State aid — United Kingdom — State aid C 14/08 (ex NN 1/08) — Restructuring aid to Northern Rock — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (Text with EEA relevance)
Date: 2008-06-03
Institutions: European Commission
Subjects: State aid, United Kingdom, aid for restructuring, bank, company in difficulties, control of State aid

3.6.2008

EN

Official Journal of the European Union

C 135/21

STATE AID — UNITED KINGDOM

State aid C 14/08 (ex NN 1/08) — Restructuring aid to Northern Rock

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(Text with EEA relevance)

(2008/C 135/06)

By means of the letter dated 2 April 2008 reproduced in the authentic language on the pages following this
summary, the Commission notified the UK of its decision to initiate the procedure laid down in Article 88(2)
of the EC Treaty concerning the abovementioned measure.

Interested parties may submit their comments on the measure in respect of which the Commission is initi-
ating the procedure within one month of the date of publication of this summary and the following letter,
to:

European Commission
Directorate-General for Competition
State Aid Registry
B-1049 Brussels
Fax (32-2) 296 12 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

TEXT OF SUMMARY

I. PROCEDURE

1. By decision of 5 December 2007, the Commission decided
that the measures granted by the State to Northern Rock
(hereinafter ‘NR’) on 17-20 September and 9 October 2007
contained aid which until 17 March 2008 is compatible
with the common market as rescue aid in conformity with
the Community guidelines on State aid for rescuing and
restructuring firms in difficulty (1) (hereinafter ‘the R & R
Guidelines’).

2. By letter of 17 March 2008, the UK authorities notified

restructuring aid measures in favour of NR.

II. FACTS

3. The beneficiary of the aid is NR, which was the 5th biggest
UK mortgage bank with a balance-sheet
total of
GBP 101 billion (as per 31 December 2006). Residential
mortgage lending is NR's core activity. The bank roughly
trebled its share of the UK mortgage market over the last
8 years. NR has financed the growth of its lending mainly
via wholesale funding and in particular by securitisation of
its assets. This proved to be a problem, when, because of
the turbulence in the world's financial markets, the mort-
gage securitisation markets virtually closed, while raising
funds on the wholesale money market became very difficult
as banks became reluctant to lend to each other.

4. On 18 December 2007, the UK authorities extended the
guarantee arrangements implemented on 17 September

(1) OJ C 244, 1.10.2004, p. 2.

2007 and 9 October 2007 to certain unsubordinated
wholesale obligations of NR, whether existing or arising in
the future.

5. In February 2008, the UK authorities nationalised NR.

6. On 17 March 2008, the UK authorities notified a restruc-
turing plan to the Commission, of which the key elements
are:

— a

reduction of

from around
GBP 107 billion in 2007 to about half that size at the
end of 2011,

the balance

sheet

— stabilisation of the balance sheet by seeking to grow the
retail deposit base as a proportion of total funding, but
with balances staying below pre-crisis levels,

— business in Denmark to be closed and put into run-off
in 2008 and maintenance of small capped operations in
Ireland and Guernsey,

— restoration of market confidence in the Northern Rock

brand,

— new management team,

— preparing the company to return to the private sector

7. The plan would be supported by restructuring aid, which
would mainly consist in the prolongation of the rescue aid
measures,
including the guarantee arrangements imple-
mented on 18 December 2007. The intention would be
that the liquidity facilities would be fully repaid by 2010

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3.6.2008

and the guarantee arrangements would be progressively
lifted by the end of 2011 in the base case (in the downside
case the guarantees may remain until 2013). The Govern-
to the following specific
ment
compensatory measures, in order to limit the distortion of
competition and trade created by the aid:

is prepared to commit

— a targeted reduction in the balance sheet

to about

GBP 48-53 billion by 2011,

— a drastic reduction in new residential mortgage origina-

tion,

— a commitment

to an aggressive redemption policy
including the active encouragement of redeeming custo-
mers to move to competitors,

— closure and run-off of NR's operations in Denmark in
2008 and a commitment not to expand in other EU
markets before 2011,

— a commitment to a ‘Competitive Charter’, which would
be rendered public and would set out the basis on
which the business would compete in the retail savings
and mortgage lending markets,

— a commitment to withdraw from unsecured personal
lending for the restructuring

lending and commercial
period,

— a commitment not to increase the overall number of

branches in the UK.

