Treasury tries to salvage Rock sale

Northern Rock's chances of staying private have taken a turn for the better. So the hedge funds will be pleased...

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Last Updated: 31 Aug 2010

After a weekend of speculation, the Treasury released a statement this morning outlining its latest rescue package for the ailing Geordie lender. With all the private sector bidders struggling to raise enough money to make the deal happen (thanks to the logjam in the money markets), nationalisation was looking inevitable. However, the Government has now offered to guarantee a £25bn bond issue, which will allow the Rock to pay off its loans to the Bank of England and remain in the private sector. Well, sort of.

The plan is that the Rock puts various assets (mortgage, unsecured loans and so on) into a pool that’s big enough to more than cover its existing debt to the Bank. The winning bidder would then issue bonds against this pool of assets; in other words, raise cash by borrowing against it. Of course, if they tried to do this through the usual channels, there’d be an obvious problem: given the current state of the market, what kind of idiot would lend to the Rock in its current parlous state? Step in HM Treasury. By guaranteeing the bonds, the government effectively removes the risk of default – which should mean that buyers will snap them up.

However, since this guarantee is worth a lot to the Rock (about £1bn, the BBC reckons) it will come at a price. The government will put various restrictions on what management can and can’t do without their say-so. And they’re also demanding an ‘appropriate share in potential upside equity returns’ – probably an option that lets them buy shares at a certain point in the future. So even if Virgin, or Olivant, or even the plan being developed by management does come off, it won’t really be a private company – more like a public-private partnership. And as we know from the Metronet debacle, the Government’s got a patchy record in this area.

On the other hand, the alternatives can’t have looked much better for Darling and co. If they hadn’t signed up to this latest wheeze – dreamed up by the mega-brains at Goldman Sachs – nationalisation would have been the only option left on the table (it might still be, if the bidders can’t get their act together before the February 4 deadline or if the EU sticks its oar in). And that would have been seriously humiliating.

And at least this news will please shareholders. If the Rock is nationalised, they’ll probably get nothing; now there’s a chance they can claw back their losses. So hedge funds RAB and SRM (the biggest shareholders) will no doubt still make a killing...

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