THE GOVERNMENT accepted a loss of at least £400m yesterday as it offloaded the bailed-out lender Northern Rock for just over half of the cash it originally put into the bank.
Virgin Money paid £747m in cash for the Rock, but promised that it would give the Treasury up to £280m more if it manages to float the business for a profit within the next five years.
If it manages to do so, the government will end up with a maximum of £877m in cash and a £150m stake in the bank.
The extra payments will consist of a £50m signing bonus when the deal goes through on 1 January, £150m in bonds that pay a 10.5 per cent annual coupon rate and then convert into equity and a £50-80m float bonus.
Even in a best-case scenario, however, taxpayers are £400m out of pocket. In a worst-case, the loss rises to £650m.
The business sold to Virgin consists of the “good bank” part of the Rock nationalised in 2007. While its most “toxic” assets were hived off into a “bad bank” that is still in state hands, the government used £1.4bn to set up the rest as a standalone mortgage lender with £14bn in assets.
Since then, it has lost hundreds of millions, knocking its equity value down to around £1bn. Factoring in a significant sector discount brought the expected price down to around £850m.
Labour used the difficult sale conditions to attack the deal. Shadow chancellor Ed Balls said: “It is being sold off at a loss, and I think there is a question as to whether or not this is the best time, with the markets in turmoil, to get the best deal. George Osborne will need to explain that.”
However, he also added that he would have preferred to see the Rock mutualised, despite advice from the Treasury’s financial adviser, Deutsche Bank, that a sale was the best way to maximise proceeds from the deal.
The equity in the new banking business to be run by Virgin Money will be 90 per cent owned by Sir Richard Branson’s Virgin Group and US billionaire and private equity investor Wilbur Ross, who is known for buying up heavily discounted bankrupt companies and recently took a stake in the troubled lender Bank of Ireland.
Ross and Virgin Group will have equal shares of 45 per cent each. The bank’s board will be led by Sir David Clementi as chairman while Jayne Anne-Gadhia will continue as Virgin Money chief executive.