III. ASSESSMENT

8. The Commission concluded the guarantee arrangements of

18 December 2007 constitute compatible rescue aid.

9. As regards the nationalisation of NR,

the Commission
concluded that it does not involve State aid elements under
Article 87(1) EC to the extent that the shareholders are
only compensated on the basis of the value of the company
without any State support. However, the commitment of
HM Treasury to the FSA to take appropriate steps to ensure
that NR will operate above the minimum capital require-
ments could constitute additional restructuring aid.

10. As regards the restructuring aid notified on 17 March
2008, the Commission has decided to initiate a detailed
investigation.

— First, the Commission, while observing that the down-
sizing of the balance sheet will contribute to restore
viability, nevertheless has not been able to assess in
details whether the restructuring plan will allow the
firm to restore its long term viability. It needs to be
verified whether
retail
deposits to non-retail funding is sufficient to stabilise
the balance sheet and avoid the risk of being overly
dependent on any one source. The Commission doubts
whether the duration of the plan is as short as possible.
Finally, the Commission has not been able to assess in
details whether it was made on the basis of realistic
assumptions as to future operating conditions.

the planned 50:50 ratio of

competition and trade. From the analysis of the relevant
markets and NR's presence in the respective markets,
the Commission concludes that the market where NR
held and will continue to hold a significant market
share is
the UK mortgage market. Compensatory
measures should therefore in priority aim at reducing
the presence of NR on this market.
In addition,
measures aimed at limiting NR's presence on the UK
and foreign retail deposits markets could also prove
necessary. The Commission notes positively that the
downsizing of the bank will strongly reduce its market
presence on the UK mortgage market. However, the
Commission doubts whether the size and duration of
this downsizing are sufficient to avoid undue distortions
of competition. The Commission also notes that if NR
implemented ‘through-lending’
i.e. offering third party
branded products directly to customers with maturing
mortgage deals, this would reduce the significance of
the downsizing as a reduction of the market presence.
Finally, the Commission doubts that, if NR were in the
next years sold to a new owner, the latter would not
have to carry on the implementation of the compensa-
tory measures.

— Third, the Commission, while acknowledging that the
downsizing of the balance sheet allows a rapid reduc-
tion of the aid, nevertheless doubts whether the aid is
limited in size and in duration to the minimum neces-
sary. In particular, it seems that a more rapid and more
profound downsizing could be implemented, allowing
thereby a more rapid redemption of the State facilities.
In addition, the Commission doubts that the State guar-
antees could not be lifted earlier than planned in the
restructuring plan. Finally, the Commission doubts what
price would need to be charged by the State for these
facilities and guarantees in order to ensure that the aid
and thereby the distortion of the competition is limited
to the minimum.

TEXT OF LETTER

‘The Commission wishes to inform the United Kingdom that,
having examined the information supplied by your authorities
on the measure referred to above, it has decided to initiate the
procedure laid down in Article 88(2) of the EC Treaty.

1. PROCEDURE

(1) By decision of 5 December 2007 (hereinafter “the deci-
sion of 5 December 2007”) the Commission (2) found
the measures implemented by the Bank of England (here-
inafter
“BoE”) of 14 September 2007 in favour of
Northern Rock (hereinafter “NR”) not to constitute State
aid and decided that the measures granted by the UK
authorities on 17-20 September and 9 October 2007
contained State aid which until 17 March 2008 is compa-
tible with the common market as rescue aid in confor-
mity with the Community guidelines on State aid for rescuing
and restructuring firms in difficulty (hereinafter “the R & R
Guidelines”) (3).

— Second, the Commission doubts that sufficient compen-
satory measures are taken to avoid undue distortion of

(2) OJ C 43, 16.2.2008, p. 1.
(3) OJ C 244, 1.10.2004, p. 2.

