Eminently less Googleable than Justin Bieber’s haircut or Stephen Hester’s wages, the fortunes of a business you may never have heard of should attract more attention than they do. UK Asset Resolution (UKAR) is less than a year old, created last October when the Treasury bashed together the nationalised mortgage books of Northern Rock Asset Management (NRAM) and Bradford & Bingley (B&B), deemed toxic and good only for winding down. Its mandate is to repay the UK taxpayer for bailing out banks and mortgage lenders in the crash of 2008.
And of the bailed out entities, it is closest to doing so: its maiden set of financial figures this April reported swinging from a loss of £258m to a healthy profit of £401m. Many were surprised that the ‘bad bank’ turned a profit, but almost 90 percent of the mortgages it houses are being repaid in full every month.
“Those mortgages will continue to pay every month. It’s not difficult to see there’s profit to be made,” Philip McLelland, finance director of UKAR, tells Financial Director. “Part of that is because we have government funding on the balance sheet and the rates on it are lower than if you went into the markets. But that’s the set of cards we have been dealt.”
And what seemed like a poor hand has been played well in comparison with its bailout peers (though UKAR is not a bailed-out entity in itself). Lloyds, Royal Bank of Scotland (RBS) and Northern Rock – the latter of which is labelled the ‘good bank’ and not part of UKAR – are currently loss-making. UKAR is not under the same commercial pressure as they are, but McLelland says that its focus on sound management of its assets, with a view to selling them on in time, is just as crucial. He has a quiet chortle at the mention of the ‘toxic’ label given to the assets that UKAR manages.
“We don’t talk about bad banks and good banks here. That was invented by the media,” he says. “We talk about the business we have to get on with, maximising the opportunity for the taxpayer. It may take a long time – generations – but if we govern this business well, taxpayers will get their money back.”
That goal is as important to the Treasury, from which UKAR emanates, and UK Financial Investments (UKFI), which manages it on behalf of the Treasury, as it is a personal thing for McLelland. As group financial controller at B&B when it collapsed (and with a seat on its asset and liability, balance sheet management and credit risk committees), he was in the centre of the action. He tells Financial Director that his role at UKAR is a chance to make reparations.
“I feel a sense of responsibility. I was there. We were all there, not realising that the banking market would suddenly decide it didn’t want to lend money to itself,” he admits. “Bradford & Bingley did some things wrong, and some things could have been done better. But what I’m pleased about now is being involved in making it better – in fixing something. And it feels like that. It didn’t feel like that for a while: it was more like our back was against the wall.”
McLelland was likely chosen for the UKAR role because of his man-and-boy building society career, spanning 30 years from the trainee scheme with Abbey National progenitor National & Provincial to a decade in executive management at B&B. When that segued into the group FD role at the nationalised B&B in June 2009, he was charged with preparing for the company’s wind-down by restructuring finance and treasury (saving £6m in cost), unwinding its specialist mortgage securitisation structure and complex offshore funding structures.
On first look, it is not evident why an outfit such as UKAR needs an FD. It is not selling or buying anything.
“The fundamentals of this business are about collecting cash for the government. But it is not as simple as that: we’ve got a load of customers sitting in mortgage arrangements they wouldn’t be able to repeat today because they were taken out in a different world, in a different market,” explains McLelland. “We’ve got mortgages not repaying quickly and with no incentive to go anywhere else because of the credit conditions. Sitting on the other side is the biggest secured funding structure in Europe, and government funding that is structurally simple, but really big. So we need to manage that situation long-term.”
Derivatives are fun
People who want their money back now come often and draw McLelland into legal discussions around contracts that did not foresee those lenders going insolvent. He must be one of the only FDs Financial Director has interviewed to consider derivatives contracts entertaining.
“What’s quite good fun is the legal contracts around our wholesale funding transactions, derivatives and so on,” he says. “None of them were written with administration or wind-up in mind. So you end up in conversations with lawyers who are looking for ways to get all their money back straightaway. We haven’t got their money right now. And if you try to do anything in a hurry, you just destroy value.”
The so-called toxic assets, the asset-backed securities that these organisations had pre-financial crisis, which were supposed to be car parks for capital, “turned out to be the more risky assets”, he adds. “Now they’ve got to be dealt with sensibly, and if we don’t get that right, there is the potential to lose value. That’s not as straightforward as you might think.”
One of McLelland’s responsibilities at UKAR is to be the single point of contact for UKFI, a continuation of his position as the point of contact for that organisation as group FD at the nationalised B&B. On inspection, though, the relationship is more fluid and, in any case, he admits he prefers not to be the focus. “It is facilitated by finance and therefore by me, but I wouldn’t put myself in the spotlight in that way,” he says. Informally, he explains, he and UKAR’s commercial director meet once a month with UKFI to talk about financial performance and ideas. Formally, UKAR chief executive Richard Banks meets UKFI to discuss similar things.
What does get McLelland going is UKAR’s possible future. There has been talk between himself, Richard Banks and UKFI about it becoming a service outfit for a regenerated British mortgage industry – not selling mortgages, but providing front- and back-end services for new market entrants. While surprising that a hard-headed commercial incantation is already in mind for an outfit that less than a year ago was charged solely with ensuring taxpayers got their bailout cash back, McLelland thinks it a logical progression emanating from a £60m investment he has made in a new platform onto which both NRAM and B&B’s mortgage books will be moved that should lead – he hopes – to a cheaper, efficient “one-system, one-process, one-touch” approach to each task its service team undertakes, which could be a saleable proposition.
“If you think about what this business is, it is a balance sheet, an operating and servicing company,” he says. “If you do the latter well, it can only be a good thing: we’ll save £40m each year by doing that. If that means other people want to use the service – you can envisage mortgage service companies that might want to enter the market but don’t have their own processing operations – we could potentially deal with them.”
That, however, would change UKAR’s mandate and require a rethink on its line of reporting to UKFI. It is not authorised to undertake that sort of commercial activity under the terms of the European Union bailouts that B&B and Northern Rock received.
“But I can see a world in which that debt is restructured if the commercial situation gets better, and there may be other people prepared to lend to this kind of asset base to allow us to pay the government back that way,” muses McLelland. “Or we could restructure the whole business into two pieces – a balance sheet piece and an operating piece. The former would keep the government support, while the other bit could, in theory, become independent.”
McLelland describes himself as a commercial person doing an accountant’s job. “If UKAR gets smaller it won’t interest me, frankly, and part of my job might be to do myself out of a job and find the next thing,” he says candidly. “But if there is a different future for another part of the business, that’s interesting to me.”
He denies that becoming a service provider to other mortgage lenders is a plan. It is “just an idea” at this stage, he asserts. The only client for the moment is the UK taxpayer. They may see their money pass into the hands of their children’s children rather than their own. In the meantime, more market bubbles may burst. Might we be in another credit crunch by the time value is repaid?
“Maybe,” he says. “But we’ll be excellent at servicing by then, so we’ll be able to help.”