Bidders for Northern Rock to accept a performance warrant

Today is the deadline for bidders for Northern Rock to come forward with rescue proposals.

The bidders for the crisis-torn bank have been informed that they will have to accept a “performance warrant” to allow the government to share in any financial recovery of the bank.

The warrant can be converted into shares at a future date and will protect the government from a successful bidder making huge future profits at the public’s expense.

The warrants are part of a series of limitations that have been imposed on prospective buyers of Northern Rock. Most of the restrictions relate to ensuring any rescue deal does not fall foul of European Union rules on state aid.

In government guidance notes, bidders have been informed that the number of retail deposits that could be accepted within the first 3 years may be capped.

Furthermore, the successful bidder will be barred from going into the wholesale markets to raise more capital while Northern Rock is benefiting from a £28 billion government guaranteed bond.

This is to stop complaints from rival banks accusing Northern Rock of exploiting an unfair commercial advantage. Those who have seen the notes say the implication is that Northern Rock’s cost base will have to be scaled down quickly, which will result in 6,500 job losses.

Today, 3 bidders will submit their rescue plans to the Treasury. They include a consortium led by Sir Richard Branson’s Virgin Group and Olivant, run by Luqman Arnold, former Abbey chief executive. The third bidder is a stand-alone solution that would see Paul Thompson, a former investment banker, put in as chief executive. Nationalisation is an option and is not being ruled out by Chancellor Alistair Darling.

Paul Thompson has been spending time seeking support from investors to support a rights issue. Shareholders have indicated they will help him raise £400 million, however, the does not include any help from the bank’s 2 biggest investors - hedge funds RAB Capital and SRM Global.

The two hedge funds have re-iterated their support for Olivant. Jon Wood of SRM said this deal represents the best chance for the company to thrive and the fastest way for the government to get its money back.

It is believed the decision of the preferred bidder will be announced on 11 February.

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