H M Treasury
21 January 2008
NORTHERN ROCK
HM Treasury, on behalf of the Tripartite Authorities, today announces the basis
on which the Tripartite Authorities are taking forward discussions with the
Board of Northern Rock, and with other interested parties, on the potential for
a private sector solution for the entire company, with a view to ensuring that
all existing loan facilities provided by the Bank of England are repaid in full,
with interest, immediately following closing of any such transaction and any
future financial exposure of HM Treasury meets the objectives of the Tripartite
Authorities.
This announcement also provides further information about the contingency plans
of the Tripartite Authorities should a private sector solution not be achievable
on terms acceptable to the Bank of England and HM Treasury, as providers of
financial support to the company, and the Financial Services Authority, as its
regulator.
BACKGROUND
As explained on 11 October 2007, the Tripartite Authorities' objectives in
relation to Northern Rock are to protect taxpayers, to promote financial
stability and to protect consumers. The specific objectives of the Financial
Services Authority are set out in Part I of the Financial Services and Markets
Act 2000.
On 19 November 2007, HM Treasury, on behalf of the Tripartite Authorities,
published a statement of principles setting out how the Tripartite Authorities,
acting in their respective capacities, expected to approach proposals for the
future of Northern Rock and its business, in particular considering the
objectives against which the Tripartite Authorities expect to assess proposals
made or received by Northern Rock.
EXISTING HM TREASURY GUARANTEE ARRANGEMENTS CONTINUE
The existing HM Treasury guarantee arrangements remain in place. Savers' money
remains safe and secure.
FINANCING
Timetable and Process
The Tripartite Authorities are working closely with the company, and other
interested parties, to develop a financing structure based on the outline terms
described below that could be available to support a private sector solution,
subject to the acceptability of detailed terms to the Tripartite Authorities,
applying the principles published by HM Treasury on 19 November 2007.
HM Treasury and the Bank of England will have the right, at their complete
discretion, to determine which, if any, of the proposals put forward by the
company and other interested parties will receive their financial support. Any
proposal would also need to satisfy the specific regulatory requirements of the
Financial Services Authority. Accordingly, the Tripartite Authorities, acting
in their respective capacities, will hold discussions with interested parties in
relation to their proposals, in consultation with the Board of Northern Rock,
where appropriate. Northern Rock has agreed to inform the Tripartite
Authorities of any proposals made to it and make available relevant information
about its group to interested parties.
The process of exploring this financing structure and determining whether there
is a proposal for Northern Rock under private sector ownership that is
acceptable to the Tripartite Authorities, acting in their respective capacities,
will need to be completed in sufficient time to enable a restructuring plan to
be submitted to the European Commission by 17 March 2008 under European state
aid rules. Accordingly, detailed proposals on which this plan can be based
should be submitted as soon as possible and, in any event, must be received by
the Tripartite Authorities by 4 February 2008.
A term sheet of the principal terms and conditions of the proposed financing
structure will be provided to interested parties shortly.
HM Treasury and the Bank of England will make arrangements for the existing Bank
of England facilities to be extended up to 17 March 2008 to allow time to
explore the proposed financing structure with Northern Rock and other interested
parties.
Financing Structure: Background
In order to maximise the prospects of delivery of a financing solution that
meets the objectives of the Tripartite Authorities in the current market
conditions, the Tripartite Authorities in agreement with the Board of Northern
Rock requested their retained financial advisers, Goldman Sachs, to evaluate
options available for financing a restructuring of the company. The option they
have proposed and which the Tripartite Authorities are willing to pursue with
the Board of Northern Rock and other interested parties is described below.
It would be a condition of such financing structure that the net proceeds of the
financing would be used immediately following closing of any transaction to
repay in full amounts due under the existing Bank of England loan facilities,
together with all accrued interest (including PIK interest).
Financing Structure: Principal Characteristics
Under the proposed financing structure, Northern Rock would sell a pool of its
assets, consisting of residential mortgages, unsecured consumer loans and
certain investment-grade securities, to a financing vehicle established for the
purposes of the financing structure. The financing vehicle would fund the
purchase of the asset pool by the issue of notes in the capital markets. The
timely payment of principal and interest under the notes would be guaranteed by
HM Treasury. HM Treasury's obligations under its note guarantee would be fully
secured by a first priority interest in the asset pool. A fee would be payable
by Northern Rock to HM Treasury for the provision of the note guarantee. All
arrangement fees and expenses relating to the issue would also be paid by
Northern Rock.
