Virgin is preferred Rock bidder
Sir Richard Branson鈥檚 consortium has taken a huge lead in the contest to acquire , the troubled mortgage bank.
I have learned that the Rock wants to name it as the preferred bidder, although an announcement is being delayed pending formal approval by the .
If that approval is given, an announcement will be made early tomorrow morning.
Right to the last, the Treasury has been considering a radical alternative, which was to nationalise the bank. But it appears to have decided that taxpayers' interests are more likely to be protected by a private-sector solution.
However, if the Rock鈥檚 shareholders were to complain that they are not being offered enough by , which seems likely, the company and the Government are likely to make it clear that the alternative would be to put the bank into administration under insolvency procedures.
If the Rock went into administration, shareholders might end up with nothing.
There have been around 10 expressions of interest from financial institutions in the possible takeover of the Rock.
In the end, it came down to a two-horse race, between the Virgin team and a proposal made by JC Flowers, the US private equity house that specialises in the takeover of banks.
Their advantage over other possible bidders is that their plans were far more advanced 鈥 and the Treasury was insisting on a swift decision.
The Treasury鈥檚 central concern is to secure repayment of an estimated 拢25bn of taxpayer-backed loans to the Rock made by the .
Virgin is proposing to raise between 拢10bn and 拢15bn of loans from a syndicate of banks led by , and one other unnamed bank 鈥 and would use the proceeds to repay some of the money owed to the Bank of England.
As for Flowers, it plans to raise 拢15bn from a similar group of banks (its syndicate is led Citi, RBS and ) for the same purpose.
The Rock board preferred the Virgin proposal largely because it was offering more to the bank鈥檚 existing shareholders.
Both Virgin and the Rock would pump around 拢1bn of new equity capital into the bank, thus diluting existing shareholders.
But Flowers put a negligible value on the Rock鈥檚 shares and was told to go away and come back with a better offer.
Under the Virgin scheme, the Rock鈥檚 shareholders would retain around a third of the Rock and would also receive a share of any future gains made by the new owners.
Virgin鈥檚 proposal also had several other significant presentational advantages: it would continue to make a modest annual contribution to the Rock鈥檚 charitable arm, the Northern Rock Foundation; and it would guarantee a proportion of the Rock鈥檚 employment.
If Virgin emerges as the new owner, the Rock will continue to benefit from taxpayer backed loans running to billions of pounds for two or three years. It is believed that these would get around a European Union prohibition on state aid by being reconstructed so that they would be identical in every way to the new commercial bank loan: the interest rate would be the same; and they would be backed by identical collateral.
UPDATE 18:51 The Treasury has said yes. So the Rock will announce that Virgin is the preferred bidder tomorrow.
Here are some additional details:
1) The Virgin consortium will repay 拢11bn of taxpayer-backed loans from the Bank of England on the day the takeover of Northern Rock is formally completed.
2) A similar size loan from the Bank of England will remain in place. It will be on exactly the same terms as the commercial loan 鈥 arranged by Citigroup and Royal Bank of Scotland 鈥 that the Virgin consortium is arranging to refinance part of the taxpayer loan. So the Treasury is confident that the continuing Bank of England loan will not be viewed as illegal state aid.
3) Virgin has agreed it will only pay itself 鈥渘ormal鈥 dividends from Northern Rock until all public money is repaid 鈥 thus avoiding the potential embarrassment for the Treasury of the Virgin making spectacular profits with the help of the taxpayer-backed loan.
4) The Treasury will give three-months notice before withdrawing 100 per cent protection for the Rock鈥檚 depositors.
I'm 
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I hope Virgin does get to take over Northern Rock. Richard Branson could turn it around, especially with his media group able to give some offers to it's customers.
Looks like a sensible decision if Virgin take over NR.
However, changes in the law are required to prevent such a situation from ever happening again.
What IS going on?
Is Virgin the frontrunner because Virgin are actively leading the pack? Or is Virgin just the celebrity ambassador of a giant cover-up exercise?
Is this just the latest attempt to lead us down the garden path, or does Virgin genuinely have something special that enables them to out-bid everyone else in this process? Other than being a fairly big cog in the political loop, that is.
I only ask because I want to know. But I don't expect a truthful answer, however, even privately.
Then for the ordinary small shareholder sake why not NRK use the same solution as RB and borrow from government and the banks, instead enriching more a bargain hunters by robbing thousands of small investors / share holders, aided and abetted by gullible/ lobbied media.
As a shareholder, I'll be voting "NO" to the Virgin offer ... it basically strips most of the value and potential out of the hands of the current shareholders
Decisions need to be made ...
