Lessons from Northern Rock

We recently came across a great report from the United Kingdom National Audit Office on the disposal of former Northern Rock mortgages and loans in 2015 – the government’s largest ever financial asset sale.

To give context:

The sale, conducted by the UK Asset Resolution (UKAR) which is owned by HM Treasury, comprised of £11.9 billion of mortgages from the Granite debt financing vehicle within Northern Rock Asset Management (NRAM) and additional loans (£1.4 billion). The taxpayer received £5.5 billion in cash while Cerberus took on nearly £8 billion in liabilities. Some 270,000 mortgages and loans were sold in the deal.

Northern Rock was a British bank. 

As our friends at Wikipedia tell us:

Northern Rock was best known for becoming the first British bank in 150 years to suffer a bank run after having had to approach the Bank of England for a loan facility, to replace money market funding, during the credit crisis in 2007.

Having failed to find a commercial buyer, it was taken into public ownership in 2008, and was then bought by Virgin Money in 2012. During 2012 the Northern Rock brand was phased out and replaced by Virgin.

The National Audit Office report is an excellent example of the assurance that audits can provide that a process has been well executed.

Noted the National Audit Office:

This was an extremely large and complex transaction that was professionally executed within a tight timeframe, though there are some lessons to be taken from the process. Overall, in the context of the overall objective of swiftly reducing the balance sheet, the sale achieved value for money.

A report such as this can be used as a template for audit involvement in acquisition (or here – divestment) initiatives. 

We particularly like that there was no sidestepping of this work due to its size – indeed its size warranted the assessment of an independent eye.

The first key observations related to the need for competitive tension:

The scale of this sale limited the number of potential bidders but good competitive tension was maintained through the sales process.

The sales process was well run.  The deal took 18 months from appointment of advisers to final close in May 2016. The number of bidders at each stage, the convergence of bid prices, the willingness of bidders to incur high transaction costs, and their acceptance of key terms and conditions of the sale agreement, was evidence of competitive tension.

However, UKAR’s processes were criticized:

The limited degree of competitive tendering in UKAR’s procurement process was not good practice. The financial adviser, Credit Suisse, was involved in the early phase of the programme to sell its mortgage servicing operation on a pro-bono basis and subsequently won a tender against a small number of preselected competitors.

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