Bidders can avoid £24bn Northern Rock debt

The details of the sale options for struggling UK bank Northern Rock reveal bidders may be able to acquire the bank without taking on the company’s expected £24 billion debt to the Bank of England.

The sale of troubled bank Northern Rock will reportedly leave the company owing the Bank of England billions for many years, although it is possible public shareholders will take on this debt instead of bidders, according to UK newspaper Financial Times.

The UK High Court granted a limited injunction prohibiting further reporting of the document which has not already been reported in other media.

The documents prepared by Northern Rock’s advisors US bank Merrill Lynch, US bank Citi and US investment firm The Blackstone Group detail three options for bidders, one of which is to acquire the entire company.

Northern Rock, one of the most high profile victims of the recent credit crunch, had to borrow £20.6 billion (€29.2 billion; $42.7 billion) from the Bank of England, according to figures published last month by the central bank. Northern Rock expects to borrow £24 billion in total from the Bank of England by 1 January 2008. The FT said the bank will owe as much as £5.88 billion to the UK central bank in 2010. The Bank of England could not be immediately reached for comment.

Bidders also have two options which will allow them to acquire selected bank assets and its businesss without acquiring its debts, while leaving public shareholders to retain a remaining run-off vehicle. Any “residual value” after the sale of Northern Rock’s assets would be provided to these shareholders.

Olivant, led by chairman Luqman Arnold, said in a statement this weekend it would attempt to parachute in a team for Northern Rock. Olivant has said in a statement it is working on a proposal to bring in a management team to Northern Rock. The statement said this team would work alongside Northern Rock’s existing Board and management, while acquiring a minority stake in the company.

A city source said Olivant intends to take a 10 to 20 percent stake in order to align the management team’s interests with shareholders. The source said it was likely, if the Olivant bid is successful, Adam Applegarth, the bank’s chief executive would be removed.

Arnold is the former chief executive of Abbey and also former senior adviser to Emilio Botin, the chairman of Spanish bank Banco Santander.

The source said: “The offer may be attractive to shareholders as it would value their stake over a longer period of time.”

On the Friday deadline other bidders will reveal their proposals to the board of Northern Rock. These bidders include private equity firm JC Flowers, with a management team led by city grandee Paul Myners; a consortium led by Richard Branson’s Virgin Group and also reportedly US buyout firm Cerberus.

The bank’s share price was down 1.18 percent to £1.50 at 1125 GMT today.