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Treasury鈥檚 five-year Rock loan

• Robert Peston
• 19 Nov 07, 07:30 AM

Alistair Darling doesn鈥檛 want taxpayers to lose a penny on the enormous financial support provided by the to .

And in a statement to the Stock Exchange he has said this morning that there is no certainty that any bidder for the Rock will have access to Treasury-backed Bank-of-England loans after February 鈥� which is when the current support package expires.

Those loans currently total about 拢24bn.

But what he didn鈥檛 point out is that there is a smaller financial exposure to the Rock by the Treasury which is not supposed to be repaid for five years (although there are options allowing earlier repayment).

Or to put it another way, the Treasury has already made one very long financial commitment to the Rock.

It arose because in October it 鈥� and the and the 鈥� became concerned that the relatively high interest rate being charged on the Bank-of-England loan could do severe damage to the Rock.

So the terms of the Bank-of-England loan were altered.

The Rock would only have to pay interest in cash equivalent to the Bank鈥檚 5.75 per cent interest rate.

A further interest rate 鈥減remium鈥� 鈥� which I understand is 1.25 per cent 鈥� is rolled up into what is called 鈥渟ubordinated term debt鈥� with a minimum term to maturity of five years. And this subordinated debt is owed to the Treasury, not the Bank of England.

It actually qualifies as part of the Rock鈥檚 capital base. To be more precise, it ranks alongside tier II capital under BIS rules.

One very important characteristic of this subordinated debt is it would rank very low down the list of any creditors in any wind-up of the Rock. It is just a hairsbreadth away from being equity. Or to put it another way, the Treasury has already come very close to taking shares in the Rock.

And what should also matter to taxpayers is that if Northern Rock continues to borrow substantial sums from the Treasury 鈥� and the bank itself can鈥檛 see how to do otherwise 鈥� this subordinated debt could grow quite big indeed.

If for example the Northern Rock鈥檚 loans from the Bank of England averaged 拢20bn over two years 鈥� which is a realistic scenario 鈥� the rolled up interest would total 拢500m.

There are two ways of looking at all this subordinated debt.

Some will see it as a taxpayer subsidy to a bank which got itself into a mess and was unable to raise money in a conventional way.

However shareholders are likely to view it as a potentially crippling burden on the company which 鈥� if the Treasury wanted it back 鈥� could wipe out the value of Northern Rock鈥檚 shares.

Update 08:00 Northern Rock's shareholders have had a huge dose of bad news this morning.

The company says that the preliminary bids for the business all value it at significantly less than the current market value.

And the Treasury has said that neither bidders or the company should assume that the 拢24bn of loans made to it by the Bank of England will be kept in place after February.

The Treasury has also warned that the support it has provided to the Rock represents state aid under EU rules and may therefore turn out to be illegal.

It means that Northern Rock's battered share price will fall further this morning.

And it also means that the future of the Rock, for its 6000 employees, remains highly uncertain.

However the Treasury has reiterated that the Rock's depositors have nothing to fear.

It will continue to guarantee that they do not lose a penny.

And its other aim - which may be harder to achieve - is to prevent the taxpayer losing a bean.

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