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The process of choosing the successful bidder for Northern Rock appears to have evolved from a typical mergers-and-acquisitions bid process into one focused on how best to restructure the stricken bank.
Like any senior creditor in a corporate restructuring, the tripartite authorities – the Financial Services Authority, the Treasury and the Bank of England – will assess all three restructuring proposals to examine the quality and credit-worthiness of the business plans.
The government is, after all, the senior creditor of Northern Rock, having lent £28bn ($55bn) to the stricken bank and possessing the power to decide which bidder it is prepared to lend to in future.
After this initial decision has been made, Northern Rock’s board must decide which option is best – not only for shareholders and employees, but also the pension fund and the bank’s charitable foundation.
“The tripartite [authorities] need to work with the company in understanding the debt restructuring and how the financing package will work in practice, and what mortgage collateral will be used in the special purpose vehicle,” said one person close to the process.
The three proposals are similar. They all use the same government-sponsored funding package and put forward the same highly risk-averse business plans for new mortgage lending.
However, Virgin’s proposal is the most likely to change. One person close to the process said: “They may have to pull a rabbit out of the hat. There doesn’t seem to be any shareholders that support it as it stands at the moment.”
Virgin is now likely to include some provision to give the government a share of any windfall profits made in Northern Rock – possibly through an equity stake or warrants.
It is also likely to alter the amount of equity it will inject into Northern Rock. Virgin had originally proposed injecting £1.3bn of equity into the bank, plus Virgin Money, its financial arm, which is valued at £250m. However, the amount needed to recapitalise Northern Rock is now likely to be only £500m-£750m.
Virgin is set to propose taking a majority stake in Northern Rock of 50 per cent or more and rebranding the Newcastle-based lender as Virgin Bank.
Olivant’s proposal is likely to remain broadly the same as mooted last year. It plans to take a stake of about 15 per cent, allowing investors to inject the majority of any new equity.
It has put in place warrants of up to 5 per cent to give the government a share in any rise in the share price and will keep the Northern Rock name.
The proposal has attracted support from key shareholders such as RAB Capital and SRM, which between them have an 18 per cent stake in Northern Rock.
The company’s standalone restructuring proposal is most similar to Olivant’s. Investors have indicated that they would back the option, which would see the retention of the Northern Rock name and a rights issue to raise new equity.
It would shrink the bank initially and then grow it over the medium term.