The UK government’s deadline for rescue bids for crisis-hit mortgage lender Northern Rock expires today with a trio of possible deals on the table.
Richard Branson’s Virgin-led consortium and investment firm Olivant are set to table their plans for the company, with a bid by Northern Rock’s own management also possible.
Any potential deal must be approved by the “Tripartite Authorities” of the Treasury, Financial Services Authority and the Bank of England, which are likely to decide on a preferred bidder by the end of February.
Northern Rock owes around £24bn (€32bn) since it was forced to seek a Bank of England bail-out last September as its borrowing costs soared in the credit crunch – sparking the first run on a UK bank in more than 140 years.
The company was on the brink of nationalisation until two weeks ago because potential private sector rescuers were struggling to raise funding in tighter debt markets.
This forced the Treasury into plans to split up the massive £24bn (€32bn) taxpayer debt into Government-backed bonds to sell to investors as a “back stop” to fund a private sector solution.
The Government will also need to satisfy the European Commission that the eventual solution decided on for Northern Rock’s woes does not flout rules on state aid to companies.
Virgin plans to merge the Northern Rock with its existing Virgin Money business and inject £1.3 billion of new equity into the ailing firm. Half of the cash will come from the consortium, with the remainder being raised through an offer to existing Rock shareholders to buy new shares for 25p each through a discounted rights issue.
Meanwhile Northern Rock’s in-house management is also said to be preparing a potential rescue, which would see the former chief executive of insurer Resolution, Paul Thompson – who joined the lender’s board a month ago – take over as chief executive if successful.
Northern Rock had a stock market value of around £5.3bn (€7bn) a year ago but it is now worth less than a tenth of that figure.
Its business model involved borrowing most of its cash for mortgage lending in money markets, but the firm was caught out last August when banks fearful of losses on US mortgage investments stopped lending to each other.