Northern Rock shares rise as British Treasury unveils plan
Crisis-hit British bank Northern Rock edged back from the brink of nationalisation today after the Treasury unveiled new funding guarantees to support a private sector rescue.
The beleaguered lender's massive £24bn (€32.25bn) taxpayer debt will be split into British Government-backed bonds and sold to investors to help fund a rescue, the Treasury confirmed.
Although Northern Rock could still be taken into public ownership if private sector bids fail, shares in the group rose 40% as investors cheered the news.
Richard Branson, whose Virgin group is spearheading a potential rescue of the bank, added in New Delhi today that his offer would repay the taxpayer loans and save most jobs at the ailing bank.
Investment group Olivant and a team led by Northern Rock's own management are also vying to salvage the business and must present plans to the Treasury by February 4.
Under the Treasury plans, Northern Rock's debt would be sold off in money markets via bonds, which will be underwritten by the Government.
The bond scheme has been drawn up by the Treasury's financial advisers, investment bank Goldman Sachs.
The Treasury had originally hoped that private sector bidders would be able to pay off up to £15bn (€20.2bn) of the lender's Bank of England debts up front, but would-be rescuers have struggled to raise financing following the credit crunch.
Although this will allow the debt to be paid off straight away, the Treasury guarantee means that the taxpayer will be exposed to potential losses for the same period as the term of the bonds - which could be five or 10 years.
The move prompted angry responses from opposition politicians. Shadow chancellor George Osborne said last night: "Gordon Brown is mortgaging the taxpayer to try to get him out of the political hole he's dug for himself."
Northern Rock's shareholders - who could have been virtually wiped out by nationalisation - welcomed the plans, however.
Robin Ashby, head of the Northern Rock Small Shareholders Group, said: "We are pleased that there is some certainty going forward and that there is a platform on which the various proposals can be built.
"The immediacy of nationalisation is removed and there is a clearer medium-term prospect for the business."
The British Treasury laid down several conditions for the deal today, insisting that it gains a share in any recovery of Northern Rock in private sector hands.
Northern Rock must pay for the Treasury guarantee and the scheme also depends on a "robust" business plan from the potential rescuers. The lender must show it has enough capital to survive in difficult trading conditions and plans must not breach European Union state aid rules.
Branson, currently on a trade trip to China and India with British Prime Minister Gordon Brown, said his consortium would not be making excessive returns if their bid was successful.
He said: "The margins we are actually going to make out of this deal are not unusual margins, so there's not much room to sharpen our pencils."
Northern Rock, which was at the centre of the UK's first bank run for nearly 150 years in September after soaring borrowing costs in the credit crunch, said it "welcomed" the British government's preference for a private sector rescue.
The company said: "A private sector solution is also the board's objective as being in the best interests of its shareholders and other stakeholders."
Trade union Unite also praised the move as a "a creative way of resolving the current logjam".
Deputy general secretary Graham Goddard said: "Over four months of uncertainty has led to employees fearing there may be no secure solution to the current crisis.
"Unite will now be pressing the bidders for more information on their proposals in order to give the workforce some assurances about their future."
Brown said his government was seeking "the best deal for the British taxpayer" and economic stability.
Speaking in India, Mr Brown said: "When we were faced last August with the problems at Northern Rock and the danger that these would spread to the rest of the economy, it was right, and I believe everybody agreed, that the Government intervened to protect the depositors and the savings and at the same time to ensure the stability of the economy.
"For the last four months, because of our action, that has been achieved.
"Today the loans that we have made to Northern Rock, through the Bank of England, are secured against its assets.
"Most people agree that Northern Rock has a quite high-quality loan book and I can assure you that our aim in all of this, and the Chancellor will be making a statement in the House of Commons, is to secure the best deal for the British taxpayer and ensure the stability of the British economy amidst the existing global financial turbulence."
