The Chancellor has announced (notably without using the n-word) that Northern Rock is to be nationalised.

What does this mean?

• The shares pass into public ownership
• The government has at last called the bluff of the hedge fund shareholders
• Ron Sandler becomes Executive Chairman
• Focus should now be brought to restructuring the business to create - in several months' time - something saleable

Although the company should now be able to concentrate on turning itself around, the government - as the new owner - should steer clear of micromanagement. Mr Sandler and his team should be left to manage the business, and the government should concentrate on the politics (and the arguments with shareholders about compensation).

At least the risk of formal insolvency has receded almost entirely - it's just not necessary with the Treasury as both senior lender and shareholder. The balance sheet has been restructured through a form of debt-for-equity deal. One could also describe nationalisation in this case as a form of administration or receivership but without the stigma of insolvency and with only shareholders being crammed down. Indeed, had the government not guaranteed all the depositors, Northern Rock would have been in a similar position to other companies with administration being the mechanism used to restructure the balance sheet.

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Schefenacker AG, the €930m turnover automotive parts group manufacturing rear-view mirrors with 7,900 employees in 33 locations worldwide, which was founded in Esslingen (near Stuttgart), Germany in 1935, has become Schefenacker PLC with a registered office in Portsmouth, UK. (Were some reports of the company moving to Brighton a mis-translation of Britain?)

In a move redolent of the Deutsche Nickel restructuring in 2004/05, the owner of this typical Mittelstand family business, Dr Alfred Schefenacker, is likely to be diluted to below 4%, with the majority of the equity passing to bondholders in a debt for equity swap. German debt for equity deals are rare and don't often go below 10% equity retention, but greater dilution is the norm in the UK.

Binding all creditors with a 75% majority vote is posible in the UK through a Company Voluntary Arrangement or a s425 Companies Act 1985 Sceme of Arrangement, whereas in Germany a small minority could hold out. This stage of the deal has not yet been reached, but is expected to be thrashed out between the 90% of creditors said to be based in London.

Further incentives for the choice of mechanism include the German "21-day rule" where German management face criminal sanctions if they fail to file for insolvency within 21 days of the company being unable to pay its debts as they fall due. The more flexible UK test - a reasonable prospect of avoiding insolvent liquidation - and the absence of criminality facilitates consensual restructurings like this one.

Another factor is the bondholders' perception that they have more control or influence in the UK system, which is less dependent on court involvement than Germany.

The group's recent history involved the acquisition of Britax Vision Systems in 2000, which resulted in too heavy a debt burden. Refinancing in 2005 put some €400m in hedge funds' hands. Q3 2006 figures were below target and on 19 October 2006 the company announced the appointment of Dr Burghard Knolle of AT Kearney as CRO/COO. At that time Hedgeco.net reported bonds trading at 30% and loans at 85%.

On 12 December 2006 the company announced the appointment of Stephen J. Taylor of Alix Partners as CRO

Reuters reports an estimated enterprise value of €200m, based on a conservative distressed multiple of four times a projected EBITDA of €50m (down from €78m in 2005). €50m of senior debt and €155m of second-lien debt is expected to be paid back.

Who else is involved? (sources: Legal Week, Global Turnaround)
Company advisers:

• Freitag & Co


• Allen & Overy - David Frauman, Mark Sterling

• Freshfields - Ken Baird, Lars Westpfahl


• Deloitte

• Latham & Watkins - John Houghton, Frank Grell

• Houlihan Lokey - Peter Marshall, Joe Swanson


• Cadwalader - Andrew Wilkinson, James Douglas

• Bingham McCutchen - James Roome


• Close Bros - Matthew Prest

• Clifford Chance - Mark Hyde, Kolja von Bismarck

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