Rock bonds
I can't escape Northern Rock even in Davos. What I've discovered is that the term sheet for the massive bond issue has now been discussed with potential issuers.
Much is still up for negotiation. But as of this moment the Treasury is insisting that it will have a claim on the assets of a rescued Northern Rock, were the new special purpose vehicle that would hold billions of the Rock's assets and would issue the Government-backed bonds to suffer a calamitous fall in the value of its assets and be unable to pay bondholders their due.
Or to put it in more technical terms, the term sheet provides that the Treasury would have full secured recourse against all other assets of the Rock in the event that the Treasury guarantee is called.
What does that mean?
Well it provides extra comfort to the taxpayer. In the event that the value of assets in the special purpose vehicle - dubbed 'crapco' by one of the putative rescuers - were not sufficient to repay bondholders, the taxpayer guarantee would only kick in after the reconstructed and rescued Northern Rock distributed all its capital to said bondholders.
I'd better translate further. It means that if crapco suffered a capital shortfall, it could wipe out the new equity to be provided by any successful rescuer of the Rock, such as Virgin, Olivant and/or the existing shareholders, inter alia.
So the Bond issue - which could be as big as £35bn or £40bn - isn't quite the gift that the supposed rescuers may have believed.
Also rules provide that holders of more than 15% of the shares of a bank must normally provide a comfort letter backing the bank – for the full amount of its liabilities.
So presumably the would-be Rock rescuers will take great pains to construct their participation in the Rock to ensure that only their Rock capital could be called were crapco's assets to be vaporised. Sir Richard Branson won't want to hand over a few jumbo jets to bondholders, in the event of a crash in the housing market.
It all rather suggests to me that the partial nationalisation of the Rock favoured by Gordon Brown may yet stumble and fall - so it's not quite 100% certain that nationalisation will be avoided.
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"I can't escape Northern Rock even in Davos". I think you really mean that Northern Rock can't escape you....
So effectively, a lender of last recourse is selling his loans to the market, whilst guaranteeing the payment, but only with full recourse over the entire assets of the group. Who would inject equity into this company, especially where the terms on the loans are that some of the interest is capitalised rather than paid out immediately? Surely this has got to fail.
All the while, the fees keep on rolling in for Goldmans.
Would all these unnecessarily complex machinations not have been avoided by quite simply allowing Northern Rock to fail as seemingly put forward by The Governor of the Bank of England. All this activity reflects his view that those responsible, the Board of the Rock, have got away with the Moral Hazard of the situation. Their flawed business model, which the shareholders were extremely happy to go along with whilst there were profits being made, has cost this country dear both in actual financial terms and possibly more importantly, in reputation.
Time for the saga to be brought to a swift end. There is no business without Government support and therefore the company should be brought into full public ownership to rescue what little there is left. I am afraid the shareholders have lost their money by allowing the board they elected to run the business in a very risky way. Sad but true.
Such a bond with recourse to all the bank's other assets is a poison pill to anybody willing to put capital into the bank. It suggests that the Treasury and its highly paid advisors admit that they cannot calculate the value of the mortgages against which this bond will initially be secured.
Since Peston doesn't indicate who will be managing these assets and what part if any the expected new investor(s) will play in their management, some might remind themselves of the price at which our gold was sold off [
Should the new investor(s) decide to reorganise/sell the remaining assets of the bank and distribute the proceeds what lien will the Treasury have over such a distribution save any tax payable?
Whoever conceived this scheme needs extra education in corporate finance. If anything in this scheme, the State should be effectively underwriting the mortgage assets and returning any excess after their sale to NR shareholders rather vice versa or putting anothe way the Treasury buys the assets, places them in a SIV and sells State guarenteed bonds to fund part and what might be a 'preferred or preference convertible' for the balance, calculated to match a particular level of risk of default in the assets.
The problem is the political dimension, as this, like so many other NuLab policies, is a 'bribe' to a sector of the electorate to be paid for by those who don't support this Government anyway.
Mr Peston,
why cant u just comment/report on some other news than Northern Rock i.e. losses in Citi Bank, sub prime effects on uk economics etc. It looks like your are trying to report on NRK everytime when there are news related to it. I think your are trying to use the media to damage the bank
Robert, I thought you had a background as a print journalist. What sort of sentence is this?
"But as of this moment the Treasury is insisting that it will have a claim on the assets of a rescued Northern Rock, were the new special purpose vehicle that would hold billions of the Rock's assets and would issue the Government-backed bonds to suffer a calamitous fall in the value of its assets and be unable to pay bondholders their due."