Each class of notes would bear a market interest rate which reflects the
provision of the note guarantee by HM Treasury. The maturity date for the notes
would be determined upon issue and would primarily be based upon assumed levels
of principal repayments in the asset pool.
The asset pool would comprise assets having an appropriate value to support the
issue of sufficient notes to make the payments to the Bank of England referred
to above and to provide adequate liquidity for the company. Northern Rock would
have the right to repurchase mortgages from the asset pool in certain
circumstances, including where Northern Rock needs to substitute mortgage loans
into the Granite master trust or its covered bond pool and it would otherwise
have insufficient eligible mortgage loans to do so.
Because the value of the asset pool would exceed the initial purchase price paid
by the financing vehicle, Northern Rock would retain a subordinate interest in
the asset pool which would represent the difference between the asset pool and
the notes in issue. This means that any losses to the asset pool would first be
borne by Northern Rock, protecting the taxpayer in the case of underperformance
of the assets in the pool.
Principal Conditions
The Tripartite Authorities, acting in their respective capacities, have informed
the Board of Northern Rock that they would be willing to explore with the Board,
and with other interested parties, whether this financing structure can be made
available in the context of a private sector solution put forward by such
parties or by the company itself. This will involve a further assessment of
whether any state aid which it involves could be approved by the European
Commission. Any proposal would also need to satisfy the specific regulatory
requirements of the Financial Services Authority. The Tripartite Authorities
have informed the Board of Northern Rock that, in particular, the following
principal conditions would need to be complied with in order to give adequate
assurance that their stated objectives of protecting taxpayers, promoting
financial stability and protecting consumers will be met:
• Business Plan: the successful proposal would need to be based on a robust
and acceptable business plan that, in the context of the financial support
proposed to be provided, satisfies both the stated objectives of the Tripartite
Authorities and the requirements of European state aid legislation. This will
require the plan to demonstrate that the company has sound prospects enabling
it, in due course, to operate without Government support and acquire an
appropriate standalone credit rating. The agreed plan would also need to
provide for a fee to HM Treasury for its existing guarantee arrangements,
increasing over time if such arrangements are continuing.
• Protections: for so long as HM Treasury's existing guarantee arrangements
remain in place there would need to be appropriate protections that recognise
the interests of HM Treasury as a provider of financial support to Northern
Rock. In particular, the documentation would need to contain appropriate
covenants in favour of HM Treasury to protect its interests during this period
and support the delivery of the agreed business plan, including restrictions on
dividends, prohibitions on change of control without HM Treasury consent and a
range of other provisions appropriate for the provision of financial support of
the kind contemplated. The documentation would also provide for HM Treasury to
require Northern Rock to provide cash cover for HM Treasury's existing guarantee
arrangements if certain events of default occurred.
• Additional Capital: the Tripartite Authorities would need to be satisfied
that the company will have sufficient capital and liquidity to meet the
requirements of the Financial Services Authority under a range of downside
scenarios applied to the business plan, plus a significant buffer to protect
taxpayers' interests (to be determined according to the requirements of the
business plan). This capital would need to be committed as soon as reasonably
practicable and in any event within 45 days of submission of the restructuring
plan to the European Commission and would be in a form such as an underwriting
commitment to subscribe for new Northern Rock ordinary shares or a completed
issue of debt securities that would be convertible into such shares at closing
which would be released or repaid (as the case may be) if the transaction were
not completed for a reason outside the control of Northern Rock or its
shareholders.
• Management and Ownership: any proposal must provide for ownership of the
company and fulfilment of its management roles by suitable persons, having
regard to the respective interests of the Tripartite Authorities.
• Equity Participation: as additional consideration for the provision of
support from HM Treasury, HM Treasury would require an appropriate share in
potential upside equity returns of the company. The details of such equity
participation would be agreed as a condition to the financing structure. It is
envisaged that such participation would be available until after the period that
HM Treasury's guarantee arrangements remain outstanding.
