Virgin Northern Rock move to yield UK treasury £538m

BRITISH TAXPAYERS will get a further £538 million (€688 million) from Virgin Money after the bank that acquired Northern Rock last year agreed to increase the purchase price and bought a portfolio of State-owned mortgages.

Virgin Money, the banking arm of Sir Richard Branson’s company, paid the treasury an additional £73 million in cash on top of the £747 million initial sale price for Northern Rock.

The payment reflects a higher than expected calculation of the net asset value of Northern Rock when it was sold at the start of this year. At the time of the deal, UK Financial Investments, which manages the government’s stakes in banks and oversaw the sale of Northern Rock, expected the additional payment to be about £50 million. Virgin also agreed to buy £465 million of old Northern Rock mortgages from UK Asset Resolution, the government-owned body that is running down the defunct lender’s legacy book. Mortgages that were hived away from Northern Rock before it was sold were typically viewed as higher risk, as many were held by borrowers with little or no equity in their properties or who had missed payments.

Virgin said it was acquiring “high-quality” residential and buy- to-let mortgages. None of the loans is in arrears and the lender said the acquisition would not significantly raise its loan-to-value, which stands at 64 per cent.

The £465 million purchase price is equal to the value of the outstanding loans it is acquiring.

“The transaction enables Virgin Money to deploy some of its excess liquidity to grow its mortgage book with high-quality loans that complement the existing book structure,” it said yesterday.

Virgin inherited a mortgage book worth about £14 billion when it bought Northern Rock and expects to start promoting its own branded loans in the autumn. The purchase of the existing mortgages will hand Virgin 3,700 customers. The group confirmed that it would maintain customers’ existing interest rates and terms.

So far Virgin, which opened its first fully branded bank branch earlier this month, has paid £820 million cash for Northern Rock and £150 million of debt. It is set to pay an additional £50 million- £80 million depending on the future performance of the business.

The purchase also relieves the pressure on the asset resolution agency, which has been looking to speed up the repayment of its £46 billion government loan by selling portfolios of loans. – Copyright The Financial Times Limited 2012