U.K. to Back Northern Rock Debt in Plan to Spur Sale

U.K. to Back Northern Rock Debt in Plan to Spur Sale


Jan. 21 (Bloomberg) -- The U.K. government, in a last-ditch attempt to find a buyer for Northern Rock Plc, said it will guarantee a sale of bonds backed by the bank's home loans and gave bidders two weeks to come forward with proposals.

Under a plan devised by Goldman Sachs Group Inc., which is advising the government on Northern Rock, the bank's mortgages, consumer loans and some investment-grade securities would be packaged as debt and sold to investors, the Treasury said today. Bids based on the new funding plan must be submitted by Feb. 4.

Northern Rock gained as much as 55 percent in London trading on speculation the proposal will revive interest among potential buyers such as Richard Branson's Virgin Group Ltd. The Newcastle, England-based bank borrowed about 24 billion pounds ($47 billion) from the Bank of England since September, hampering a sale and forcing the government to consider nationalization.

``It seems a very reasonable solution for Northern Rock,'' said Simon Maughan, an analyst at MF Global Securities Ltd. in London who has a ``neutral'' rating on the stock. ``The problem comes when the competition cries foul.''

Northern Rock shares rose 26.5 pence, or 41 percent, to 91 pence by 9:46 a.m., valuing the bank at 383 million pounds.

Weighing Options

Northern Rock sought the government's help after the U.S. subprime mortgage crash rattled credit markets. The bank relied on the wholesale debt markets for more than 70 percent of its funding, a higher ratio than U.K. peers such as Bradford & Bingley Plc and Alliance & Leicester Plc.

By tapping the central bank for aid in September, Northern Rock triggered the first run on a bank in the U.K. in more than a century. The government guaranteed the bank's customer deposits and will also back the bond sale.

While Northern Rock is weighing private solutions, including a bid by Virgin and a reorganization plan of its own, concern has grown the bank may have to be nationalized as bidders struggle to secure financing to repay the Bank of England debt.

Northern Rock welcomed the authorities' preference ``to reach agreement on a private sector solution for the company,'' the bank said in a statement today. The lender said it would work with bidders and the government to develop their proposals and its own standalone plan.

A sale of the bank will need to be agreed in time to enable a restructuring plan to be submitted for approval to the European Union by March 17, the government said. Pending approval by the EU, the Bank of England's debts would be repaid in full under the plan.

Government Backing

The Treasury's obligations under its bond guarantee would be fully secured by a ``first priority interest'' on Northern Rock's assets, the government said. Northern Rock will pay a fee for the guarantee and all arrangement fees and expenses relating to funding plan.

``Goldman Sachs has identified this as the most efficient and effective means of using the government's support,'' said a Treasury spokesman who commented on condition he not be identified. ``The bonds issued under this financing structure would be triple-A rated government-backed bonds and have an extremely low risk of default,'' said the spokesman.

``There remains much uncertainty about how exactly this process will evolve, and indeed if it will prove practical given the size of the assets Northern Rock would need to sell,'' said John Wraith, head of U.K. interest rate strategy at Royal Bank of Scotland Group Plc, in an e-mailed note to clients today.

Darling to Speak

U.K. Chancellor of the Exchequer Alistair Darling will make a statement today on the loan conversion plan and possibilities for a private sale. Darling will outline conditions under which Northern Rock loans would be converted into bonds, as well as what bidders may have to do to get the funds, according to a person with knowledge of the plan, who declined to be identified.

``We are mortgaging ourselves for years to come in order to get the government out of a political hole,'' said George Osborne, who speaks on finance for Britain's Conservative Party, in an interview on BBC Radio 4's Today program.

The government will bring forward legislation to put the company into temporary public ownership if a private sale isn't possible, the statement said. If it is nationalized, the bank ``would be managed at arm's length, as a commercial entity,'' with a new management team, the Treasury said.

Branson told reporters on Jan. 18 that his group is still the ``preferred'' bidder for the bank. Virgin will sweeten its offer to try to win support from investors, the Sunday Times reported yesterday, without saying how it obtained the information.

Branson, Brown

``Superficially, we are happy,'' Branson told reporters in New Delhi today. ``We'll put our best foot forward in two weeks time and obviously we hope we are successful.''

Virgin, backed by billionaire Wilbur Ross, American International Group Inc., Toscafund Asset Management LP and First Eastern Investment Group, has pledged to inject about 1.3 billion pounds into the bank, half of which would be a rights offer to shareholders. It plans to re-brand the bank and bolt it onto its Virgin Money unit.

U.K. Prime Minister Gordon Brown denied he made a deal with Branson over the sale of Northern Rock during their tour of China and India. The Virgin founder is one of 30 executives traveling with Brown on his trade mission, which arrived in Delhi yesterday. Both said Jan. 19 that they discussed Northern Rock during the trip, though ``not in any detail.''

Luqman Arnold's Olivant Advisers Ltd. has also made an offer for the bank. Olivant has said it will raise as much as 650 million pounds in a rights issue, invest 150 million pounds and continue to run the business. An Olivant spokesman declined to comment on the funding proposal.

Northern Rock has proposed a plan whereby it would shrink the bank's assets while not shutting it to new business. Other companies, including J.C. Flowers & Co. and Lloyds TSB Group Plc may be interested in bidding using the bond plan, the Daily Mail earlier reported.

BLOOMBERG