Commercial insurance article archive
Northern Rock - Investors nervous as endgame nears
The future of troubled mortgage-lender Northern Rock remains as uncertain as ever following on from a mixed report by the bank's advisers.
Merrill Lynch, Citigroup and Blackstone compiled the 36-page 'briefing memorandum', portraying the bank as a company with a strong future based on its solvent mortgage books, but glossing over many of the risks potential buyouts firms would be saddled with.
The Newcastle-based lender first ran into difficulties in September when it was revealed that the Bank of England has issued it emergency funding in the wake of the growing credit crunch, which had been affecting its ability to raise financial capital for mortgage lending.
Despite assurances from the Treasury - and later even a guarantee by the government to protect all customers' savings - the funding revelation sparked a wave of panic among the general public which saw long queues developing outside Northern Rock banks.
Initially lampooned by pundits as the first run on a British bank in 141 years, the general public's paranoia rapidly grew from somewhat of a comical spectacle to a self-fulfilling prophecy. Even with its entirely solvent mortgage books and sound financial footing, confidence in the Northern Rock brand had all but evaporated and the lender lost 80 per cent of its £5 billion market value in under a week.
With shares plummeting from a 1251p high in February to a pitiful 112p low in October, analysts have since been debating whether the bank's reputation can be salvaged or if its mortgage books should be subsumed by any firms that succeed in staging a takeover.
Cautious buyout offers have so far trickled in from various corners - with Richard Branson's Virgin-led consortium leading the pack, followed closely by US investment groups JC Flowers and Cerberus - and this week's anonymously-leaked memorandum aims to lay out possible future scenarios facing prospective buyers.
Three potential courses are outlined for Northern Rock officials in the memo - the first two of which are seen as the most likely recourses: selling the firm's assets to the highest potential bidders and lumping shareholders with a near-worthless stake in a debt-saddled rump company.
The third option, meanwhile, is widely perceived to have failed already as it hinges on finding a buyer for the entire company, demanding huge capital reserves and exposing any such takeover firm to the bank's amortising debts.
Financial advisors predict in the memorandum that even by 2010 the Newcastle-based lender will still owe as much as £5.88 billion to the Bank of England (BoE), totally undermining the fact that the company is predicted to make a profit of £143 million next year, rising to £625 million by the end of the decade.
And even if the bank focuses its efforts on the less desirable option of enticing a consortium of bidders with its under-priced mortgage assets, reaching any such deal will still be contingent on the retention of the emergency funding facility that is currently scheduled to expire in February.
Observers insist that dropping the facility and imposing an artificial deadline on potential bidders would only strengthen the hand of circling US vulture funds looking to acquire the mortgage books at a hefty discount, but Bank of England officials are said to be pushing for a quick sale due to concerns over infringing EU bailout rules.
All in all, Northern Rock's future remains depressingly bleak and the company that was once responsible for one in every five new mortgages in the UK now looks set to be consigned to the history books as the first major British casualty of the 2007 credit crunch.
Having seen as much as £14 billion worth of its deposits withdrawn since the start of the crisis, the bank has to date borrowed £23 billion in emergency BoE loans and faces £26 million a week costs in penal interest rates alone.
Its effective nationalisation following on from the government's savings guarantee - coupled with accusations from the British Banker's Association that the UK's tripartite system of financial regulation was totally impotent during the crisis - will only further undermine public confidence.
As Colin Morton of the fund manager Rensbury explained to thisismoney.co.uk, a majority of investors have now all but given up on the ill-fated lender: "The share price could easily fall back again - there is just so much uncertainty surrounding the future of the business and the brand name is irreparably tarnished.
"Things are gong to get tougher for the housing market over the coming 18 months or so," he continued. "Technically, Northern Rock could be worthless, it has a market cap of some £653m but it's awash with liabilities - £100bn - so its actual equity value is tiny."
16 Nov 2007