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(2) On 17 December 2007,

the UK authorities provided
informal background information regarding the extension
of the guarantee arrangements to be announced on the
next day. The UK authorities officially informed the
Commission about this measure on 21 December 2007.
On 8 January, 24 January, 6 February, 13 February, and
10 March 2008 meetings were held between representa-
tives of the UK and the Commission services.

(3) On 17 February 2008, the UK authorities announced
that NR was to be nationalised. On 17 March 2008 the
UK sent to the Commission a restructuring plan for NR
and notified State aid measures which would accompany
that plan and enable it to be implemented.

2. DESCRIPTION

2.1. The beneficiary

(4) NR, which is based in Newcastle-upon-Tyne, was the
5th biggest UK mortgage bank.
Its balance-sheet total
was GBP 101 billion on 31 December 2006 and
GBP 113,5 billion on 30 June 2007. In 2006, its interest
income represented GBP 5 billion, with a profit of
GBP 443 million. The bank has a staff of 6 000 persons.
NR has 77 branches throughout the UK, and is present in
Ireland, Denmark and Guernsey (4). NR does not belong
to a larger group.

(5) Residential mortgage lending is NR's core activity.

It
represents more than 90 % of all outstanding loans to
customers. NR's lending has significantly increased over
the last 8 years until mid 2007. The bank roughly trebled
its share of the UK mortgage market over that period. In
the first half of 2007, the bank achieved gross lending of
GBP 19,3 billion and net lending of GBP 10,7 billion,
representing market shares of UK gross mortgage lending
of 9,7 % and of net mortgage lending of 18,9 % (5).

(6) Whereas retail funds and deposits constituted the main
source of financing for the bank in 1998, it has since
then funded the growth of its mortgage lending mainly
via wholesale funding, including issuing mortgage-backed
securities, covered bonds and medium term and short
term unsecured funding.

(7) The success of the business model was dependent on
(a) the ability of Northern Rock to raise money in the
term
wholesale markets in order
borrowing from those markets and to fund its lending;
and (b) its ability to pay a lower rate of interest on the
money which it borrowed from the wholesale markets
than the interest which it charged to its mortgage custo-
mers.

to repay its short

(4) In the case of the Guernsey operation, the UK authorities consider that
the majority of these deposits are from UK customers. These are likely
to represent a small segment of high net worth UK individuals who
make large deposits in order to gain from interest being paid on a gross
rather than net basis and hence gain from the roll up of interest.

(5) Gross lending is total advances, and net lending is advances less

redemptions and repayments.

(8) The structure of its liabilities therefore changed so that, in
recent years, unlike most UK banks, NR financed the
majority of
its long-term mortgage loans by issuing
securitised notes (6).
In March 2001 NR established a
“master trust” securitisation structure known as “Granite”
since made extensive use (it had
of which it has
previously carried out
standalone securitisations not
forming part of the master trust). The Granite structure
involved the creation of a trust into which NR sells mort-
gages and under which both Granite and NR are benefici-
aries.

(9) NR also funded itself

are

bonds

another

Covered

through the issue of

“covered
bonds”.
form of
mortgage-backed security. The bonds in question are
issued by NR itself (unlike Granite where the bonds are
issued by SPVs) but a pool of mortgage loans and related
security is transferred to an SPV, which provides a guar-
antee of the bonds secured over the SPV's assets. Inves-
tors therefore have direct recourse against NR as well as
recourse to a pool of mortgage loans and related security.

2.2. The difficulties and the approved rescue aid

measures

(10) In the summer of 2007, the world's financial markets
turbulence, which began with
entered a period of
markets'
fears over exposure to American sub-prime
mortgages. A consequence of this turbulence has been a
significant shift in trading conditions in the sterling and
global money markets and the virtual closure of
the
mortgage securitisation market. Banks and other institu-
tions started to retain cash to meet their own potential
liquidity requirements and to reduce their
and actual
exposure to other institutions until it becomes clear what
the impact of the turbulence has been on the assets and
liquidity of
those other institutions. This has created
severe liquidity difficulties that especially threatened insti-
tutions whose business model is reliant on raising finance
in the wholesale markets to fund their business. This is
the case of NR, which funded new loans principally
through money raised on the wholesale markets.

