City Investors Bank On £55m RBS Branch Payout

By Mark Kleinman, City Editor

A consortium of City investors vying to buy 315 branches from Royal Bank of Scotland is in line to receive £55m in annual interest payments from the state-backed lender - even before they complete a deal.

Under the proposal W&G Investments, a vehicle set up by the former Tesco finance director Andy Higginson, would be paid a 5% "coupon" on a £1.1bn down-payment to acquire the branch network.

The payments would be made by RBS during the period between it agreeing to sell the branches to W&G and the completion of a deal, which analysts expect could take as long as two years.

If it takes longer, RBS could have to pay an even bigger sum to the consortium.

The details are disclosed in a document published on Friday by W&G, which will formally list on London's junior AIM stock market next week.

It marks the latest stage of RBS's protracted efforts to offload the business, codenamed Project Rainbow, under the orders of the European Commission in return for the banks's £45bn taxpayer bailout in 2008.

Santander pulled out of a deal to buy the RBS branches

RBS wants to revive the venerable banking brand-name Williams & Glyn to entice bidders and has granted W&G Investments a licence to use the name during the auction.

The admission documents include, however, dozens of risk factors that could inhibit a takeover of the branches by W&G, which is backed by leading investors such as Lansdowne Partners, Schroders, Talisman and Toscafund.

The potential barriers to a successful acquisition of Rainbow include the greater scrutiny of bank bosses by financial regulators and the drawn-out nature of a deal.

W&G said: "During the period between the Signing Date and the Completion Date, which is anticipated by RBSG to be approximately two years, it is expected that the Company [W&G] will have rights to monitor the performance of the Rainbow Assets.

"However... the Company may not have the ability or right to intervene and the value of the Rainbow Assets may be materially adversely impacted."

It also pointed to the ongoing review of Britain's small business banking market by the Office of Fair Trading, which it said could jeopardise investors' willingness to back a deal.

And it said adverse customer reaction to a takeover could put at risk the bank's desired funding model.

It said: "The currently anticipated funding model for Rainbow is dependent on deposits, rather than wholesale funding.

"There is a risk that there may be adverse public reaction to the Company post acquisition of Rainbow which could lead to depositors withdrawing their money.

"Certain customers and depositors may seek to change banks if they perceive the Separation or the acquisition of Rainbow by the Company might put their money at risk.

"This could result in a funding gap that would need to be addressed by accessing funding in the wholesale markets (provided that such funding were to be available) which is likely to be a more expensive form of funding for the Company than deposit-based funding."

W&G also warns in the documents that the recommendations of the Vickers Commission on banking reform could scupper a deal because of moves to force banks to make themselves safer by ring-fencing retail activities from investment banking operations.

Although the RBS network falls within the permissible limit of £25bn of deposits to avoid having to be treated as a ring-fenced bank, the W&G directors point to uncertainty over the legislation as another risk.

It said: "The draft secondary legislation to the Financial Services (Banking Reform) Bill provides that the requirement to ring-fence will not apply to UK banks holding less than £25,000,000,000 in 'core deposits'. At this stage it is unclear what the finalised threshold will be and therefore whether Rainbow would be a ring-fenced bank."

An earlier deal to sell the network, which comprises all RBS-branded branches in England and NatWest branches in Scotland, fell through last year when Santander UK pulled out citing concerns about IT systems.

Santander had initially agreed to pay £1.65bn for the branches, which include £19bn of assets, 250,000 small business customers and approximately 5,000 staff.

The rival bidders remaining in the RBS auction include a private equity bid from Corsair Capital and Centerbridge that is backed by the Church of England's pension fund, and one led by Blackstone, the US private equity group.

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