UK - HM Treasury and the Bank of England is extending the lending facilities to Northern Rock until 17 March under proposals for a new financing structure.

The UK Tripartite Authorities, HM Treasury, Bank of England and the Financial Services Authority, outlined the proposal, put forward by its advisers Goldman Sachs, to establish a "financing vehicle" which would raise money to repay the Bank of England loans by the issue of government-backed investment notes to the capital markets.

Under the new structure Northern Rock would sell a pool of its assets, consisting of "residential mortgages, unsecured consumer loans and certain investment-grade securities", to the financing vehicle which would then issue the notes to the market.

That said, HM Treasury confirmed Northern Rock would have to pay all the arrangement and fees and expenses relating to the issue, along with a fee for the guarantee, and it highlighted that its "obligations" under the note guarantee would be "fully secured" by a first priority interests in the asset pool.

The assets themselves would have an "appropriate value to support the issue of sufficient notes" to make repayments on the Bank of England loans and to provide adequate liquidity for the company, although Northern Rock would have the right to repurchase mortgages from the asset pool in certain circumstances and it would also retain a "subordinate interest" in the assets so any losses would be initially borne by the bank and its shareholders instead of the taxpayer.

HM Treasury said the proposal would reflect its objectives of ensuring financial stability, and protecting consumer and taxpayer interests by ensuring existing Bank of England loans are repaid in full, including interest, as soon as the money is raised.

The aim is to try and find a "cost-effective private sector solution" to the bank's financial difficulties, although any proposals would have to be consistent with regulatory requirements from the FSA and would also have to comply with a range of conditions including clear restrictions on the sale of the company and dividend payments while taxpayers remain at risk.

However, because any proposals relying on this structure are "likely to involve state aid", which requires approval from the European Commission, the government has set a deadline for proposals for February 4 to allow it time to submit a restructuring plan to the Commission by March 17.

If no private sector proposals meet with these requirements HM Treasury has confirmed the government will bring forward legislation to take the bank under "temporary public ownership" rather than let it go into administration.

In this instance all of the government's guarantee arrangements would remain in place and Northern Rock would continue to operate and provide services to customers as
Normal, as it would be managed on "arms' length terms, as a commercial entity, by a newly appointed, experienced and professional management team".

The Board of Northern Rock said the timescales announced by HM Treasury "remain consistent with the company's previous guidance for its strategic review process" and confirmed it would be working with both the Tripartite Authorities and interested parties to develop a private sector solution.

Alastair Darling, Chancellor of the Exchequer, is expected to make a full statement to the House of Commons on the proposed financing structure at 3.30pm.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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