• State Aid: implementation of the financing structure would require the
submission by HM Treasury to the European Commission of an appropriate
restructuring plan and the authorisation by the Commission of any state aid
which it involves. The company and other relevant interested parties would be
expected to assist HM Treasury with the preparation of such a plan.
Implementation of the financing structure would follow receipt of the necessary
state aid authorisation.
General
The financing structure is not an offer or commitment of any kind by the
Tripartite Authorities or Goldman Sachs or a representation or undertaking by
the Tripartite Authorities or Goldman Sachs that the financing structure can be
implemented. The Tripartite Authorities and Goldman Sachs reserve the right to
withdraw from the process of exploring or implementing the financing structure
or any other proposal for Northern Rock at any time.
CONTINGENCY PLANNING
In order to ensure that their stated objectives are met, the Tripartite
Authorities have continued to plan for the full range of possible outcomes to
the strategic review of Northern Rock.
The preference of the Tripartite Authorities, acting in their respective
capacities, is to reach agreement on a private sector solution which meets the
objectives and conditions set out above. However, if no private sector solution
is proposed which the Bank of England and HM Treasury, as providers of financial
support to the company, and the Financial Services Authority, as its regulator,
consider they can agree in light of their objectives of protecting taxpayers,
promoting financial stability and protecting consumers, the Government would
bring forward legislation which would empower HM Treasury, by order, to take
Northern Rock into temporary public ownership. It is envisaged that any such
power would be used to transfer Northern Rock's share capital, including its
preference shares, into public ownership. It is anticipated that the remaining
Tier 1 and Tier 2 capital instruments would continue in their existing ownership
as listed securities. Holders of these capital instruments would remain at risk
of first loss ahead of the Bank of England and HM Treasury as providers of
secured financial support to the company. The Tripartite Authorities consider
that a temporary period of public ownership would best serve their stated
objectives if a private sector solution could not be agreed on terms acceptable
to the Tripartite Authorities, acting in their respective capacities. The
Tripartite Authorities do not consider that an administration of Northern Rock
would meet these objectives.
All of the Government's guarantee arrangements would remain in place and
accordingly savers' money would remain absolutely safe. Savers and borrowers
would not be affected by the company being taken into public ownership.
Northern Rock would continue to operate and provide services to customers as
normal. Branches, call centres, postal and internet banking would all remain
open and accessible, as usual.
In the event of Northern Rock being brought into temporary public ownership, it
would be managed on arms' length terms, as a commercial entity, by a newly
appointed experienced and professional management team.
The legislation brought forward would provide for the assessment by an
independent valuer of compensation payable to any holder of securities
transferred to HM Treasury. The principles for assessing compensation, which
would be set out in the legislation brought forward, would reflect the principle
that the Government should not be required to compensate shareholders for value
which is dependent on taxpayers' support and the fact that public sector
ownership would be an alternative to an administration of the company.
Accordingly, the compensation would be assessed by the valuer on the basis,
among other things, that all financial assistance to Northern Rock from the Bank
of England or HM Treasury (including HM Treasury's existing guarantee
arrangements) had been withdrawn and no other financial assistance (apart from
Bank of England assistance on its usual terms through standing facilities or
open market operations) were made available by them to Northern Rock.
Any decision or announcement to take Northern Rock into temporary public
ownership would also address the future of the Northern Rock Foundation.
The preference of the Tripartite Authorities, acting in their respective
capacities, is to reach agreement on a private sector solution which meets the
objectives and conditions set out above. However, if no private sector solution
is proposed which meets these objectives and conditions, the Government would
bring forward legislation which would empower HM Treasury, by order, to take
Northern Rock into temporary public ownership.
Goldman Sachs International ('Goldman Sachs'), which is authorised and regulated
in the United Kingdom by the Financial Services Authority, is acting as
financial adviser to members of the Tripartite Authorities and no-one else in
connection with the restructuring of Northern Rock and will not be responsible
to anyone other than those members of the Tripartite Authorities for providing
the protections afforded to clients of Goldman Sachs or for providing advice in
relation to the restructuring of Northern Rock.
This information is provided by RNS
The company news service from the London Stock Exchange