Sir Richard Branson is prepared for Britain’s economy to plumb the depths that it reached during the 1990-92 recession, under a series of business plans that the Virgin consortium has submited to the Treasury for Northern Rock.

A day after the consortium emerged as the likely winner of a bid battle for the Rock, Sir Brian Pitman, who would become executive chairman of the rebranded bank, told The Times that Virgin and its partners were prepared for a “tough time” if they won the takeover fight.

“We need enough [capital] to get us through rocky waters,” Sir Brian said. “We had to do business plans on a base case scenario and a recession case and we chose the worst recent recession, the period of 1990 to 1992, for the parameters on our model.”

The Treasury’s deadline for offers for the troubled Newcastle bank closed on Monday evening, when Virgin’s main rival, a consortium led by Luqman Arnold, the former Abbey chief executive, shocked ministers and the City by dropping out. Virgin’s only foe now is a standalone solution led by Northern Rock’s management.

The Virgin consortium has also prepared an “upside” business plan, but it is reluctant to reveal how richly Sir Richard and his fellow investors may benefit from a rejuvenated Rock. That Virgin Group could immediately receive up to £10 million a year in fees for Northern Rock’s use of the Virgin name – at a time when shareholders will be denied dividends – has already raised investors’ ire. Nor are they likely to appreciate the notional £1 value that Virgin attaches to their shares. But Sir Brian said: “The idea that we’re going to make huge returns is frankly nonsense.”

The Government will provide the successful bidder with a guarantee backing £25 billion to £30 billion worth of bonds, which will be used to fund the Rock during its recovery. The bonds must be repaid within three years and the Treasury will receive a fee for its guarantee. To avoid breaching European Union rules on state aid, the auction winner must also down-size the bank during these years.

Sir Brian described the downsizing as a tightrope-walk. “You could shrink the business quickly by making yourself uncompetitive, but then you’d lose all your good customers and be left down the road with all the unattractive borrowers,” he said. “We’re not suggesting sudden change.”

Olivant dropped out of the bid battle because it could not receive a return on equity that satisfied its investment criteria at the same time as repaying the bonds and paying the Treasury a satisfactory fee. Analysts struggled to work out yesterday why Virgin and its investors found the figures more attractive.

Credit Suisse estimated that the winning bidder would have to pay the Treasury at least 1 per cent of the bond value in return for its guarantee. The analysts said: “By the time you have factored in lower fees from lower volumes and operating costs, it is tough to see how you can make enough money to earn a decent return on equity”.

Sandy Chen, an analyst for Panmure Gordon, said that it was hard to see how Virgin would turn the Rock into a profit-maker. “To grow deposits, they’ll have to offer attractive savings rates and that cuts into margins,” Mr Chen said.

Sir Brian accepts that the new Rock will struggle in its first few years but hopes to build the deposit base sufficiently to fund the bank’s mortgage business and almost completely avoid wholesale borrowing. He said that Virgin’s investment partners had also downsized their expectations.

The Virgin consortium is in talks with ratings agencies over how quickly the rebranded bank might secure an improved credit rating without the assistance of the Treasury’s guarantee. This will be the key to Rock’s ability to raise cash in the wholesale market.

The consortium has lined up a “well-known banking executive” to become its finance director if it wins the bid. It has verbal promises on the underwriting of its £500 million rights issue, but nothing on paper – “because then we’d have to pay a fee,” Sir Brian said.

The former Lloyds TSB chairman bristled at the suggestion that, like Olivant, the consortium may abandon its bid. After all, the Treasury is covering the bidders’ costs so Virgin would have nothing to lose by dropping out. “Do you think we’d come in and work every weekend if we weren’t deadly serious,” Sir Brian said.

Then and now...

— Unemployment reached 10.4 per cent in last quarter of 1992. It was 5.3 per cent in the third quarter of 2007

— Interest rates were 14 per cent in 1990, falling to 10 per cent in 1992. They are now 5.5 per cent

— There were 75,540 repossessions in 1991 and there were 22,700 in 2007. The Council of Mortgage Lenders forecasts 45,000 repossessions in 2008

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