´óÏó´«Ã½

Rock "needs" £1bn

• Robert Peston
• 20 Nov 07, 11:45 AM

With Northern Rock's share price in free fall this morning, there must be a concern that a false market has developed in the stock.

There are so many rumours swirling around, arguably it should publish a statement rather more detailed than what it put out .

Here is what would concern me if I were a shareholder.

The two leading bidders, the consortium led by and , both estimate that the Rock needs an injection of £1bn of new capital - which they are each proposing to provide (by the way, Flowers's formal proposal is being submitted at last today).

This represents an astonishing deterioration in the strength of the Rock's balance sheet since July - when its directors thought it had excess capital and secured the agreement of the to pay out this supposedly unnecessary capital in the form of permanently higher dividends!

And just to be clear, the Rock has confirmed to me that it needs this additional capital. But if its mortgage book is in such great shape, as the chancellor claimed yesterday, why does it need so much?

Now I am told it has suffered some losses on SIV investments (yes, it's been hit by that sucker punch). And it may well need to increase loan loss provisions on unsecured consumer lending (as will all banks, probably).

And, of course, its margins have been squeezed by what it's being charged for the Treasury-backed Bank of England loan (though as I disclosed yesterday it is only being charged a cash interest rate of 5.75%, with the 1.25% premium being rolled up into a long-term, subordinated loan from the Treasury.

So far so gloomy. But it's beyond me why all that requires a billion of new permanent capital. Enlightenment from the company would be nice.

Anyway, if it needs all that wonga, is a takeover the only way to find it?

Well, and his investment company believe that - even at the current squished share price - the Rock could raise a billion from existing shareholders in a massive rights issue. Olivant itself would contribute £200m of that.

And he thinks that he could raise between £10bn and £15bn of commercial funding to replace at least some of the taxpayers’ loan facility.

It would take him three weeks to put together a business plan that would allow this financial reconstruction, he estimates.

What's stopping him? The Rock board won't give him access to its books unless he signs a confidentiality agreement that would prevent him lobbying shareholders for financial backing. And he, of course, can't raise the new equity unless he can talk to investors.

Arnold is a credible banker. And Rock shareholders may therefore wonder, as the price of the stock tumbles earthward, whether their company's board should at least give him the info he wants. After all, this bank does not have a glittering array of possible escapes from its predicament.

• Permalink
• Comments