£1.5 billion saved in banks debt deal

Taxpayers were saved around £1.5 billion after the government moves to buy back debt in nationalised lenders Northern Rock Asset Management and Bradford & Bingley, the UK public spending watchdog said.

A report by the National Audit Office hailed efforts last year to snap up £2.4 billion of so-called subordinated debt (high interest paying debt that ranks behind other loans in the event of insolvency) in the failed banks as value for money for the taxpayer.

Subordinated bondholders in B&B and Northern Rock Asset Management, which was spun off from the “good” part of Northern Rock last year, were being paid “excessive” rates of interest despite being protected from losses after the government took the banks into public ownership, said the NAO.

These debt holders would have normally absorbed losses if the two banks had been allowed to collapse into insolvency, but the government instead opted to wind them down.

UK Financial Investments, which manages state-owned banking assets, launched a buy-back of subordinated debt designed to make savings for the taxpayer and encourage holders to sell. The NAO said the decision helped save around £1.5 billion in future interest payments and ensured these bondholders contributed to the costs of nationalisation.

Amyas Morse, head of the NAO, said: “Opportunistically buying back the subordinated debt of the taxpayer-owned banks was value for money in the circumstances.

“The holders of this debt had been paid to bear the risk of taking loss if the banks ran into trouble, but were rescued as part of the nationalisation.

“It is good for the taxpayer that the debt holders have now shared part of the costs of restructuring the banks. It remains to be seen if the cost of subsidising the banks will eventually be recouped by the taxpayer.”

However, the NAO report revealed that holders of £619 million of the subordinated debt did not accept the buy-back offer, while a further £825 million was not included.

It urged the Treasury to look at ways to cut the outstanding debt to limit interest payouts.