- Do we have a free market in the UK ... if we do then Government needs to keep their hands off NR
- Is the BOE going to fulfil its role and act as the lender of last resort and not pull the plug giving NR breathing space and time for the inter-bank markets to recover? After all they have failed to create the required financial liquidity thus causing thus problem, so now they need to fulfil their role as lender of last resort.
Nobody appears to give a dam about the shareholders being ripped off in all this 鈥 but remember that shareholders are not a separate species 鈥 shares are generally held by pension funds that will pay you your pension 鈥 so in that context are you prepared to see all that taken from you. If NR shareholders can be ripped off, why should anybody have confidence in any shares in any company?
The BOE is responsible for financial stability 鈥 this includes maintaining liquidity. They have utterly failed to do this (unlike the Fed and EU). So now due to the BOE failure the BOE is required to act as the lender of last resort (at a high interest rate) 鈥 all income for UK PLC to help fund other essentials such as hospitals etc鈥
Remember, NR is not broke, they are fully solvent 鈥 they can and will pay the debt 鈥 their assets are far larger than their debt obligations.
NR has been doing what all banks do 鈥 borrow short to lend long 鈥 unfortunately due to the US sub-prime toxic waste floating about that system has broken down.
NR just needs to be left alone for a bit of time to allow the inter-bank lending to return to normal 鈥 the last thing it needs is to be forced to sell it soul to financial vultures that will strip the current shareholders of all the current potential value they hold.
Dave,
the only reason Northern Rock is still around is because the BoE stepped in to save it.
Flawed business model lending stupid amounts of credit to people who could not ever afford to repy it. Also lending stupid credit on the top of a bubble. And also lending credit over the price of the asset...
If UK house prices are over valued...then why lend 125% morgage...Complete idiots and deserve to be washed away...
So as a shareholder...did you complain when the share price increased then????
The only good thing to come of this, is that it has made ll other banks scrap their subprime lending and reel in their overextended credit lines at last...
On the face of it this looks great - but the fire sale keeping the bank out of administration also ensures banks with huge loans to Northern Rock do not face a domino effect of losing their capital.
So what about NR employees?
Whole thing puzzles me. The charlies at Northern Rock have taken massive risks. Their lending criteria are nonsense. If it has a breath, it can borrow - up to 125% of the value of the property. Weird! Once upon a time you had to offer collateral against a loan. Now, Northern Rock will lend you 拢125 against something valued at 拢100. Shrewd eh? Cutting edge banking eh?
They have fuelled the massive increase in consumer borrowing. It is high time consumer lending was regulated. The banks cannot regulate themselves. They will take ludicrous risks in their mad attempt to lend more and more and more.
What can you buy for the same amount as a Northern Rock share (86p)?
- a cup of tea from Java Cafe
- a new tie for Robert Preston; they are that cheap
- or you and three friends could club together and purchase a share in
that other great bastion of northern banking B&B (unadvised)
- 86 of Adam Applegarth's thoughts - only if you think they are worth
a penny each
- 8 minutes on hold to the NR helpline trying to withdraw your savings
- 4 cans of cheap lager
- 2 tins of chopped pork
- a bus ticket to the job centre (fellow employees only)
Or a partridge in a pear tree.
So what about NR employees?
Whole thing puzzles me. The charlies at Northern Rock have taken massive risks. Their lending criteria are nonsense. If it has a breath, it can borrow - up to 125% of the value of the property. Weird! Once upon a time you had to offer collateral against a loan. Now, Northern Rock will lend you 拢125 against something valued at 拢100. Shrewd eh? Cutting edge banking eh?
They have fuelled the massive increase in consumer borrowing. It is high time consumer lending was regulated. The banks cannot regulate themselves. They will take ludicrous risks in their mad attempt to lend more and more and more.
But why is the Govt not taking an equity stake on our behalf? The Wreck is completely bust without a Govt bail out, the shareholders are dead, but given five years there will be value. As a taxpayer I want some of that.
However, if the Rock鈥檚 shareholders were to complain that they are not being offered enough by Virgin, which seems likely, the company and the Government are likely to make it clear that the alternative would be to put the bank into administration under insolvency procedures......If the Rock went into administration, shareholders might end up with nothing.
Once again, Northern Rock is in no danger whatsoever of going into administration. The share price is so woefully low, I can't see many shareholders wanting to sell - and that's their prerogative.
The Treasury is in no position whatsoever to put Northern Rock into administration, because there is no reason to (NR is not in imminent danger of going bust and having to sell off the furniture), they're a private company, and beyond the lender of last resort loan and its conditions, the BofE and especially the Treasury get no say whatsoever in how NR is run.
