U.K. Risked Underselling Mortgage Book, Lawmakers Say

  • Valuation of Northern Rock book ‘erred on the side of caution’
  • Cerberus, Credit Suisse come under scrutiny in panel report

The U.K. government risked selling a 13 billion-pound ($16 billion) portfolio of mortgages for less than its true value, according to a parliamentary committee.

UK Asset Resolution Ltd., the body that manages Britain’s fully nationalized banks, “erred on the side of caution” when valuing the Northern Rock mortgages it sold last year, the Public Accounts Committee said in a report published Wednesday.

“Valuations are important as they set a reserve price which has to be bettered for the asset to be sold -— if the bar is set too low and there is insufficient competitive tension or there are poor market conditions, there is a risk of accepting an offer which does not reflect the true worth of the asset,” the PAC said. “In this case, a well-run sale meant that this risk did not materialize.”

As the government’s biggest-ever sale of financial assets, the disposal of the Northern Rock mortgages has been heavily scrutinized, with lawmakers asking whether taxpayers and consumers got the best deal. The PAC also questioned the tax arrangements of Cerberus Capital Management LP, which purchased the assets, and the selection of Credit Suisse Group AG as the government’s adviser.

There are “many positives” to be taken from the way the sale was conducted, the panel said. These included the tight timeframe in which it was achieved and the ferocity of the competition for the assets, with bidders including Blackstone Group LP, CarVal Investors and Och-Ziff Capital Management Group LLC. That allowed for a sale price that was slightly more than the outstanding value of the loans sold, the PAC said.

Still, the government has some lessons to learn, it said. Better preparations should have been made, including a formal business case for the sale and a discussion of the potential value of alternative sale options.

Complicated Structure

The U.K. Treasury should have also made greater efforts to take account of the tax domicile of bidders as that could affect the value to taxpayers, the PAC said. Cerberus, which has “a complicated company structure” with units in the Netherlands and the Cayman Islands, said it would probably have paid more in tax and less upfront for the assets if it had bid using a U.K. domiciled company, the committee said.

Meanwhile, UKAR did not follow good practice when it appointed Credit Suisse as its financial adviser and subsequently more than doubled its fee, the PAC said. The government entity also allowed Credit Suisse to provide financing for Cerberus even though it prohibited this in an earlier asset sale due to a potential conflict of interest.

The report’s conclusions will be examined closely by the government as it prepares further asset sales. The sale of as much as 15.7 billion pounds of mortgages from Bradford & Bingley, another nationalized lender, was restarted last month after the process was paused in the wake of the Brexit vote.

(Corrects story to say UKAR was at risk of underselling mortgage book.)
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