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Economy

Darling proposes Northern Rock rescue

Monday, 21 January 2008

Chancellor Alistair Darling has unveiled details of proposals that could make the private sale of Northern Rock easier, although he added that nationalisation remains an option.

HM Treasury announced on behalf of the Tripartite Authorities (HM Treasury, the FSA and the Bank of England) a new financing structure on Monday that could be made available to Northern Rock and other interested parties, for a possible private sector solution for the entire company.

It said that this new financing structure would only be available for proposals that would protect taxpayers' interests, as well as meeting other objectives of financial stability and the protection of consumers.

The Government said it would bring forward legislation in order to “temporarily” nationalise Northern Rock if no proposal is received which meets these objectives.

This puts added pressure on the bank’s shareholders to accept possible takeover bids from the private sector.

Guarantee to investors

The Treasury confirmed that existing Government guarantee arrangements would remain in place, adding, that “savers' money continues to be safe and secure”.

The proposed financing structure envisages Northern Rock raising funds from investors in the financial markets backed by a mixed pool of assets.

This structure would ensure all Bank of England loan facilities to the company are repaid in full, with interest, upfront, as soon as the funds are raised.

The Treasury said it would put in place a guarantee for the payment of investors to facilitate this, in the event that the assets were insufficient to fulfil the obligations.

It added, however, that any losses to the asset pool would first be borne by Northern Rock to protect the taxpayer. Northern Rock would pay a fee for this guarantee in addition to the fees for the existing guarantee arrangements which will continue.

Clear restrictions

The Tripartite Authorities said that they considered that this would reflect their stated objectives, as a proposal using this structure would have the potential to:

ensure the Bank of England's loan facilities to the company are repaid in full, with interest, upfront as soon as the funds are raised;
contribute to finding a cost-effective solution under private sector ownership with the private sector at first risk for Northern Rock's commercial success or failure;
involve significant private sector participation, including new private sector capital, in the financing of Northern Rock; and
provide the Treasury with the ability to share in the potential upside returns for private sector participants in return for the financial support being provided to the company.

The Treasury said that proposals would need to demonstrate compliance with a range of conditions, including a robust business plan, commitment of sufficient additional capital and management and ownership by suitable persons, appropriate for the provision of financial support of the kind contemplated.

It added that there would also be clear restrictions on the sale of the company and on dividend payments whilst the taxpayer remained at any risk. The proposals will also have to be consistent with the regulatory requirements of the FSA.

HM Treasury and the Bank of England, as providers of financial support to the company, and the Financial Services Authority, as its regulator, will consider proposals received by 4 February from Northern Rock and other interested parties.

State aid

“The Tripartite Authorities recognise that any proposal relying on this financing structure is likely to involve state aid, which would require approval by the European Commission, and will submit a restructuring plan to the Commission by 17 March,” according to the Treasury.

HM Treasury and the Bank of England will make arrangements for the existing Bank of England loan facilities to be extended up to this date to allow time to explore the financing structure with Northern Rock and other interested parties.

The three authorities said that the company would be managed at arms' length on a commercial basis in the event of temporary public ownership. They added that an experienced and professional management team would be appointed.

The Treasury said that services for savers and borrowers would not be affected and the company would continue to operate and provide services to customers “as normal”.

Branches, call centres, postal and internet banking would all continue to be open and accessible, as usual.

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