Trying to feebly scare shareholders is simply not going to work.
The Treasury鈥檚 central concern is to secure repayment of an estimated 拢25bn of taxpayer-backed loans to the Rock made by the Bank of England.
These loans are not backed by the taxpayer, and they are of no danger to the taxpayer at all. That's what the lender of last resort system is for. Let's just stop repeating this falsehood. There is NO repayment of public funds. This has absolutely nothing to do with the taxpayer.
I never cease to be amazed that this gets repeated by people who call themselves economists.
I wish everyone would stop harping on about saying NO to the Virgin offer. I'm am sure you would rather get something for your shares than nothing which is the alternative. The other issue is the staff, if you all say no then the option is administation and that means 6000 jobs are lost.
Three points:
1. Of course the proposed loan is state aid, since the terms of the loan from the consortium are only available given the matching loan from the government. The true terms that would be commercially available are those to refinance the ENTIRE amount from the private banking sector, which I doubt would be possible on any realistic terms, if at all. These terms would be VERY different from those proposed (i.e. If the government lent us all half the money for our houses we would be able to buy better houses on better terms). I will be amazed if this gets past the EU since any person with the slightest understanding of finance would see through this.
2. Northern Rock is worth nothing since without the intervention of the Bank of England and its continued support it would be insolvent. I cannot understand why Virgin is the preferred bidder because it offers the most to shareholders, rather than to the taxpayers who stand to lose most. The hedge funds, while they will bleat, deserve little sympathy. Why should the shareholders receive any future profits, given that the company is worth less than nothing and has put billions of pounds of taxpayers' money at serious risk?
3. Why, given the above, should Richard Branson be the beneficiary of 拢11 billion of UK government funds? His web of offshore companies is hardly designed to maximise either transparency or payments to the Exchequer.
if RAB and SRM are so desperate to keep the rock from selling up then why aren't they putting their hand in their pockets and providing the 拢25billion to repay the treasury and the 拢2billion a week on average it's taking to ceep the rock afloat? - then they can wait as long as they feel necessary to sel it off
maybe its just easier to sit back in their lavishly furnished offices and send out press releases threatening to block the sale while the taxpayers foot the bill
even though i work for the rock (as a bottom of the pile dogsbody) i'd rather see the rock go into administration and end up as part of the unemployment statitics than see some profit crazed shareholders (who seem to have built up a large proportion of their shares after the crisis hit) run it into the ground and cost the taxpayers a fortune just to feed their ego
hex
However, if the Rock鈥檚 shareholders were to complain that they are not being offered enough by Virgin, which seems likely, the company and the Government are likely to make it clear that the alternative would be to put the bank into administration under insolvency procedures......If the Rock went into administration, shareholders might end up with nothing.
Once again, Northern Rock is in no danger whatsoever of going into administration. The share price is so woefully low, I can't see many shareholders wanting to sell - and that's their prerogative.
The Treasury is in no position whatsoever to put Northern Rock into administration, because there is no reason to (NR is not in imminent danger of going bust and having to sell off the furniture), they're a private company, and beyond the lender of last resort loan and its conditions, the BofE and especially the Treasury get no say whatsoever in how NR is run other than as an interested party.
Trying to feebly scare shareholders is simply not going to work.
The Treasury鈥檚 central concern is to secure repayment of an estimated 拢25bn of taxpayer-backed loans to the Rock made by the Bank of England.
These loans are not backed by the taxpayer, and they are of no danger to the taxpayer at all. That's what the lender of last resort system is for. Let's just stop repeating this falsehood. There is NO repayment of public funds. This has absolutely nothing to do with the taxpayer.
I never cease to be amazed that this gets repeated by people who call themselves economists, and by the Chancellor.
Dave,
Are you mad? NR is fully solvent?
If the BoE (effectively the people of the United Kingdom) had not lent them money, they would have been entirely insolvent. They needed to borrow money to repay loans that were falling due, as they could not borrow that money, they were effectively bankrupt.
The only reason the UK taxpayers stepped in was to prevent potential collapse of the banking system and to keep the UK economy going.
I agree that the shareholders are often pension funds, but the fact is, all shareholders take risks. When the risk pays off, you're golden, when it fails, you loose. Whilst it's unfortunate when that happens to pension funds, that's the market.
Like it or lump it.
Paul.
PS: Disappointed that Virgin are probably going to take over. I don't want my mortgage to be with that self publicising fool.
I am a shareholder, a member of staff and a taxpayer! I think that virgin is the best offer for shareholders in that it at least gives investers some prospects in future gains of the bank. Without a takeover I see no future.
