New plans for a state-guaranteed securitization and potentially retained equity or windfall taxation are being discussed as measures to save Northern Rock. This is yet another addition to the long list of proposals to come to the rescue of the British mortgage lender without imposing too much taxes on U.K. citizens.

The U.K. Treasury posted on its Web site guidelines for proposals for the government-guaranteed securitization. It stated that the new financing structure will be available only for proposals that both look out for taxpayers' interests as well as tend to consumers' financial stability and protection.

"Political powers are at force and ministers are keen to be seen as being decisive and not allowing the private sector to profit at the government's expense," Societe Generale analysts said last week. "We expect this will lead to further conflicting news flow until the matter is finalized."

Northern Rock would raise funds by securitizing residential mortgages, unsecured consumer loans and certain investment-grade securities. This structure would ensure that all Bank of England loan facilities to the company, which are estimated at GBP24 billion ($46.7 billion), are repaid in full, with interest and upfront as soon as the funds are raised. The Treasury plans to put in place a guarantee for the payment of investors in the event that the assets were insufficient to fulfill the obligations, although Northern Rock would retain a subordinate interest in the pool, which will effectively serve as a first loss piece to protect the taxpayer. Northern Rock would then pay a fee for this guarantee. This is aside from the fees for the existing guarantee arrangements that will stay in place. By paying a fee, the guarantee avoids being classified as state aid by the European Union.

"The proposed securitization would be overcollateralized with Northern Rock retaining a subordinated interest in the pool, which would allow it to benefit from any upside in the value of the assets when paid down while at the same time providing the Treasury with a buffer should asset valuations fall," Deutsche Bank analysts said.

However, the main issue being debated at the moment is how the deal will affect the taxpayer. Even with the mortgage lender taking up the first loss piece, losses beyond the first loss will still be a cost to the U.K. taxpayer. "In any event, the existing government guarantee arrangements remain in place," the Treasury said. "Savers' money continues to be safe and secure."

The U.K. Treasury also said that the securitization will need to demonstrate compliance with a range of conditions, including a robust business plan, commitment of sufficient additional capital and management and ownership by suitable persons, appropriate for the provision of financial support of the kind contemplated. The structure must also maintain restrictions on the sale of the company and on dividend payments while the taxpayer remains exposed to risk. It will also have to be consistent with the Financial Services Authority's regulatory requirements.

If these objectives are not met, the government will go ahead with the bank's nationalization, although this measure would be only temporary and the lender would be managed at "arms length" or as a commercial entity.

The U.K. government said that the new financing structure could also be made available to other interested parties. This falls in line with recent published reports that U.K. mortgage lenders are pressuring the government to help kick-start the RMBS market through some form of sponsorship or underwriting.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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