Leaked memo by Rock advisers paints grim picture for investors

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The Independent Online

On sale at an investment bank near you: Blackbird, "the UK's fastest growing mortgage company", offering "access to one of the best and most efficient mortgage distribution platforms and infrastructures in Europe".

Northern Rock, as Blackbird is better known, could be making annual profits of more than £500m within three years, advisers to the distressed mortgage bank have been telling potential buyers, even though it is likely to still owe the Bank of England £5.9bn by 2010 and to offer current shareholders little return on their money.

The figures, which emerged yesterday when a confidential briefing memorandum for Northern Rock's suitors was posted on the internet, are based on a best-case scenario for Blackbird, the codename given to the bank by its advisers, Merrill Lynch, Citigroup and Blackstone.

The memo outlines a rosy view of the future for Northern Rock, assuming that financial markets stabilise and normal credit conditions are restored, though its health warnings include a caution that regulators including the Bank of England and the Financial Services Authority have not approved the assumptions made.

The memo detailing Project Wing, as Northern Rock's advisers have dubbed the bank's rescue, says "Blackbird's preferred outcome" would be a sale of the whole business, under which the buyer would take on Northern Rock's debts, including the £23bn it has already borrowed from the Bank of England. However, the paper also presents two alternative plans, under which a buyer would acquire the bank's assets and systems, leaving the remainder of Northern Rock, including its liabilities, in a holding company.

This type of arrangement, which Northern Rock's advisers believe is a more realistic outcome, would leave the bank's existing shareholders owning a company ultimately likely to prove almost worthless. This company would, the memo says, "be placed into a solvent run-off with the objective of (i) orderly down of the balance sheet; (ii) repayment of cred-itors; and, if appropriate, (iii) the return of residual value to Blackbird shareholders". The four potential buyers to have emerged so far are due to submit their proposals by Friday.

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