Contingent Liability Notification and Disclosure of Asset Sale

John Glen Excerpts

Tuesday 2nd April 2019 Written Statements

[The Economic Secretary to the Treasury (John Glen)]

I can today confirm that I have laid a Treasury minute informing the House of the contingent liability that HM Treasury has taken on in authorising the sale of a portfolio of NRAM (formerly part of Northern Rock) loans acquired during the financial crisis under the last Labour Government. This sale generates proceeds of £4.9 billion for the Exchequer and the portfolio will be sold to Citi. The majority of financing is being provided by PIMCO.

Rationale

The previous Government intervened in the financial sector to preserve financial stability; this policy objective has now been met, and these assets should be returned to the private sector. The proceeds from this sale will reduce public sector net debt. This marks a major milestone in the plan to recover taxpayers’ money and exit from the Government’s shareholdings in NRAM and Bradford & Bingley.

Format and Timing

The Government, UK Asset Resolution (UKAR) and UK Government investments concluded that this sale achieves value for money for the taxpayer having (i) conducted a rigorous analysis of whether market conditions were conducive for the sale of this portfolio; (ii) considered whether the transaction was likely to generate sufficient competitive tension to lead to a properly competitive process; and (iii) conducted an assessment of the fair market value for the assets. The sale made use of a two-round bidding process, which has been shown to create competitive tension through the bidding process and been used for previous sales of UKAR assets.

Contingent Liability

On this occasion, due to the sensitivities surrounding the commercial negotiation of this sale, it was not possible to notify Parliament of the particulars of the liability in advance of the sale announcement.

The contingent liability includes certain market standard time and value capped warranties and indemnities confirming regulatory, legislative and contractual compliance. The maximum contingent liability arising from these warranties and indemnities is approximately £1 billion. There are further remote fundamental market-standard warranties which are capped at £4.9 billion.

Fiscal Impacts

I can confirm that the sale proceeds of £4.9 billion are above the Government’s hold valuation. In 2019-20 the sale reduces public sector net debt (PSND) by £4.9 billion, as well as reducing public sector net liabilities (PSNL) by £182 million, and public sector net financial liabilities (PSNFL) by £149 million. PSNFL and PNSL are reduced by different amounts as PSNL also takes into account provisions against the loans that are being released. Public Sector Net Borrowing (PSNB) will increase by a total of £750 million by 2023-24. PSNB is increased by the sale as the Government will no longer receive the interest payments associated with these assets.

The impacts on the fiscal aggregates, in line with fiscal forecasting convention, are not discounted to present value. The net impacts of the sale on a selection of fiscal metrics are summarised as follows: