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Banks' reluctance to lend standing in way of Northern Rock rescue

08 January 2008 / by Rachael Stiles
Hope is fading fast for a viable recovery of Northern Rock, as lenders are becoming reluctant to provide potential buyers Virgin and Olivant with sufficient funding to take over the struggling bank which was hit hard by the credit crisis.

A solution is looking less likely which will not disappoint shareholders and leave taxpayers footing the bill for its Bank of England loan, which currently stands at an estimated £26 billion, if it goes into administration or is nationalised.

The backers lined up to provide the £15 billion loan required by the successful bidder are Citigroup, Royal bank of Scotland and Deutsche Bank; they are said to be getting cold feet about the deal as a result of the continued effects of the credit crisis and the dwindling property market which has a pessimistic outlook for 2008.

In line with European laws regarding state aid, the Government only has until the end of February to find a solution to the Northern Rock problem, one way or another, or face accusations from the European Commission of giving illegal assistance to a private company.

Northern Rock's shareholders stand to lose out if a take over cannot be arranged, so SRM and RAB Capital – two hedge funds which collectively own 17 per cent of the bank – have called an emergency meeting where, for the first time, Northern Rock's 14,000 shareholders will have the opportunity to publicly voice their concerns regarding its future and the poor management which landed it in its current precarious position.

The two hedge funds are expected to propose changes to current procedure, which will prevent the board from making hasty decisions without shareholders' consent; the new safeguards will mean the board must seek approval from a shareholder vote if they wish to sell more than five per cent of its assets.

© Fair Investment Company Ltd