Government reveals private sector plans to bail out Rock

Published on Monday 21 January 2008 09:30

THE Government today announced plans to back a private sector rescue of Northern Rock.

The proposed solution will see the 25 billion of public money that was loaned to the crisis-hit lender converted into government-guaranteed bonds and sold to investors.

But the funding would be dependent on a "robust and acceptable" business plan, the Treasury insisted.

Three private sector teams are vying to salvage Northern Rock – a consortium led by Sir Richard Branson's Virgin group, investment group Olivant, and the Newcastle-based bank's own management.

They now have until February 4 to submit their proposals.

Northern Rock was at the centre of the first run on a UK bank in nearly 150 years last September after its borrowing costs soared in the credit crunch, leading to the Bank of England bail out.

The bond scheme announced today has been drawn up by the Treasury's financial advisers, investment bank Goldman Sachs and given the go-ahead by Prime Minister Gordon Brown.

The Government had originally hoped that private sector bidders would be able to pay off up to 15 billion of the lender's Bank of England debts up front, but would-be rescuers have struggled to raise financing following the credit crunch.

Shares in the company sank to new lows last week amid fears that the group would be nationalised.

But today's proposals would see the lender selling a pool of its mortgages to a financing company, which would sell the Government-backed bonds in money markets.

It means the taxpayer will be exposed to Northern Rock for much longer than planned.

The Treasury said if none of the private sector bids are acceptable, Northern Rock would be taken into "temporary public ownership".

But the renewed hopes of a private sector rescue saw Northern Rock's share price leap almost 29 per cent in early trading.

The company was worth almost 5.3 billion at its peak in February last year, but has now slumped to less than a tenth of that level

The group was relegated from the FTSE 100 Index in December after the crisis hammered its share price.

Northern Rock said it "welcomed" the Government's preference for a private sector rescue. It added: "A private sector solution is also the board's objective as being in the best interests of its shareholders and other stakeholders."

If forced to nationalise Northern Rock, the Treasury stressed that all guarantees to savers would remain in place, but warned that shareholders may get nothing.

It said: "The principles for assessing compensation 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 public sector ownership would be an alternative to administration."