Although… is this by any chance the same Sir Richard who’s famous for being one of Britain’s very sharpest entrepreneurs?
According to today’s Update on Strategic Review put out by Northern Rock, taxpayers will remain committed even after Virgin takes over. True, Virgin will repay £11bn of the Bank of England loan immediately, but that will still leave £13bn plus outstanding. And we will rank no higher than the commercial banks backing Branson (who may very well be on other sweeteners to ease their troubled minds).
How quickly will we get the rest back? And what happens if the bank gets into difficulties again? What happens in a world of falling property prices? And what happens if it can’t attract new deposits without that Bank of England guarantee?
That second point could be very important. Northern rock currently offers some very attractive interest rates to depositors- their Silver Saver instant access account pays a market leading 6.3% and is fully guaranteed by HMG.
But we know that unsecured Rock debt is currently rated as junk. Specifically, its credit rating for senior debt without the HMG guarantee is BB, a junk bond rating.
Now there are all kinds of reasons why you might want to invest in junk bonds, but only if you get paid for taking the risk. As we’ve blogged before, bank deposits are unsecured senior debt, and 6.3% is most definitely not being paid to take the risk (cf this sleep-at-night Halifax account on 6.25% ).
So as soon as the HMG guarantee goes, a lot of the remaining deposits may well walk out the door.
Of course, Virgin and their backers are aware of this risk. They are going to inject some new capital. The NR Update says it will be £1.3bn, plus the £250m current value of Virgin Money, which will be folded in. Call it £1.5bn, of which £650m will be raised via an issue of new shares at 25p each. Acccording to the Update:
"The Virgin Consortium expects that the Company will quickly re-build a deposit base to drive a more sustainable funding structure and is targeting a credit rating of no less than ‘A’."
Single A? Halifax (HBOS), for example, is a strong AA, much more comforting. Why would a rational depositor leave money with a Branson owned, single A targeting, recovering Crock, when she could get virtually the same interest rate from Halifax?