Select Committee on Treasury Written Evidence

Letter from the Chancellor to the Chairman

  Last Monday I published a statement of principles underpinning the Government's approach I proposals received by Northern Rock with regard to its future. These principles set out our commitment to protecting the interests of the taxpayer, protecting depositors and maintaining wider financial stability. They also explained how, as I have set out on number of occasions, any outcome must meet EC state aid rules.

  The Board of Northern Rock has announced to the markets this morning that it has concluded it wishes to take forward discussions on and accelerated basis with a consortium comprising Virgin Group, WL Ross & Co, Toscafund Asset Management LLP an First Eastern Investment Group. At this point I want to make two points clear.

  First, in reaching agreement with Northern Rock on its bidder status, the Virgin Consortium has at the same time confirmed to the Treasury and the Bank of England that it accepts that:

    —  its equity and debt financing proposals will, at the point of announcement of a definitive transaction, be fully underwritten;

    —  a included in the Virgin Consortium's proposal, the private sector debt financing must be comparable in scale to any public sector debt financing required following closing;

    —  the public sector debt financing required must be on comparable terms, including as to ranking in time of repayment and point of priority, as the private sector debt financing envisaged by the proposal;

    —  there must be binding incentives for delivery of the Virgin Consortium's plan for achieving appropriate credit ratings, bringing to an end any public sector guarantee arrangements, repaying the public sector financing and terminating any other public sector commitments; and

    —  returns on equity investments made by member of the Virgin Consortium and other holders of ordinary shares must be restricted until the public sector loans have been paid back with interest and all other public sector commitments are at an end.

  It should be noted that in addition to these requirements, the regulatory requirements of the Financial Services Authority (including as to the business plan and control of Northern Rock) must be met and EC state aid requirements complied with.

  These confirmations given by the Virgin Consortium are in line with the principles I set out last week.

  Second, until a transaction is finalised, the Government continues to keep all options open in relation to the future of Northern Rock.

  I shall continue to keep the House informed and will be placing copy of this letter in the Library of both Houses.

  I am writing in similar terms to Edward Leigh MP.

26 November 2007

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