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Northern Rock nationalised

The Chancellor has announced (notably without using the n-word) that Northern Rock is to be nationalised.

What does this mean?
  • The shares pass into public ownership
  • The government has at last called the bluff of the hedge fund shareholders
  • Ron Sandler becomes Executive Chairman
  • Focus should now be brought to restructuring the business to create - in several months' time - something saleable
It will be difficult for the government to avoid the charge of dither and delay. As reported in our previous post, the Treasury Select Committee has made clear that early decisive action was the missing ingredient in this restructuring.

Although the company should now be able to concentrate on turning itself around, the government - as the new owner - should steer clear of micromanagement. Mr Sandler and his team should be left to manage the business, and the government should concentrate on the politics (and the arguments with shareholders about compensation).

At least the risk of formal insolvency has receded almost entirely - it's just not necessary with the Treasury as both senior lender and shareholder. The balance sheet has been restructured through a form of debt-for-equity deal. One could also describe nationalisation in this case as a form of administration or receivership but without the stigma of insolvency and with only shareholders being crammed down. Indeed, had the government not guaranteed all the depositors, Northern Rock would have been in a similar position to other companies with administration being the mechanism used to restructure the balance sheet.

 

 

Date: 18th February, 2008
Author: Chris Laughton

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