range of downside scenarios”.
A deadline of February 4 was put on bidders to put forward their proposals. Bids are expected from Sir Richard Branson’s Virgin, Olivant, the private equity group, and the bank’s management, although other bidders would also be able to express an interest.
The bidders have already outlined ways they would raise fresh equity as part of their proposals.
The successful proposal would then be put to the European Commission by March 17, which would consider whether it conformed to EU state aid rules.
Investors welcomed the plan, sending Rock shares 28p, or more than 43 per cent higher at 92½p in early London trading.
Under the government’s proposal, Northern Rock would put together an asset pool consisting of mortgages, unsecured consumer loans and listed securities, of a size that would more than cover the direct loans it has received from the government. The bidder would issue bonds against this asset pool, with maturities reflecting the likely repayments in the pool.
Proceeds from the bond issue would repay the government loans, while a government guarantee would mean the bonds would trade in the market at or near prices of similar gilt-edged stocks. Northern Rock would pay a fee for this guarantee.
The government would then have the first interest in the asset pool, and the excess of assets over the value of the bonds would protect taxpayers’ interests if the assets underperformed. The extra funds would also provide liquidity to Northern Rock.
The government would continue with its guarantee over other Northern Rock liabilities, such as savers’ deposits, which amount to about £30bn.
The bidder would have to provide an equity participation to allow taxpayers to share in any gain it made. This would be expected to be available until after the period when the government’s guarantee remained in place.
Any proposals would also be vetted by the government to ensure that a bidder had a robust business plan and that its management comprised “suitable persons”.
The government said that the alternative option would be nationalisation of the bank, not administration. This would require legislation to take the Northern Rock into “temporary” public ownership.
An independent valuer would assess how much compensation shareholders would receive, but this would be based on the value of Northern Rock without any state aid. Analysts think this would leave very little for shareholders.
Northern Rock said it welcomed the government’s confirmation that a private sector solution was the preferable outcome, and said it believed that would be in the best interests of “shareholders and other stakeholders”.
The bank said it was working on its standalone options but would also enable other interested parties to develop their proposals. It thought the timetable outlined was consistent with its strategic review process.
RAB Capital, one of two hedge funds which together hold 18 per cent of Northern Rock’s shares and have been agitating on behalf of shareholders, said it welcomed the government’s announcement. It said it had always viewed a private sector solution as both possible and desirable.
RAB has been supporting the proposal from Olivant, led by Luqman Arnold, former chief executive of Abbey National. RAB said that Olivant’s plan, involving an equity injection partly funded by existing Northern Rock investors, would give shareholders “by far the best participation and the least dilution.”
Copyright The Financial Times Limited 2008