As for me as a member of staff... I am heartbroken that a good company (operationally, NOT strategically - believe me I don't need to be ridiculed by know it alls who have no idea how the company is run) which is an extremely fair and reasonable employer.
I and 6000 others have worked night and day for 10 weeks to support this bank to find out its future from the 91热爆. I also at the same time find out that my job is probably not going to exist. How big is this 'proportion'?
JOHN - NR mortgage book has an average ltv of 59%, so we lend 拢59.00 for something valued at 拢100.00.
The together mortgage did not cause the credit crunch! Northern Rock did not loose those CD's with million's of customer's information, nor did we cause foot and mouth or bird flu!!!!
The BoE is responsible for fancial stability not for protecting NR shareholders.
If they waste one penny looking after equity holders then the BoE is not doing its job properly.
I have no idea what the Treasury is supposed to do but it is probaly safe to say it has done it wrong.
Post 6.NR NOT broke? Well I'm amazed.
You could sell your shares to UBS (yes, them again) - this must rank as the most pathetic excuse for investing in NR so far
Interesting that it is not the ranting Mr. Richards of RAB but UBS, who actually have the biggest stake.I would also worry that Citigroup are behind Virgin - they recently sacked their CEO for losing shedloads on the US subprime market.
Has Mr Branson looked at the un secured loan risk at NR. They were the lender offering 125% loan to value on their mortgage products. e-g 95% secured 30% unsecured.
It is a bite your bum after he takes over what he thought was a good idea.
It just begs the question as to why NR was the first lender to have problems in the uk after all none of the others have - as yet.
Gregg Hackney London
When is completion expected? Within days, weeks or months? A lot can go wrong in the meantime unless the deal is watertight from the beginning. What is the share price target now - seen a sugestion 20 p to 40p.
Call me simplistic but:
If NR is solvent then surely all it needs to do is stop financing new business. The existing payments from its credible customers will cover its debts as and when they fall due and once the credit crunch is over this upstanding company can continue to trade.
If it can not do this then it is insolvent and shareholder value is already compromised. The shareholders are not really in a position to complain about anything other than the way the previous management handled their investment.
Why did they need as much as 24 Billion? Has the treasury allowed them to issue further mortgages?
Like Donald Trump once said, if I owe you one thousand dollars and I can't pay it back I am in trouble. If I owe you a hundred million then you are in trouble.
Dave 6 wrote
"As a shareholder I'll be voting NO to the Virgin offer" simply because it undervalues what he thinks his shares are worth and I sympathise with him to a certain extent.
However his comment that decisions need to be made (presumably he means to guarentee him more money) is somewhat ironic because if Dave had made a decision, earlier, to sell his shares then he would not now be out of pocket. Instead he would be feeling quite smug and happy with his investments.
Don't condem the message bearer/s for the message they bring.
Ijust hope Virgin can run this bank better than they can their telephone, TV and broadband businesses - which are a shambles
If our money is at risk then we should have a share of the dividend on similar terms to the Virgin consortium. Let's not have another absurd contract like S Maclaren who had a heads I win, tails I win contract. Paying a "normal" dividend to avoid embarrassment would simply demonstrate the financial illiteracy of the public.
Alternatively, nobody should be taking any cash out of this until the treasury loan is repaid.
If NR is really solvent and capable of trading after this rescue then why does it still need the treasury loan? Surely if a pile of cash has been pumped in then it should be able to stand on its own feet and borrow commercially again?
Distressed Employee: Your management were asleep at the wheel! (Nobody blames the employees) 59% ltv might sound good but we're at the top of the bubble and the retail mortgages may bear lower returns than the wholesale money that the bank came to depend upon. Is the bank still a sound investment? Market says no!
For the shareholders' sake, let's hope Virgin run their banking business rather better than their cable TV fiasco.....
Would not the banks assets include property?? The assets are then surely worth more (ney massively mmore) than the value of the offer from Virgin.
All mortgages are secured against property with NR having the first charge in the land register - if NR is liquidated - do the houses of the Lenders become a liquidated asset? Will this force the owners to remortgage with other companies?
Average house price in UK must be 拢200k?? Over 10,000 NR borrowers did not pay their mortgages last month? this alone would place assets at 2 billion?? on defaulting borrowers alone? (minus deposits up to 10% 拢1.8 Billion)why therefore is NR only worth 拢300 million??? I'm amazed!! Or am i missing something?
Segedunum, you need to re-read your history. The Bank of England was nationalised in the 1940's; though not the same as HM Treasury, it is in effect an independent arm of the UK government, much like the Fed is here in the US. (The 12 Fed banks are nominally owned by their member banks, but are effectively controlled by the government-run Federal Reserve Board.)
