Shares, value and optimism continue to fall for Northern Rock

20 November 2007
Northern Rock’s shareholders are having to resign themselves to the inevitable hit they’ll take when the bank’s troubles are brought to a close, one way or another; all potential options will leave them with very little, including sympathy from the Government.

The struggling bank’s shares slumped to the lowest level since the first signs of a credit crisis in February when they proceeded to fall steadily. Shares plummeted to 104.2p yesterday after the chancellor Alistair Darling said that he was keen to protect taxpayers’ money, but shareholders were not mentioned and left out in the cold.

Despite his wishes to prevent the taxpayer from footing the £25 billion bill which the Government will hand to Northern Rock for the contingency loan it provided when it suffered liquidity issues, Mr Darling refused to guarantee that the loan would ever be fully repaid by the bank.

Gloom and uncertainty are shrouding Northern Rock’s future, as the chancellor also said that there is no guarantee that any of the current discussions regarding its fate will result in an offer, or that any offer will be accepted if it does not meet with approval. In other circumstances, shareholders would have a great deal of influence is determining Northern Rock’s fate, but in these uncertain times this cannot necessarily be honoured.

Several potential fates await the bank; one is that Richard Branson would inject cash into it in return for a majority stake and rename it Virgin. Another is that Luqman Arnold would inject less cash for less of a stake and keep it in its present form. JC Flowers is also amongst those thought to be making a proposal, but the other strong contender, Cerebus Capital, announced yesterday that it was pulling out of the running because of persistent instability in the global markets and credit crisis-related losses.

The Government is said to be favouring a proposal from Arnold’s investment company Olivant, because it wants to keep Northern Rock as a solid entity which would protect taxpayers, savers and the financial system. It has said that the Government will support the path which offers the least disruption for Northern Rock’s customers, safeguards the most jobs, and requires the least amount of public funding.

Other options for its future include going into receivership, selling all or part of the bank, nationalising it, or putting it into a run off. Administration is the least attractive offer, because it would see the Government – and consequentially the taxpayer – with a £25 billion debt and another £20 billion which is thought to be needed for repaying retail and wholesale depositors, whose savings the chancellor has guaranteed.

To buy more time and offer potential bidders more incentive, the Government is hoping to seek approval from the European Commission to extend the term of its loan to Northern Rock without breaking EU rules on state aid.

© Fair Investment Company Ltd