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UPDATE 2-Virgin Money to pay back Treasury loan with bond debut
July 25, 2014 / 9:02 AM / in 3 years

UPDATE 2-Virgin Money to pay back Treasury loan with bond debut

* UK lender completes Northern Rock acquisition

* Equity convertible AT1 bond comes ahead of rumoured IPO (Recasts, adds HM Treasury quotes, pricing details and background information)

By Aimee Donnellan

LONDON, July 25 (IFR) - Virgin Money is poised to pay back a £150m UK government loan it borrowed to acquire Northern Rock, completing its acquisition of the failed mortgage lender.

The banking arm of Richard Branson’s Virgin Group swiftly raised £160m of Additional Tier 1 bonds on Friday and will pay back £154.5m to the UK government, leaving the state with a profit of £4.5m for the financial support it offered in 2012.

Virgin Money borrowed the money from HM Treasury in exchange for Tier 1 Capital Notes to pay for the acquisition.

“This is another step in the government’s long-term economic plan to deliver a more secure and resilient economy,” said the Economic Secretary to the Treasury, Andrea Leadsom in a statement.

“It is another step in repairing the banks, in reducing our national debt and in getting taxpayers’ money back.”

“The sale has secured further value for the taxpayer and will be used to pay down the national debt,” according to a statement from HM Treasury.

The transaction has been a long time in the works, with Virgin Money deciding to take advantage of a deserted financials bond market to launch the deal on Friday.

“The issue of the new Tier 1 Capital Notes marks Virgin Money’s inaugural access to the unsecured debt capital markets,” said Jayne-Anne Gadhia, Chief Executive at Virgin Money in a different statement.

“Investor feedback was very positive and the transaction was comfortably oversubscribed, representing a significant vote of confidence in Virgin Money.”

Bank of America Merrill Lynch arranged the trade, which attracted a three-times subscribed book from over 40 investors. It priced with a 7.875% coupon at par, paying a spread equivalent to 579bp over mid-swaps.


UK financial institutions have been among the biggest users of the Additional Tier 1 market in 2014, taking advantage of the strong market backdrop to raise junior debt at competitive levels.

Banks across Europe are seeking to boost their balance sheets to meet tough new regulatory requirements via Additional Tier 1 issuance, which is cheaper to raise than equity.

Under the terms of the perpetual non-call five-year deal, investors’ bonds can be converted into equity if the group’s Common Equity Tier 1 ratio falls below 7% on a fully loaded basis.

According to Virgin Money’s 2013 results released in March of this year, the bank has a Common Equity Tier 1 ratio of 15.3% and leverage ratio of 3.7% on a Basel III basis. This means that investors have a buffer of 830bp above the trigger level.

Virgin Money in March reported its first profit since it acquired failed lender Northern Rock in 2012, and has been rumoured to be looking at a potential IPO.

Virgin Money made an underlying profit of £53.4m in 2013. The growth stemmed from its take over of Northern Rock, the group said in the trading update.

The bank was Britain’s third-biggest net mortgage lender last year behind Barclays and Nationwide.

In addition to the payback of the loan, Virgin Money has announced the creation of 200 new UK jobs. (Reporting by Aimee Donnellan; editing by Alex Chambers, Helene Durand)

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