Northern Rock faces years of debt
By Jane Croft and Peter Thal Larsen in London
Financial Times Published: November 13 2007 20:41 | Last updated: November 13 2007 20:41
Northern Rock could still owe the Bank of England billions of pounds in three years¹ time, according to a confidential sales memo circulated to would-be buyers of the stricken lender.
The memorandum, obtained by the Financial Times¹ Alphaville website, is now the subject of a court injunction after Northern Rock sought to prevent publication of its details. The High Court granted a limited injunction preventing further reporting of material, but it rejected a much more sweeping prohibition sought by the bank after much of the FT¹s report was followed up in other media.
The document suggests that even if the company was bought outright, the Bank may have to provide support to Northern Rock until 2010 when the stricken lender could still be drawing down £6bn.
The memorandum discloses that Northern Rock expects to have borrowed an estimated £24bn from the Bank of England by January 1 2008. Northern Rock is thought to have borrowed about £20bn from the Bank so far. Last night, Treasury insiders voiced surprise at the suggestion that the government, which has underwritten the Bank loan, would still be waiting to be repaid in
2010.The memo talks about the loan being refinanced though it is not explicit about whether such a refinancing would continue to involve government support. However, people involved in the sale process doubt whether any bidder would be able to raise the necessary financing to repay the Bank in the near future.
This could leave the government facing the political embarrassment of having agreed to a long-term guarantee that it could be forced to justify to the European Commission under rules governing state aid.
According to the sales memo, even in 2010 Northern Rock will need to be in receipt of £6bn from what it calls a replacement facility from the Bank of England.
The information memorandum has been sent to about 50 potential bidders and sets out three options for a sale of Northern Rock. As well as a sale of the whole business, the other scenarios envisage splitting up Northern Rock.
One option would see a sale of the basic infrastructure of the business such as the branches, IT and call centre that might or might not include Northern Rock¹s £13.5bn of retail deposits and matching assets.
The other option would be a sale of the infrastructure plus securitised mortgages, leaving behind some assets and liabilities for an orderly run-off. Both these scenarios would leave Northern Rock as a listed entity with assets that could be used to repay the Bank of England.
The memorandum assumes Northern Rock¹s profits will plunge to £143m in 2008 but will recover to reach £643m by 2010. This would be an impressive recovery as it is more than the bank made in 2006.
Potential bidders looking at Northern Rock include a Virgin-led consortium as well as private equity groups including JC Flowers and Cerberus.
Luqman Arnold, the former Abbey National executive, is also proposing to lead a team that could turn round Northern Rock in its current form. His plan would see his private equity company, Olivant, bring a team of experienced executives into Northern Rock in return for the right to buy a minority stake.
Most of the bidders for Northern Rock are thought to have concluded that the shares are worth next to nothing. However, several hedge funds have built substantial stakes in the bank and would be expected to resist any proposal that would undermine the value of their shares.
On Tuesday it emerged that SRM Global, the hedge fund run by Jon Wood, a former UBS trader, had increased its stake in the bank from 4 per cent to
6.17 per cent. Shares in Northern Rock closed down 1.55 per cent at 152p.