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New bidders for Northern Rock, but rescue still not guaranteed

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11th Dec 2007
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A late applicant may supplant Virgin as preferred rescuer for Northern Rock, after winning the support of stranded shareholders. But with even Olivant’s offer seeing no way to return the government’s loan before 2009, the possibility of a longer spell under public administration cannot be ruled out.

Although Virgin Group remains management’s, and the government’s, preferred rescuer for Northern Rock, the alternative bid tables last week by investment fund Olivant is getting serious attention. Its organiser, Luqman Arnold, is an experienced banking strategist credited with turning round another High Street heavyweight, Abbey. And its offer, to take a strategic stake and make a rights issue of shares at the current market price, is attractive to the hedge funds that bought into the Rock when its price first collapsed.

Those funds have been apprehensive over the Virgin offer, which would give Sir Richard Branson’s group a majority stake and issue the new shares at only a fraction of the price of the present ones. Having won outline approval from the two biggest hedge funds, which together hold around a quarter of the shares, Arnold has been able to build support among smaller shareholder groups.

Northern Rock’s new management remains keener on the Virgin bid, partly because this is the buyer most likely to keep the bank intact. But the Treasury, whose priority is to recover the £25bn loaned to the Rock by the Bank of England may be more open to persuasion by Olivant’s alternative. Arnold can argue that, by persuading the shareholders to subscribe more to the rights issue and keeping this at the market price, it could return up to 60% of the loan within weeks – more than the Virgin formula appears to offer. While the Treasury has not yet questioned the preferred-bidder status, this may be a tactic to persuade Virgin to offer more.

The long wait for a final rescue plan has allowed competition to build, but also risks more money flowing out and Northern Rock’s debt running up even higher. Some analysts take last week’s exit from the contest of other groups - notably private equity bank turnaround specialist JC Flowers – as a signal that the opportunity for a sale has already passed. Under the more negative scenario, the bank is left to default on its debt and passes into Treasury hands. Existing shareholders would lose their hoped-for price recovery, but the government might then acquire equity at a price cheap enough to ensure appreciation on recovery – a gain still more probable than certain under the Olivant plan.

Other, currently less troubled banks have not endeared themselves to the government through their refusal immediately to pass last week’s Bank of England base rate cut on to borrowers, despite having already reduced their rates to savers in anticipation of the move. More seriously, the absence of a conventional rescue operation for the Newcastle-based mortgage bank means that its bill has been passed to the government, instead of spread thinly across the private financial sector as in previous cases of collapse.

That oversight, or lack of it, leaves many in the City believing that Northern Rock will be drawing its income from the Bank of England rather longer into 2006 than Mervyn King, its present governor.

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