By Patrick Jenkins and Jim Pickard
A third of the ?747m cash price that Sir Richard Branson?s Virgin Money is paying to buy Northern Rock will be funded from the state-owned bank?s current capital base, the Financial Times has discovered.
According to people involved in the deal, Virgin believes it can extract up to ?250m of ?excess capital? from Northern Rock – as well as a further ?150m or so from Virgin Money – leaving the combined business with a thinner capital cushion.
Virgin Money announced on Thursday that it would pay ?747m in cash plus ?150m of new convertible debt for Northern Rock – the bank that epitomised the credit boom and bust before it was nationalised three years ago. A further sum of up to ?130m will be payable to the government depending on performance and the timing of any resale of the business.
Virgin Group is injecting only ?50m of cash alongside a similar amount from little-known Abu Dhabi fund Stanhope Investments, and close to ?260m from US financier Wilbur Ross. The rest is set to come from release of the nearly ?400m in ?excess capital? from Northern Rock and Virgin Money.
The revelation of the structure behind Virgin?s deal makes no difference to the amount of money the taxpayer will receive, but could reduce money that might otherwise be deployed for loans or expansion. It also risks further infuriating critics of the deal, who on Thursday pointed to the loss of at least ?400m that the government is making compared with the bail-out money it injected.
Lord Oakeshott, the Liberal Democrat peer, said he was concerned whether Sir Richard Branson and his overseas backers might be planning an ?asset strip? before the deal was formally completed.
?If he is going to do an asset strip for ?250m of capital it could mean that if things go wrong again we would have to rescue them again.?
Chris Leslie, Labour?s shadow treasury spokesman, will submit a parliamentary question on Monday demanding more details about the consortium?s plan to reduce Northern Rock?s capital base. Virgin Money declined to comment.
Northern Rock and Virgin Money both have core tier one capital ratios, the key measure of financial strength, in excess of 20 per cent – double the level of most banks.
Virgin Money has been told by regulators that it cannot run on a thinner cushion after the acquisition, according to people close to the bank. But bankers are counting on the Financial Services Authority to approve a plan allowing them to cut the ratio for the combined business to about 15 per cent.
The strategy of releasing trapped funds from an acquisition target is not unique to the case of Northern Rock.
When Resolution, the specialist acquisition vehicle, acquired Axa?s UK life insurance business last year, it set about freeing up ?1bn of ?orphan assets?. Regulators, however, have held up that process.
Some observers believe the FSA may take a similar stance with Virgin Money. ?The complexity and intensity of scrutiny by the FSA cannot be underestimated,? said one person close to the deal.
Another admitted that ?there is still more work to do?. The FSA declined to comment.
? The Financial Times Limited 2011