The Government’s Northern Rock Proposals
Monday's Government proposals for Northern Rock's rescue package sent the ailing bank's shares up by almost 50%, as news that the UK taxpayer is to support the bank to £25bn for up to five years came through.
The unprecedented proposals make a takeover by Sir Richard Branson's Virgin Group more likely, as he said he is 'ready and willing' to buy the struggling northern bank.
The Stock Exchange was informed by the Treasury that its plans involved the issue of millions of government bonds that would pay off the debts at Northern Rock and make it a more attractive proposition for private bidders. Chancellor Alistair Darling headed off fears that Virgin could make massive gains from the deal by revealing plans to enable the Government to take a cut of any windfall profits.
The proposals suggest that Mr Darling will decide who buys the bank - rather than its board or shareholders - and funding would be dependent on a 'robust and acceptable' business plan, together with guarantees for the taxpayer. In return the Treasury will take a fee from the bank and receive warrants or an equity stake of up to 10%.
If a private buyer cannot be found, Northern Rock will be taken into 'temporary public ownership'.
The scale of the rescue package is seen as risky by critics, as, if the housing market crashes or if the bank's mortgage holders default on loans, the taxpayer may suffer.
It was last September when the Bank of England stepped in to save Northern Rock after it was hit by the credit crunch and didn’t have enough cash to support its operations. Savers queued round the block at many branches to withdraw their funds.
The government bonds it plans to issue will be sold to investors, with guaranteed interest, and would be available for up to five years.
Some experts estimate that the planned government support is the equivalent of a £1bn cash injection to Northern Rock as it will be able to raise huge funds at low interest rates. The package was drawn up by bankers Goldman Sachs, and could start a fresh bidding war as the bank instantly becomes more attractive.
In addition to Virgin, private equity group Olivant are interested, and former bidders JC Flowers, plus even a high street bank may now find the deal more interesting. Bidders have until 4 February to submit plans, and the loan to Northern Rock is extended to 17 March.
Sir Richard Branson said that in the event of a successful bid, branches across the country would have the new name Virgin Bank erected on the same day as the deal was completed. "We've been working on it for months and we are ready and willing to go. A decision will be made in the next two weeks and I believe we have got the best proposition, in terms of saving jobs, very well capitalised and the chance of creating great British bank." He was speaking at a business event in New Delhi, on Gordon Brown's tour of China and India. He denied having secured a better deal on the trip, and said they had not talked about Northern Rock.
Published on January 25, 2008
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