(11) As a result, NR had difficulties in meeting its funding
needs (7). Funding needs in this context mean the funds it
has to raise on a day to day basis in order to meet its day
to day liquidity requirements and in particular to refi-
nance its maturing wholesale borrowings, including short
term commercial paper, as and when they fall due for
repayment.

(6) The Bank of England Financial Stability Report of October 2007 indi-
cated that the industry average for UK banks' wholesale funding as a
percentage of total funding was 50 %, while for NR it amounted to 66 %
in 2006 and over 70 % at the first half of 2007. This difference is highly
significant because experience shows that retail deposits are less likely
to be withdrawn than wholesale funding in the event of a tightening of
credit conditions in the market.

(7) A more detail description of the causes of NR's liquidity crisis can be
found in the Financial Stability Report of the Bank of England dated
October 2007, pages 10 to 12.

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(12) Its ongoing difficulties in meeting its funding needs as at
13 and 14 September 2007 were so serious that there
was a real likelihood that, in order to meet its funding
requirements (new lending and repayment of wholesale
liabilities as they fell due), it would have to draw down
on its buffer stock of high quality finite sterling liquid
assets (8) and/or sell assets, probably at distressed sale
values. Against this backdrop NR's auditors recorded their
concerns that the firm might not be able to draw up its
accounts on a going concern basis. In this context, NR
explored all possible financing options,
including a
possible takeover, without success.

(13) NR,

therefore, requested the support of

the Bank of
England (the “BoE”) as lender of last resort for a substan-
tial liquidity facility pending a longer term resolution of
its difficulties (9). The liquidity support was provided on
14 September.

(14) The difficulties of NR were further aggravated by a bank-
run, which started after the news on the BoE granting
support to NR was made public. In order to stop it and
avoid contagious effects, the Treasury announced guar-
antee arrangements for all existing accounts in NR on
17 September 2007. Further, HM Treasury clarified the
assumed liability guarantee backed by State resources via
a publication on HM Treasury's website on 20 September
2007.

(15) On 9 October 2007, the Treasury extended the guarantee
to new retail deposits and, together with the BoE, modi-
fied the terms and conditions of the emergency liquidity
assistance (hereinafter “facility of 9 October”, consisting
of so-called B and C facilities, according to the Decision
of 5 December 2007).

(16) By decision of 5 December 2007,

the Commission
authorised the above measures until 17 March 2008.
Whereas the Commission considered that the measures
implemented by the BoE on 14 September 2007 did not
constitute aid until
their amendments on 9 October
2007, all the measures implemented from 17 September
2007 onwards were found to constitute aid, which is
however compatible as rescue aid pursuant to the R & R
Guidelines.

2.3. The persistence of

the difficulties and the

measures subject to the present decision

and implemented, and therefore condemn the firm to
exit the market.

(18) In order to avoid the adverse effects of such a downgrade,
on 18 December 2007 the UK authorities extended the
State guarantee arrangements to the following unsubordi-
nated wholesale obligations, whether existing or arising
in the future:

— all uncollateralised and unsubordinated wholesale
deposits which are outside the guarantee arrange-
ments previously announced by HM Treasury,

— all payment obligations of NR under any uncollatera-

lised swap transactions,

— in respect of all collateralised swaps and all wholesale
(including,
are
collateralised
borrowings which
without
the
covered bonds of NR),
limitation,
payment obligations of NR to the extent that those
obligations exceed the available proceeds of
the
realised collateral for the relevant swap or borrowing,
and

— all obligations of NR to make payments on the
repurchase of mortgages under the documentation
for the “Granite” securitisation programme.

(19) These measures […] were the minimum […] to ensure

that NR's ratings were not downgraded.

(20) NR pays to HM Treasury a monthly guarantee fee of
GBP […] for so long as these new guarantee arrange-
ments shall remain in force.

