 |
February 4, 2008 |
|
|
|
 |
NORTHERN ROCK: Restructuring Proposals Entail Job Losses Virgin Group, Olivant and Northern Rock plc's management's restructuring proposals are threatening job losses at the bank, the Financial Times reports. The bidders have until today, February 4, 2008, to submit their proposals, which according to the FT, are highly risk-averse business plans, although they reflect the government's need to comply with European Union rules on state aid, under which the new owner must not gain an unfair advantage. The proposals, the FT adds,, which can use the government- sponsored financing package, could include writing far less new mortgage lending at the bank to be funded from new retail deposits. Meanwhile, a less aggressive business plan requires injecting fresh equity of between GBP500 million and GBP750 million. Ministers, however, claims, there are likely to be job losses under any scenario, the FT reveals. The FT relates that Northern Rock, which employs 6,500 people, has not carried out a redundancy program but stopped recruiting after it sought emergency funding from Bank of England in mid- September. According to the FT, the independent rescue plan drawn up by Northern Rock director Paul Thompson for the bank has purportedly won support from shareholders this week. Mr. Thompson, the FT discloses, intends to retain much of the present bank's management, should the plan be favored, although Bryan Sanderson may not remain as chairman. As previously reported in the TCR-Europe report on January 30, 2008, Cerberus Capital Management LP and Five Mile Capital Partners have expressed interest in taking an equity stake in Northern Rock under the plan, which could force Luqman Arnold's Olivant and Sir Richard Branson's Virgin Group to come up with a better offer. Rights Issue As stated in the TCR-Europe report, the bank's shareholders, SRM Global and RAB Capital, will support a rights issue, which would inject between GBP200 million and GBP250 million in new equity, majority of which will come from SRM. Merrill Lynch and ABN Amro will underwrite the remainder of the rights issues, which is estimated to be about GBP1 billion. Olivant's Initial Proposal On November 16, 2007, Olivant has submitted a detailed proposal to the Board of Northern Rock offering an alternative to a distressed sale of all or part of the company's business. The Olivant proposal entails taking urgent steps to re-establish Northern Rock as a viable business, retaining its brand and restoring it to financial health. Overview of proposal: * Immediate introduction of an experienced operational team into Northern Rock, led by Olivant's chairman, Luqman Arnold, to achieve stabilization of the company and its business * Prompt repayment of Bank of England liquidity support facility through active operational management, accelerated through external market financing * Implementation of a restructuring strategy to size Northern Rock to its natural funding and operational capacity * Subscription for a minority stake in Northern Rock on terms to be agreed with the Company's board * Olivant's only financial return will arise from an increase in the value of its investment Virgin Group's Initial Proposal A Virgin-led consortium's formal proposal to recapitalize and refinance Northern Rock has been lodged with the company's advisers on November 16, 2007. * The consortium's intention is that Northern Rock continues as a going concern and a listed entity -- rebranded as Virgin. * An experienced plc board is being assembled, including Sir Brian Pitman as Chairman. Sir George Mathewson is senior adviser. * A significant proportion of the Bank of England borrowings will be repaid immediately. A clear timeline is envisaged for full repayment of the borrowings and the release of HM Treasury's guarantees. As previously reported in the TCR-Europe on Jan. 23, 2008, HM Treasury, on behalf of the Tripartite Authorities, outlined 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. The HM Treasury also provided 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. In order to maximize 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. 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 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 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 November 19, 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 March 17, 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 February 4, 2008. HM Treasury and the Bank of England will make arrangements for the existing Bank of England facilities to be extended up to March 17, 2008, to allow time to explore the proposed financing structure with Northern Rock and other interested parties. 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, these 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 recognize 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 favor 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 fulfillment 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 authorization 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 authorization. About Northern Rock plc Headquartered in Newcastle upon Tyne, England, Northern Rock plc -- http://www.northernrock.co.uk/mortgages/ -- deals with mortgages, savings accounts, loans and insurance. The company also promotes secured loans to its existing mortgage customers. The company had more than US$200 billion in assets at the end of June 2007. * * * As reported in the TCR-Europe on Dec. 20, 2007, Moody's Investors Service downgraded to E+ from D+ Northern Rock's Bank Financial Strength Rating. The E+ maps into a Baseline Credit Assessment of B1. The bank's dated subordinated debt was downgraded to B1 from Baa1 and the undated subordinated debt and Tier-1 securities were downgraded to B3 from Baa1 and Baa3 respectively. All of these ratings have negative outlooks. Northern Rock's short- term rating was affirmed at Prime-1. As reported in the TCR-Europe on Sept. 28, 2007, Standard & Poor's Ratings Services placed its 'A-/A-1' counterparty credit ratings on U.K. bank Northern Rock PLC on CreditWatch with developing implications. At the same time, the 'BBB' subordinated, 'BB' junior subordinated, and 'A-' senior unsecured debt ratings were placed on CreditWatch with developing implications. |
|
|
||
|
Today's Top Stories have been selected from the Troubled Company Reporter - Europe. To receive the Full TCR-EUR please CLICK HERE.
