Nationalization of Northern Rock more likely than commercial rescue

Bankers Throw in the Towel Over Rock

By Katherine Griffiths, Philip Aldrick, and Helen Power
The Telegraph, London
Saturday, January 12, 2008

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=ETMRJBRBWKXF3QFIQ...

The Government has all but ruled out a commercial rescue for Northern Rock after conceding that funding for a deal cannot be found.

It is understood bankers who have been working for weeks to put together a private L15 billion debt funding package have thrown in the towel, leaving the Government to find another solution, though negotiations with bidders, including Virgin and Olivant, about some form of a sale continue.

As the Newcastle-based lender enters the last few days before a showdown with shareholders at an emergency meeting in Newcastle on Tuesday, the Treasury's adviser, Goldman Sachs, has been locked in discussions with the Tripartite Authorities.

Goldman updated Northern Rock's board on the Government's progress last night but is not expected to inform the board of the company's fate until the end of next week.

Options on the table include full nationalisation or the Government leaving its funding in place for an extended period in a move that would require approval from Brussels, although it is understood the Government has had an initial steer from the European Union that approval would be given.

Citigroup, Deutsche Bank, and Royal Bank of Scotland have been poring over Northern Rock's books for several months, but it looks increasingly likely they cannot lend up to L15 billion to a bidder on terms that would be acceptable to bidders.

One banker said: "It was always 50-50. That now looks significantly less likely. Collateralised mortgage assets are not flavour of the month." Bidders are also growing increasingly dubious that lending banks will put up the L10-15 billion of funding they had indicated might be provided.

However, it is thought the Government could choose to leave the Bank of England loan in place, which would require an application to the European Union.

The Government may demand some kind of equity warrant so the taxpayer participates in the upside if the bank recovers, possibly in the form of a "golden share."

Meanwhile, Northern Rock yesterday attempted to show it is taking steps to address its sickly state, selling a portfolio of equity release mortgages to JP Morgan Chase at a premium to its balance sheet value. The portfolio is worth L2.2 billion, and Northern Rock will make a L50 million profit on the sale. The move will enable it to repay almost L2.3 billion of the Bank of England's L26 billion.

The move was seen as an encouraging sign, but analysts noted that Northern Rock had sold one of its most attractive portfolios.

Trustees of Northern Rock's pension scheme are attempting to set up safeguards. They have asked the company to place members on the same footing as depositors by setting aside enough mortgage assets to guarantee that all promised benefits could be fully paid if the bank becomes insolvent.

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