A problem you recognise ...."What does that mean?"...."I'd better translate further."
Generally your post are very helful and informative but this one shows signs of lack of oxygen at altitude.
How Alistair Darling must hate you Robert. (Hurrah!)
It will be fascinating to see what happens. Branson started his career in a financial pickle so it will be interesting to see if his career ends in one as well.
Robert - You deserve great praise for finding out the details that HM Government seem so reluctant to provide to the general public.
One wonders why the opposition parties have not winkled this out - too much bluff and bluster and too little attention to detail?
If, and let's hope it does, HM Treasury sticks to its guns, this makes the deal quite a lot better for the taxpayer. However, it will probably deter any bidder if the risk of a capital shortfall - a very real risk - falls not on the taxpayer but on the bank.
The cynic might say that this wil give the governement the excuse it seems to need for nationalisation - "no private sector buyer could be found even though we offered to provide the funding". We watch with interest!
You can't resist it can you? Now call ing the Northern Rock "crapco". What is your vendettor against the Rock? Has someone upset you in the past?
As a hard working employee, who has battled through in the last few months not knowing if we still have a job or pension, in fear of loosing our homes. You continue to poke and dig.
Yes, the big bosses did mess up and I am furious, but your imflamatory stories and "what if the bank goes bust" headlines CAUSED the run which caused the share price drop whch caused more loans.
You cant resist picking at the wound. Please give it rest.
Robert,
I just read your article and didnt understand word of it. I am not stupid, just an ordinary bloke with ordinary intelligence. Try writing in plain English for a change instead of you customer centric empowered touch base wordisms. That was crapco. Thanks
'So the Bond issue - which could be as big as £35bn or £40bn - isn't quite the gift that the supposed rescuers may have believed.'
Nor the unqualified risk by the Government you kept telling people it was.
Robert, isn't it true that the assets the special vehicle is buying are loans, not houses?
In the event of a crash in the housing market, payment defaults may rise, impairing NR profit but are a long way to wipe out NR shareholders equity. Are we not a wee bit alarmist here?
#3 Spot on.
And if no mortgages are being processed then what are the staff doing? - apart from being kept in makework jobs by the rest of us.
#3 Spot on.
And if no mortgages are being processed then what are the staff doing? - apart from being kept in makework jobs by the rest of us.
Ruthless business people like Richard Branson are essentially vultures in situations like this.
So I'm still expecting him to walk away unless more 'sweeteners' are provided - effectively by the biggest-mug-of-all-time, the English PAYE taxpayers via the BoE.
Robert, please note that Crapcoâ„¢ is a registered trade mark of the Financial Services Authority.
If my memory serves correctly Northern Rocks bad debt record is the best in the business. Their debtors have an excellent record of paying up promptly Why should that change. As an ex credit manager I can tell you the most important evaluation of credit worthiness is previous customer record.
So why all this fuss about the dire effects of future defaults? Might I suggest you check NR's history more carefully in future Mr Peston.
What a fantastic story of triumph over adversity...no I mean the Tower Coliery boys. Having had such success with Welsh coal perhaps the government should see if they could turn their hands to a bit of Northern Rock. It's as sane as any other idea.
You managed to go about 2 days without mentioning your pet story and the shares in NR almost doubled in price!!
Do us all a favour and leave it be; don't you have a recession to help cause?
USD143bn support for world's banks?
Isn't it about time Northern Rock gets properly reported in context?
Its solvent and pays its bills. If it lost like M Lynch, Citi etc it would be well out of business. Yet it still supports 6k jobs, a major charitable foundation and pays dearly to HM Treasury. Its not the only British bank to receive support recently yet gets villified. Why is it singled out?
So the taxpayer bears the risk and the shareholders get the rewards, but nationalisation would be politically difficult!
I read with increasing dismay this wordy article;it failed to address if my elderly parents should cash in their bonds at a serious loss or hang-in for another 8 months when they mature.
Dear Mr Peston,
"Northern Rock 50 Billion Insurance Fraud, at the TAX payers expense"
Which respected global leaders or business men and women, have you interviewed on camera in Davos?
I to am in Switzerland, perhaps you like to interview me, for the ´óÏó´«Ã½, one voice from Newcastle and Jarrow.
Your coverage of Northern Rock todate, has been either science fiction, or gross miss-information or a lie.
We can return to Newcastle together and prove once and for all that there is no black hole singularity in Northern Rock.
Regards
Terry Giblin