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A trade sale for a nominal sum or a run-off scenario are the most likely solutions for UK-listed bank Northern Rock, banking sources have said.
The bank’s share price has fallen by around 85% since December in the wake of the collapse of the US sub-prime market and a consequent increase in wholesale borrowing rates.
One buy-side source said a trade sale was more likely than a run-off, although it would be now difficult to put a value on the bank after more than GBP 2bn was taken out by retail depositors over the past week. He observed: “The bank’s lost both sides of its franchise: its depositors aren’t happy with it and its mortgage brokers aren’t getting any business.”
He said the Bank of England was now attempting to find a buyer with a strong retail deposit base to acquire Northern Rock, most probably from outside the UK. He said the aim would be for the acquirer to use retail deposits to see Northern Rock through its short-term funding difficulties.
Press reports have pointed to an approach by UK-listed bank Lloyds TSB. The source said Lloyds TSB had looked at Northern Rock and had asked the Bank of England to leave an emergency credit line in place post-takeover to help fund the acquisition. He said the Bank of England refused to agree to this because it was worried about the effect of a takeover on Lloyds TSB’s own retail customers but also because it wanted to afford other potential acquirers the opportunity of looking at the bank.
Both ING and Santander could be of a size to bid, the source said, despite their insistence recently that the bank was not on their radar. “Stranger things have happened,” he observed.
However, he also described a run-off scenario as “plausible”. He said that, in essence, there would be very little difference between a trade sale for a nominal sum and a run-off of the bank.
On the question of how run-off could work, he said Northern Rock could close its mortgage book to new business and sell the existing portfolio to a third party. “Traditionally a run-off situation in the banking sector would see the carve-out of bad assets and their sale to a third party. But here, there’s not a problem with the quality of the assets. It’s a question of funding.”
He said added that Northern Rock’s mortgage administration platform, with its efficient IT platform, was still an attractive asset for any potential acquirer. This was one of the drivers of Lloyds TSB’s interest, since it could be used to rejuvenate its mortgage subsidiary Cheltenham and Gloucester, he said.
He added that, in extremis, private equity could get involved if a run-off solution were considered. But he said it would have to be one of the huge private equity firms: either KKR, BlackStone or JC Flowers.
A second senior buy-side banking source agreed with the first that run-off was now a plausible scenario for Northern Rock, adding that it was now “difficult to do any deal”.
“Any buyer would need to fund Northern Rock’s book from their balance sheet – but even the largest banks would struggle to do that,” he said.
He added: “In terms of whether or not Northern Rock is attractive, it’s not a question of share price. There’s a big wholesale funding requirement – and I’m not sure there’s anyone willing to take that on.”
When asked whether he was actively seeking a buy-side mandate, he said people were looking for mandates but that it would not be an easy deal to do.
He pointed to the difficulties of selling UK-listed mortgage bank Kensington, noting that the sales process there had been difficult even in the absence of the current market conditions.
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