What next for Northern Rock?

Last Modified: 20 Nov 2007
By: Channel 4 News

The troubled bank faces some pretty unappealing options. What are they and what are their implications?

What are the bank's options?

Receivership
Just as in any other business situation, if a debtor breaches the conditions of a loan the creditor - in this case the Bank of England - can call in a receiver.

This means the BoE has first dibs on Northern Rock's assets should the bank default on its loan.

What complicates the situation is that the Treasury also has a deciding vote in the bank's future - adding a political aspect to an already volatile brew.

The political fall out of thousands of job losses, angry small shareholders who, if the bank went into liquidation, wouldn't get a cent, and ultimately, criticism of the chancellor's decision to bail the bank out with taxpayers' cash, is something the government would dearly like to avoid.

The other snag is that because there is no current market for some of Northern Rock's assets, full liquidation could take years.

Sell-up
Although Northern Rock says there had been some expressions of interest in parts of the bank, none has so far put in an offer for the bank in its entirety. And, the offers that have come in have been deemed too low.

Around 10 companies have made advances. The front-runners include the Virgin Group headed by Richard Branson, a consortium headed by former Abbey National chief Luqman Arnold, and the private equity firm JC Flowers.

On Monday Northern Rock said the proposals received so far were "materially below" the bank's closing share price on Friday, which valued the bank at £558mn.

But the problem is that the bank is extremely dfficult to value at the moment due to its volatile share price and general uncertainty in the market since the credit crunch hit home.

If it can get enough funding from other banks, there is a possibility the bank could remain on its own feet, bu this is currently thought to be unlikely.

Nationalisation
The bank hasn't gone bust, so this isn't straightforward. It would work like this: the government woulkd make an offer for all the outstanding Northern Rock shares and turn it into a state controlled company.

But this could lead to shareholders fighting the government in a legal battle over share prices.

It's not the first time the present Labour government has nationalised a company - most recently Railtrack and British Energy. But this would be its first bank.

A number of commentators have argued the bank should be nationalised to protect the taxpayers' money which has already been spent.

But the govt doesn't seem to want to put Northern Rock into administration, which could be disastrous for the banks' investors and customers, and damage the government's own credibility.

Run off
If the treasury, along with Northern Rock's board, decides that the bids on the table would either be a bad deal for customers or would end up with further borrowing, then the bank might be put into run off.

This means the bank would continue to service existing customers but not take on any new business, gradually winding things down.

Although it's possible this could make a profit, the government would be exposed for many years as it very slowly recouped its emergency loan.

A similar option is favoured by shareholders. The UK Shareholders Association (UKSA) is backing proposals by former Abbey chief executive Luqman Arnold to parachute in a heavyweight management team to turn around the business without the company changing hands or being split up.

A UKSA spokesperson said: "The government has to be sensible and not panic about the political view of the electorate, and ask what the best solution is for all stakeholders, which include the employees, shareholders and people like the Northern Rock foundation.

Who is affected?

Shareholders
The treasury has set out its criteria for assessing bids for Northern Rock. Its priorities are protecting taxpayers, promoting financial stability and protect consumers. There is no mention of safeguarding shareholders.

Small private investors own around 18% of the shares in the company. According to the UKSA, there are more than 100,000 names on the company's share register following the lender's demutualisation in 1996.

Their investments are at considerable risk as share prices plummet.

Spokesman Roger Lawson is keen to protect the interests of smaller investors against a cheap sell-off of the bank's assets to save government blushes with a speedy conclusion to the crisis.

If Northern Rock was to go into administration, or was nationalised, it is likely shareholders would receive almost nothing.

And if the bids Northern Rock has already received value the company at less than its Friday share price, shareholders may not do much better from a private takeover, since its shares have already lost more than 90 per cent of their value.

Savers
Northern Rock savers are in the strongest position of any group affected by the crisis.

The Treasury has put in place a specific guarantee protecting all retail deposits held with Northern Rock.

This exceeds the normal protection offered to savers under the Financial Services Compensation Scheme which currently guarantees 100 per cent of the first £35,000 saved with an institution.

Money in all existing, re-opened and future Northern Rock savings accounts is guaranteed.

Borrowers
Whatever happens to Northern Rock, borrowers will still have to continue making their monthly mortgage payments.

Most customers are on fixed deals so nothing will change.

If the bank is taken over, their mortgage would be sold to another company but it would not be able to vary the deal's terms and conditions during the deal's period.

Customers whose mortgages are on or linked to the company's standard variable rate (SVR) could see their payments change if any new owner decided to increase the SVR.

Staff
Unions and local MPs have already expressed concern about the possible impact on the bank's 6,000 staff.

They have called on the government to insist that any potential bidder honours a commitment to the North East, but it is not clear whether that will be a priority.

The Northern Rock's branch network, as well as its call centres, could be sold or closed by a buyer.

Execs
The fact that chief executive Adam Applegarth, who resigned on Friday, made £2.6 million selling shares in the Rock at close to their peak will do little to improve the mood of shareholders.

Why February?

The Treasury says the financial support Northern Rock is receiving from the government could be seen as state aid, which requires approval from the European Commission after six months.

This six month period will be up next February - which is why a decision, weighing up all the factors mentioned above, must be made as soon as possible.