(21) As regards the duration of the guarantee arrangements
implemented on 18 December 2007, the UK authorities
publicly announced that this measure should “remain in
place during the current instability in the financial markets” in
accordance with the wording used in the previous notices
with regard to the guarantee arrangements granted on
17-20 September and 9 October 2007.

2.3.1. The extended guarantees of 18 December 2007

2.3.2. The search for a private sector solution

(17) […] (*) a ratings downgrade would have had a further
serious adverse affect on the company's financial position
[…] (10). A ratings downgrade could therefore have
prevented any restructuring plan from being designed

(8) Liquid assets such as bonds and securities that can be sold quickly to

provide cash.

(9) Financial regulation in UK is ensured by the “tripartite” system in which
the Bank of England, the Financial Services Authority (FSA) and HM
Treasury have different responsibilities as set out in the Memorandum
of Understanding between HM Treasury, the Bank of England and the
FSA of 22 March 2006.

(*) Business secret. Where possible, figures have been replaced by ranges

in [ ].
(10) […].

(22) The UK Government aimed to ensure that the process for
considering proposals from third parties for the merger
or acquisition of NR rigorously tests the scope of the
private sector to deliver a viable restructuring of
the
company with the minimum aid necessary.

(23) Throughout the months of August and September 2007
various attempts were made to seek a speedy and orderly
transaction for the sale of the whole entity, especially in
the period after the need for BoE intervention became
public. These attempts by NR and its adviser, Merrill
Lynch, failed to achieve the desired results.

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(24) Following the failure of the initial sale process, NR having
also retained Citigroup and Blackstone alongside Merrill
Lynch on 3 and 31 October respectively proceeded to
put in place a revised and restructured sale process.

(25) NR's advisors asked for

interest

contemplated

indications of

from
potential buyers in October 2007. The revised auction
was designed to target a wide range of potential acquirers
and
structures,
including sale of the whole or parts of NR, in an effort to
maximise prospects for a commercial solution to be
affected. Three companies expressed their interests for the
whole entity, and one for part of it.

transaction

different

2.3.3.1. Reduction

and

restr uctur ing

of

the

balance sheet

(32) […].

(33) […].

2.3.3.2. Growth of the retail deposit base

(34) […].

(35) […].

2.3.3.3. A new commercial policy

(26) On 26 November, NR declared the Virgin Consortium
(hereinafter “Virgin”) as the preferred bidder and decided
to attempt to reach an agreement on a potential sale. On
6 December, JC Flowers withdrew from the sale process.
[…], discussions with Olivant Advisers were resumed and
NR effectively initiated a two-party auction process. The
original Virgin proposal submitted in November 2007
would have reduced the asset book to […] and the
aborted Olivant bid — to […].

(36) […].

(37) […].

(38) […].

2.3.3.4. A rebranding of the company

(39) […].

(27) In the discussions that followed, […].

2.3.3.5. Restr uctur ing aid

(28) Indeed, as the bid process progressed it became increas-
ingly clear that […]. Therefore the Tripartite Authorities
asked Goldman Sachs, their financial advisor, to explore
the possibility of devising a flexible financing solution
that could be used by bidders in an effort to facilitate a
private-sector solution.

(29) On 21 January 2008, HM Treasury publicly announced a
new financing structure that would be made available to
NR and other interested parties, in order to facilitate a
private sector solution for the entire company. It was
indicated that the financing structure — which consisted
in the sale of an assets pool belonging to NR to a vehicle
which would issue bonds covered by a State guarantee —
the
would only be available for proposals that meet
Tripartite Authorities' publicly stated objectives (11).

(30) On 4 February 2004, the Tripartite Authorities received
two proposals compliant with the above-mentioned
announcement: from Virgin and NR. Olivant Advisors
had announced that they were not pursuing their bid.
The two business plans presented by the bidders, even
though neither was definitive, given that the bank's natio-
nalisation intervened before they could be agreed upon,
did not diverge substantially and both required similar
aid measures. They are described here below as potential
benchmarks against which the plan notified on 17 March
2008 could be assessed.

(40) […].

(41) […].

(42) […].

2.3.3.6. Expected financial results

(43) […] (12) (13).

(44) […].