A loan from the BofE is, in effect, a government loan--which means a 拢25bn government loan is all that's keeping Northern Rock away from administration ("closure" or technically "receivership" here, with the FDIC as receiver--unlike other US businesses, banks can't file for bankruptcy). All BofE has to do is call in the loan and NR is gone.
If this were a US bank, the Fed's loans would have lasted only days, if not hours. The FDIC would have closed it almost immediately, and would have made uninsured depositors (over US$100,000, with exceptions) wait to see if NR's assets really are worth what NR says they are (odds are they're not). The US has had too many problems with trying to protect big banks from closure; for examples, google "too big to fail", "Continental Illinois" or "First RepublicBank Corporation".
NR shareholders, you should be thankful Richard Branson is letting you keep so much of your bank (1/3 initially, 45% in the latest reports). If not for him and the foolishness of your government effectively declaring NR "too big to fail", your shares would already be worthless.
Why did they need as much as 24 Billion? Has the treasury allowed them to issue further mortgages?
The 24 billion is a made up figure that the BofE have probably allowed for. There is now way on Earth that NR have borrowed that much much in a couple of months. There is not 24 billion in cash lying around to help struggling banks.
People who repeat this don't know how this works.
The Bank of England was nationalised in the 1940's; though not the same as HM Treasury, it is in effect an independent arm of the UK government, much like the Fed is here in the US.
The Federal Bank is not an arm of the US government. It is a consortium of private banks masquerading as something that looks 'official'.
The BofE has nothing to do with taxpayers whatsoever. Saying this is so untrue it isn't believable.
A loan from the BofE is, in effect, a government loan--which means a 拢25bn government loan is all that's keeping Northern Rock away from administration
Sorry, but you have no clue how this works. No one walks to a cash machine, withdraws 25 billion in cash and hands it to NR as a loan. No one has that kind of cash lying around.
What happens is that the Governor makes an entry on a ledger or a computer screen, makes some money up and loans that to NR - not all at once obviously. NR hasn't spent 25 billion in a couple of months. In effect, what NR is doing is generating its own loan with the BofE and NR betting on its future. The business is sound, it's still a 600 million pound profit business and there is no reason for this hysteria.
Banks lend money around on this basis all the time, and have been doing so forever. They are not in imminent danger of going bust when they do so.
If this were a US bank, the Fed's loans would have lasted only days, if not hours. The FDIC would have closed it almost immediately, and would have made uninsured depositors (over US$100,000, with exceptions)
The bank is not insolvent. This is how the lender of last resort procedure works. This hasn't been made up as they've gone along with sums of taxpayer's cash.
This is just absolute nonsense. There is no repayment of public funds.
I'm one of the majority in this country that knows nothing of shares or the mechanics of business buyouts. All I know is that this country is slowly becoming the 'United Kingdom of Virgin' We can almost live our whole lives the Virgin way, and if this deal goes through, we'll also be able to bank the 'Virgin' way.
Enough is enough! Is no-one else fed up with the 'Virgin' brandname?
I don't really care who takes over Northern Rock, but the brandname should remain.
Can Robert Peston clarify some of the myths and misunderstandings surrounding NR. I assume:
a) the 24bn support from BoE is to enable NR to refinance loans that have become due and to provide funds for withdrawals by investors
b)without that support the only option available to NR is to call in a large proportion of its mortgages. To throw people out of their homes or force them to re-mortgage with other lenders who may not be willing to lend as much would have been politically unacceptable.
It is clear that the Virgin offer is generous and should be accepted.
Where did the BoE money come from? Has that been borrowed and against what security. Was there a risks statement in the Annual Report? Are auditors in trouble here?
given that so many of NR shareholders have received the shares through the company floating and given these FREE ! this is just proof that we live in a greedy society where all people are concerned about is money
does anyone care about the 6500 staff who may loose their jobs ! it doesnt appear that way does no one realise if NR ceases you will get no money surely any other option is better. For once think about other peoples livelihgoods instead of your pocket !!!!!
Bravo Dave at 6. The bofe had to maintain liquidity and stability..let one go more will slide.
RB and friends should be required to buy 29% of the shares in the market and then shareholders could subscribe to a 2 pounds a share rights (raise nearly a billion), rights to be underwritten by RB's backers. RB could get seat on board. Why do shareholders have to see RB walk off with 2billion pounds profit for just facilitating loans.
bofe loan is commercial; treasury is earning on it.
WHY SHOULD THE S'PORE G.I.C. ACCEPT ONLY 9% INTEREST WHEN CITIBANK IS PAY 11% INTEREST