If you really want to read the full, verbose statement from HM Treasury on the former mortgage bank, you can do so here. But the key extract on the “principal characteristics” of Goldman Sachs’ financing plan is as follows:
Under the proposed financing structure, Northern Rock would sell a pool of its assets, consisting of residential mortgages, unsecured consumer loans and certain investment-grade securities, to a financing vehicle established for the purposes of the financing structure. The financing vehicle would fund the purchase of the asset pool by the issue of notes in the capital markets. The timely payment of principal and interest under the notes would be guaranteed by HM Treasury. HM Treasury’s obligations under its note guarantee would be fully secured by a first priority interest in the asset pool. A fee would be payable by Northern Rock to HM Treasury for the provision of the note guarantee. All arrangement fees and expenses relating to the issue would also be paid by Northern Rock.
Each class of notes would bear a market interest rate which reflects the provision of the note guarantee by HM Treasury. The maturity date for the notes would be determined upon issue and would primarily be based upon assumed levels of principal repayments in the asset pool.
The asset pool would comprise assets having an appropriate value to support the issue of sufficient notes to make the payments to the Bank of England referred to above and to provide adequate liquidity for the company. Northern Rock would have the right to repurchase mortgages from the asset pool in certain circumstances, including where Northern Rock needs to substitute mortgage loans into the Granite master trust or its covered bond pool and it would otherwise have insufficient eligible mortgage loans to do so.
Because the value of the asset pool would exceed the initial purchase price paid by the financing vehicle, Northern Rock would retain a subordinate interest in the asset pool which would represent the difference between the asset pool and the notes in issue. This means that any losses to the asset pool would first be borne by Northern Rock, protecting the taxpayer in the case of underperformance of the assets in the pool.
So, this can be seen as Granite II – a new Rock securitisation plan that is only different from the old Rock securitisation plan in that the underlying assets will be of a lower quality, while the rate paid by the bank will be artificially depressed by the existence of a government guarantee.
Meanwhile, the government and its regulatory proxies are reserving every possible right in relation to Rock, including clearing the business plan, restricting future dividends, possibly blocking any future change of control, stipulating both working capital and a “capital buffer,” and having a say over management appointments. What’s more, the government will also grant itself a share in any future upside in Northern Rock’s value.
All of which might sound like effective nationalisation – which it probably is. But HM Treasury has some grave things to say on this subject, spelling out now what would happen if Rock had to be “brought into temporary public ownership”:
The legislation brought forward would provide for the assessment by an independent valuer of compensation payable to any holder of securities transferred to HM Treasury. The principles for assessing compensation, which would be set out in the legislation brought forward, would reflect the principle that the Government should not be required to compensate shareholders for value which is dependent on taxpayers’ support and the fact that public sector ownership would be an alternative to an administration of the company. Accordingly, the compensation would be assessed by the valuer on the basis, among other things, that all financial assistance to Northern Rock from the Bank of England or HM Treasury (including HM Treasury’s existing guarantee arrangements) had been withdrawn and no other financial assistance (apart from Bank of England assistance on its usual terms through standing facilities or open market operations) were made available by them to Northern Rock.
Is that an empty threat? Well, the market on Monday suggested that at worst it is now a distant one. The prospect now of a gilt-edged rescue saw shares in the bank jump 50 per cent in early trade to 98p.
That’s probably is not what the government intended.