2.3.4. The nationalisation of the bank

(45) On 17 February 2008 the UK government announced
that neither of the two private sector offers met the test
of protecting the taxpayer's interest and that, accordingly,
it would take the company in temporary public owner-
ship. Legislation enabling this was introduced and passed
in the UK Parliament over the following days, and NR
became publicly owned on 22 February 2008.

(46) According to the UK authorities, the nationalisation did
not result in any additional aid measures in favour of NR.
The authorities did however provide an assurance to the
to any
FSA that
constraints imposed by EC State aid rules and by Govern-
ment Accounting rules,
to take appropriate steps to
ensure that NR will operate above the minimum capital
requirements.

intention was,

its present

subject

2.3.3. The restructuring plans submitted by NR and Virgin

(31) The key elements of the restructuring plans were (a) a
reduction and restructuring of the balance sheet; (b) a
growth of the retail deposit base as a proportion of total
funding; (c) a new commercial policy; (d) a rebranding of
the firm; and (e) the grant of restructuring aid. These
elements will be described in the next paragraphs.

(47) The UK authorities also informed the Commission that
existing shareholders will be compensated by a procedure
for independent valuation of the shares on the assump-
tion that all State support had been withdrawn and that
no financial assistance would be provided by the State in
future (apart from ordinary market assistance offered by
the BoE subject to its usual terms). On this basis the
purchase price paid would not contain State aid to the
former shareholders of NR or to NR itself.

(11) They mainly concern protection of taxpayers' interests, financial stabi-

lity, protection of consumers.

(12) […].
(13) […].

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2.3.5. The notified restructuring plan

2.3.5.1. Reduction in balance sheet

(48) The plan envisages that

the NR balance sheet would
contract in the first five years of the plan from about
GBP 107 billion in 2007 to about GBP 48-53 billion at
the end of 2011. Mortgage assets would contract from
around GBP 98 billion in 2007 to GBP [30-50] billion
by 2011.

(49) This would be achieved through:

(i) an active retail mortgage redemption programme
with the aim of encouraging at least 60 % of custo-
mers with maturing products to remortgage with
another lender; and

(ii) exiting all new commercial lending and new standa-

lone unsecured lending.

rate

(50) The company plans to achieve this through a pro-active
redemption policy under which customers with products
approaching maturity would be […] contacted and
encouraged to seek a new deal elsewhere. Customers who
remain with NR once their current arrangements expire
would mature in line with their mortgage contract
terms onto the
(hereinafter
standard variable
“SVR”) […]. NR is also exploring the implementation of a
“through-lending” facility for prime residential customers
i.e. making an arrangement with a mortgage provider in
order to be able to offer third party branded products
directly to customers with maturing mortgage deals. The
financial benefit of these proposals (which are not yet
included in the plan) would be marginal: the business
rationale for this proposal is that it would increase the
probability and speed of redemptions, allow NR to main-
tain full control of the sales and advice process and by
assisting its customer to achieve a good outcome would
better maintain Northern Rock's brand promise and repu-
tation.

(51) A 60 % redemption rate (compared to […]) is considered
to be a more realistic target in view of deteriorating mort-
gage conditions, and represents a substantial change
compared to the pre-crisis rate of around [< 40] %. The
mortgage market landscape has changed significantly in
recent months:
the 100 % loan-to-value (hereinafter
“LTV”) mortgage market has effectively closed and the
decreased lending appetite of mortgage lenders is particu-
larly affecting less credit-worthy borrowers and those
seeking high income multiples.

(52) NR would also continue to conduct limited levels of new
this period (on the base case about
lending over
18-23 billion in total for the four years from 2008 to
2011 compared with about GBP 30-35 billion in 2007).
This new lending would be offered predominantly to
high credit quality new customers.

tion through them in the past; and given the significance
of intermediaries in the UK mortgage market as a whole,
in order to retain a basis for a long term return to viabi-
lity. If NR were to withdraw completely from the inter-
mediary channel it would take a considerable amount of
time and investment
franchise. The
company therefore proposes to originate the minimum
volumes (approximately GBP [3-5] billion a year or
14-16 % of historic volumes through this channel) neces-
sary through this channel
in order to maintain panel
membership with key intermediaries and write a minimal
yet meaningful mortgage capacity with each key group.

to rebuild this

(54) The aim would be to restrict new lending to high credit
quality borrowers. On the basis of
the assumed total
market volumes it is estimated that NR's market share of
gross new mortgage lending would fall back from about
8 % in 2007 to [1,5-2,5] % for four years before rising to
just over [< 4 %] in […].

