British govt. bailout for Northern Rock may continue forever

Chancellor to Extend Rock Lifeline

By Iain Dey
The Telegraph, London
Sunday, November 18, 2007

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=KTLA50204R5B5QFIQ...

British taxpayers face the prospect of propping up Northern Rock for months to come amid signs that the Government has caved in to pressure from the ailing mortgage bank and its advisers.

The Sunday Telegraph has learned that advisers to Alistair Darling, the Chancellor, are working on plans that would allow all or part of the L25 billion lifeline that has already been extended to Northern Rock by the Bank of England to continue indefinitely.

Although European Union rules block the bank from receiving state aid beyond February 17, lawyers are drafting documents that could change the status of the funding to "restructuring aid." This would allow the Bank of England to continue providing funding to Northern Rock -- and aid any takeover of the bank.

Darling is expected to lay out a "statement of principles" detailing the Government's views on the future of Northern Rock in the next 10 days.

Northern Rock has also been investigating the possibility of using loans from the European Central Bank to refinance its borrowings from the Bank of England -- a move which would be hugely embarassing to the Chancellor, who has already come under fire over his role in the crisis.

The Liberal Democats yesterday called for Northern Rock to be nationalised, and demanded that the Chancellor "explain the position of the bank" to the House of Commons tomorrow. The calls follow the resignation of Northern Rock's chief executive Adam Applegarth and several other directors on Friday. Bryan Sanderson, the Northern Rock chairman, also appointed two new non-executive directors -- John Devaney, former Marconi chairman, and Simon Laffin, a consultant with CVC, the private equity firm.

Sanderson is now believed to be looking for a third new non-executive with a legal background. It is understood Anna Mann, the pre-eminent headhunter, has been drafted in to help. The proposed move comes amid expectations that the company and its directors could face legal action over the handling of the process.

One of Northern Rock's biggest shareholders has demanded that the ongoing sale of the bank be stopped. Jon Wood, the Monaco-based hedge fund manager who controls 6 per cent of shares, is understood to have told the Northern Rock board on Thursday that a break-up of the bank was both ill-advised and unnecessary.

Northern Rock's advisers received at least eight indicative proposals from potential bidders for the bank on Friday, including one from Virgin Group and the management buy-in proposal put forward by Luqman Arnold, the former chief executive of Abbey National.

The Northern Rock board is meeting later today to discuss the offers it has received.

ING, the Dutch bank, and Apollo, the US private equity firm, are also understood to have lodged an interest. JC Flowers, the US private equity group, is expected to table an offer early this week. It is unclear whether Cerberus, another US private equity group, will table an offer.

It is understood that Virgin has secured a funding package from a consortium of banks led by Royal Bank of Scotland worth a combined sum of L20 billion. Under the Virgin proposal, roughly L10 billion of the Bank of England funding line could be refinanced straight away, with the rest repaid over time. It is also proposing to inject L1 billion of equity into the company.

It is unclear how Arnold proposes to raise funding. It is understood he wants to be appointed chief executive of Northern Rock with immediate effect and is said to believe any attempt to buy the bank outright would end up destroying value unnecessarily.

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