Rock running out of options

Northern Rock has flogged £2.2bn of mortgage assets – but it may not save it from nationalisation...

Last Updated: 31 Aug 2010

The fate of the Rock is all over the papers again this morning, after Alistair Darling gave his strongest hints yet that the lender would have to be nationalised. He told the Treasury Select Committee yesterday: ‘All options including nationalisation are on the table. All of us agree that a private sector solution would be highly desirable… [But] that may not be possible’.

In fact nationalisation could turn out to be the only option, given that Virgin and Olivant (the only two potential bidders left in the hunt) are still struggling to raise the necessary funds. The credit markets have recovered slightly – the rate at which banks lend to each other has fallen since the central banks injected money into the system before Christmas – but the situation is ‘still difficult’, Darling said. To make matters worse, the Rock has also admitted that there’s a £100m black hole in its pension fund – another big liability for any potential bidder.

Goldman Sachs, the bank advising the Treasury, has apparently come up with a complicated financing plan that involves securitising about half of the Rock’s debt to the Bank of England and selling it as bonds. However, unless these bonds are as safe as houses, investors won’t buy them – and since it’s probably illegal for the Government to guarantee them all, the plan relies on Goldman finding a big reinsurer who’s prepared to do it at a reasonable price.

The only positive news is that the Rock has managed to raise £2.2bn in cash by selling some mortgage assets to investment bank JP Morgan, Tony Blair’s new employer (perhaps he put a good word in with his old chums Gordon and Alistair) – and they haven’t been forced to sell at a knock-down price. It will use the money to pay back some of its debt to the Bank of England – though since that currently stands at about £26bn, it’s not going to make much of a dent.

A lot could hinge on next Tuesday’s shareholder meeting, where hedge funds RAB Capital and SRM Global (Darling’s least favourite hedge funds) will try and convince everyone that the Rock is still a going concern. And the stakes are high – if nationalisation happens, their equity will be wiped out and they’ll lose millions. So expect a few fireworks...

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