(55) According to the UK authorities, given the quality of the
Northern Rock mortgage book, it is expected that there
will be alternative offers available in the market for custo-
mers switching away from Northern Rock. Much of the
maturing mortgage portfolio comprises customers with
good credit scores and LTV of below […] %, who should
not experience any difficulty in finding more competitive
products with other providers. Higher risk residential
customers would be directed to a specialist panel of
brokers who specialise in providing sub-prime or other
non-mainstream mortgage products. For the proportion
of
in
transferring their mortgage under current market condi-
tions […].

customers who may

experience

difficulty

(56) High quality new lending would be achieved by imposing
high customer credit quality standards for any new busi-
ness that is taken on and offering lower loan to value
ratios. It is anticipated that lending margins would be in
the middle of the industry range between 2008 and […],
gradually being managed down thereafter […] to achieve
target increases in mortgage lending under the plan.

(57) The unsecured and commercial lending portfolios would
be discontinued and existing book would be run down
over the period of the plan. On the basis of historical
trends NR expects the unsecured lending portfolio to
reduce from GBP 4,023 million to about GBP [< 1 billion]
and the commercial portfolio (including commercial
buy-to-let) to reduce […] from GBP 1,317 million to
about GBP [< 600] million by the end of 2013. Earlier
sale or other options to liquidate these portfolios would
be considered if appropriate.

2.3.5.2. Stabilisation of

the retail deposit base

as a propor tion of total funding

(53) The company intends that most of

the new lending
would be originated through intermediaries so as to
maintain this
important distribution channel. This
channel historically represented approximately [85-90] %
of the company's lending volumes and the retention of a
minimum presence in the market is essential, given NR's
small number of branches and low percentage of origina-

(58) Under the plan the proportion of retail funding to total
funding would increase from 15-20 % in 2008 to about
[…] % in 2011 and about 48-52 % in 2012, re-balancing
the balance sheet. This would be reflected in:

(i) a decrease in total funding from GBP 103 billion in
2007 to about GBP [40-50] billion in 2011, and;

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(ii) an increase in retail deposits from GBP 10,5 billion at
the end of 2007 to about GBP […] billion in 2011,
which
of
remains
GBP 24 billion.

below the

pre-crisis

level

(59) The strategic objectives would be to recapture some
recently lost customers of NR;
to encourage a better
balance of high value and lower balance depositors; and
to encourage a higher percentage of accounts with
balances of less than GBP 35 000. The projected growth
in the deposit base represents only a moderate increase in
share of
levels
(about 1,2-1,5 % compared to 0,8 % currently) and
below the pre-crisis share of 1,9 % for the duration of
the period.

the total market compared to current

(60) Beyond the period of the stabilisation plan, a key strategic
objective would be to achieve broadly a 50:50 ratio of
retail deposits to non-retail funding.

2.3.5.3. Overseas activities

(61) NR proposes that its Danish operations would be closed
and put into run-off in 2008 and no additional overseas
businesses would be started prior to 2013.

(62) A small capability would be retained in Ireland and
Guernsey to maintain some diversification of the funding
base. NR's share in the Irish market is small, and has
already significantly reduced. Even by 2013 this share is
expected to be [35-50] % lower than pre-crisis levels
(compared to UK shares which would remain [15-35] %
lower).

2.3.5.4. Repayment of BoE facilities and release

of guarantee ar rangements

(63) The plan's priority is the rapid repayment of the BoE
facilities. The plan envisages that these facilities would be
fully repaid around […] 2010 in the base case, although
there would be a BoE/Treasury liquidity facility that
might remain in place until […] (the company intends to
seek early replacement with a third party facility if condi-
tions are appropriate). NR aims to achieve a long term
credit rating of at least A- on a standalone basis during
2011 on the basis of significantly improved financial
profile as a result of reduced borrowing, retail deposits as
a greater proportion of the balance sheet, a return to
profitability and discharge of the BoE facilities.

