Gordon Brown has given his strongest hint to date that the Government may
nationalise Northern Rock.
Speaking last night after shareholders had rejected attempts to restrict the
stricken bank board’s freedom to sell assets, the Prime Minister spoke of
the possibility of it being taken into public ownership and then being
returned to the private sector.
Mr Brown’s comments came as sources told The Times that taxpayers could be
forced to stump up an additional £2.4 billion if the Government opted for
nationalisation.
The extra costs, on top of the £26 billion already lent to Northern Rock — and
£30 billion in guarantees — would be needed to pay off the bank’s
shareholders and potentially a clutch of bondholders which own about £2
billion in debt.
Speaking on ITV’s News at Ten, Mr Brown was asked whether nationalisation was
now the only solution to the Northern Rock crisis. He replied: “Because
stability is the issue, we will look at every option, and that includes
taking the company into public ownership and then moving it later back into
the private sector. So that is, yes, one of the options that has got to be
considered.” Asked if nationalisation was not, in fact, the only option
left, the Prime Minister said: “There are a number of companies in the
financial private sector that have expressed an interest but public
ownership — later to move it back into the private sector — is one of the
options.”
It is understood that a detailed plan have been drawn up by the government to
smooth the way to nationalisation of the bank, should it be the option
chosen. An emergency Bill would be put to the House of Commons and debated
over the course of just two days. Shares would then be transferred over to
the Government.
Although Mr Brown’s comments are the strongest hint yet that nationalisation
is the most likely option, the Treasury has said that its preferred option
remains a sale of the stricken bank to the private sector. Two bidders,
Virgin Group and Olivant, the private equity firm, have been named as
preferred bidders but so far neither has been able to come up with financing
sufficient to persuade the Treasury to sell.
Sources said that the situation will become clearer after Goldman Sachs
reports back to the Treasury with its options for funding a sale. They could
include a large cash injection from a sovereign wealth fund or the
conversion of some of the Rock’s debt into bonds, which would then be sold
to the public and guaranteed by the Government.
Shareholders had been hoping to have a say in the outcome of talks between the
Treasury and the bidders. Yesterday, however, the bank’s two largest
investors failed to win support for a number of proposals that would have
given investors the right to approve the sale of the bank’s assets.
Shares in Northern Rock plunged 18 per cent to a new low of 67½p when
investors backed the board on all but one of the nine resolutions put to a
ballot at today’s extraordinary general meeting. SRM and RAB Capital, which
jointly own an 18 per cent stake in Northern Rock, put forward four
resolutions that, if they had been voted through, would have handed power to
Northern Rock shareholders to stop the sale of the bank’s assets. The only
proposal to gain backing at the EGM meant that Northern Rock must seek
approval before raising £5 million or more in shares.
About a thousand shareholders filed into the 10,000-seat Newcastle Arena. Most
were disappointed that the Rock, considered a shining beacon of Northern
business, was in such a parlous state. Denis Grainger, a shareholder and
former employee of the bank, said: “It’ll be tragic for the area if this
goes down and tragic for small shareholders to lose the value of their
investments.” Bryan Sanderson, the Northern Rock chairman, said that the
bank still had a viable future and could be set “on the road to recovery”.
But he gave warning: “Remember, the Bank of England and the FSA can withdraw
their support at any moment and we wouldn’t be able to operate. That would
be an irresponsible risk for the board to take.”
Despite the theatre, nothing has changed
The failure of Nothern Rock’s rebel shareholders to push through their
resolutions yesterday was really a red herring in the continuing soap opera
that is Northern Rock. The truth is, whether they had voted in favour of RAB
Capital and SRM’s resolutions or not, shareholders will still have the right
to vote on a potential sale of the stricken bank.
Insiders say that the vote had no real bearing on the outcome for Northern
Rock at all and the same options remain on the table today as were there
yesterday. They are:
Sale to the private sector
A sale to either one of Northern Rock’s two preferred bidders — Virgin Group
or Olivant — remains an option.
The key here is whether the bidders can persuade the commercial banks to lend
them enough money to pay off the Rock’s debt to the Treasury on terms that
will keep the Treasury happy. So far, the bidders have offered to pay only a
small amount, about £11 billion, of the total £26 billion lent to Northern
Rock. But for that they want a portion of the Rock’s prime assets as
collateral. This is clearly not an ideal solution for the Government, since
its risk will be little changed and it will still be sitting on the Rock’s
£10 billion of unsecured lending.
Another option would be for the bidders to pay more money up front, but
sources say that the banks will not lend them any more money unless they are
prepared to put in more of their own equity. So far neither Virgin nor
Olivant has shown any sign of doing that and as a result both bids are
teetering.
One unknown here is what Goldman Sachs manages to come up with as part of its
mission to find financing for a private sale. If it manages to persuade a
sovereign wealth fund to stump up the cash and take on the same risk as the
Government, a sale could be possible.
Nationalisation
Assuming that the logjam is not resolved, the most likely option is for
Northern Rock to be nationalised.
However, that will end up being more expensive for taxpayers, because they
will have to buy out the shareholders and also potentially another block of
so-called tier 1 and tier 2 creditors, who between them have about £2
billion in preferred shares and bonds.
Insiders assume a value of about £400 million to settle with shareholders, or
about 100p a share. Not only will it be more expensive for the Treasury to
nationalise Northern Rock, politically it would be a disaster. The
Government would then have to rely on selling off the assets, which, in the
present market conditions, would be no easy task.
Run-off
Another option is to admit defeat and leave Northern Rock exactly where it is,
with the shareholders and bondholders intact, and put the bank into run-off.
For sure, the Government will take plenty of criticism for failing to find a
buyer and sacking the Rock’s staff, but crucially it will not have to put
any more taxpayers’ money on the line to try to bring about a rescue. It
simply waits for the mortgages to be paid back and then, when all the assets
have been sold or repaid, shareholders will be left with the surplus cash.
One insider yesterday reckoned that could amount to about 250p a share.
Administration
This is seen as the worst-case scenario because, in these cases, the board
ceases to run the company and it is handed over to a court-appointed
adminstrator, such as Deloitte, which runs it on behalf of the creditors,
including the Government. Northern Rock would be forced into a fire sale of
its assets, which, at today’s prices, would result in losses for everyone.
Siobhan Kennedy
