2.32 On 14 December, after discussions with the company and its advisers, the Tripartite Authorities asked Goldman Sachs to investigate the market and if necessary construct a new financing package that bidders could use. In early 2008, Goldman Sachs proposed a new financing structure in which Northern Rock would sell a mixed pool of assets to a newly created special purpose company (see Box 3). The special purpose company would issue bonds to investors and use the proceeds to pay off the Bank of England loans to Northern Rock. The Treasury would guarantee the bonds, although any losses in the asset pool would first be borne by Northern Rock. This financing structure would result in a lower cost of funding for the bidders, while allowing the Bank of England facility to be repaid in full.
BOX 3 | |
Revised financing structure for the sale of Northern Rock and sale conditions 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 special purpose financing vehicle. The financing vehicle would fund the purchase of the asset pool by the issue of notes to investors in the capital markets. Each class of notes would bear a market interest rate which reflected the provision of a guarantee by the Treasury. 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 and to provide adequate liquidity for the company. The 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 the Treasury for the note guarantee. All arrangement fees and expenses relating to the issue would also be paid by Northern Rock. | |
Sale conditions |
|
Business plan | The plan would need to demonstrate that the company could in due course operate without government support and acquire an appropriate standalone credit rating. The plan would also need to provide the Treasury with a fee for its existing guarantee arrangements. |
Protection of Treasury interests | Restrictions on dividends. Prohibitions on change of control without Treasury consent. |
Additional capital | The company would have sufficient capital and liquidity to meet the Financial Services Authority’s requirements under a range of downside scenarios, plus a significant buffer to protect taxpayers’ interests. |
Equity participation | The Treasury would require an appropriate share in potential increases in the value of the company. The Treasury to share in any gains even after the demise of its guarantees. |
State aid | Northern Rock and any buyer to assist the Treasury with the preparation of an appropriate restructuring plan to the European Commission. |
Source: HM Treasury | |
2.33 Ahead of what was to be the final round of bidding, the Treasury obtained further legal advice in January 2008. Given that the bid process was now dependent upon taxpayer support, the advice indicated that the Treasury could impose certain conditions on Northern Rock for the protection of the taxpayers' interest. Such conditions would not be treated as giving instructions to the directors, even if those directors had little practical choice but to act upon such instructions. Following this advice, the Treasury sought to take a direct role in the latter stages of the bidding process. The Tripartite Authorities announced the structure of the package on 21 January 2008 and invited bids.
2.34 There were, however, material risks for the taxpayer:
■ the new financing structure would involve significant and continuing public subsidy to the company through the guarantee of its bond issue;
■ the taxpayer would be exposed to significant commercial and market risk, while it was possible that the private sector purchaser would make large profits from the deal;
■ there would be an extended period while financing was put in place and state aid approval was sought, during which the deal could fail.
2.35 Goldman Sachs approached earlier bidders who might have had an interest in making a bid with the new financing package in place. On 4 February 2008, however, Olivant announced that it was withdrawing from the process as it had been unable to formulate an offer that met its investment criteria and satisfied the requirements of other stakeholders, including the Treasury. The negative publicity surrounding Northern Rock, the failure of previous attempts to generate interest, perceptions surrounding the potential for litigation facing any prospective bidder, together with further material deterioration in the overall economic environment, combined to dampen interest in buying Northern Rock.
2.36 Two detailed proposals were received by 4 February 2008: one from Virgin and the other from Northern Rock's management team. Following further discussions with both bidders, final proposals were received on 17 February (Appendix 8).