(64) The intention is that there would be a staggered release
of the guarantee arrangements as the different aspects of
the company's position stabilise. There is limited practical
experience of the consequences of releasing State guaran-
tees of bank deposits, and the practicability of imple-
menting these proposals set out in the plan would need
to be kept under review in the light of customer feedback
and other market circumstances. However, the plan envi-
sages, on the base case, the removal of all guarantees by
the end of 2011 […]. As regards the retail funding guar-
antee arrangements (which currently cover all new and
existing retail deposits) on the base case:

(i) the indicative earliest release date for the guarantee
arrangements for new retail deposits would be […].
At this point it is anticipated that returning confi-
dence would enable the company to raise new retail
savings without them;

(ii) The indicative earliest

the guar-
antee arrangements for existing retail deposits would
be […].

release date for

(65) For non-retail deposits, release of the guarantee arrange-
ments would be determined by the company's ability to
maintain […] capital requirements (also relevant to the
retail guarantee arrangements) and a sufficient long term
credit rating. The indicative date for removal of the guar-
antees on the base case would be during […], subject, in
particular, to rating agency approval.

(66) On the base case, in addition, there would be an early
release of certain specific aspects of the non-retail guar-
antee arrangements. The company expects that
[…],
subject to ratings agency approval, it would be possible
to release the guarantee arrangements in relation to: […].

(67) Under the recession case scenario, the guarantee arrange-
ments would be withdrawn at the same time as on the
base case subject to rating agency and regulatory capital
(FSA) considerations, which could mean that the guar-
antee arrangements would be required until about 2013.
The precise timing of
the guarantee
arrangements would be driven by capital requirements
and market conditions.

the release of

2.3.5.5. Retention of “Nor ther n Rock” brand

(68) Although retail customer confidence has been eroded, the
brand retains strong loyalty with certain customer groups
(in particular in the north-east of England and with IFAs)
and, in the light of evidence from recent customer focus
groups, the company believes that the credibility of the
brand can be restored. It therefore proposes to retain the
“Northern Rock” branding,
continuous
detailed research programme would be undertaken to
confirm the validity of this strategy.

although a

2.3.5.6. Management

(69) There has been a significant change in the composition
of the board with the appointment of a new executive
Chairman, Ron Sandler, a new Chief Financial Officer,
Ann Godbehere, and three new non-executive directors
appointed by the Government: Tom Scholar from the
Treasury, Philip Remnant from the Shareholder Executive
and Stephen Hester, the former chief operating officer of
Abbey National plc.

2.3.5.7. Prepar ing the company to retur n to the

pr ivate sector

(70) Although no final decisions can be made on timing, the
plan envisages the return of
the company to private
sector ownership […]. This could take the form of either
a sale or flotation of the business.

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2.3.5.8. Alter native scenar ios

(71) The plan also involves three alternative scenarios:

(72) An “upside” scenario, under which a more benign market
outlook and higher redemption rates enable the company
the BoE/Treasury
to achieve accelerated repayment of
financing and earlier release of guarantee arrangements.

(73) A “downside — execution challenges” scenario, under
which difficulties in implementing the commercial and
financial strategy delays rebalancing of the portfolio and
a delay in the repayment of BoE/Treasury financing until
about the end of 2011. There should not be any impact
on the planned timetable for release of the guarantee
arrangements; and

(74) A “downside — recession case” scenario, which extends
the “execution challenges” scenario to take account of the
impact of a severe and prolonged downturn in the UK
leading to significantly higher provisions being made
over the period. Repayment of the BoE/Treasury finan-
cing would again be delayed until about the end of 2011.
Under unfavorable circumstances, the guarantee arrange-
ments may be delayed until 2013.

(75) The current

financial

forecasts for 2008-2013 would
indicate that on the base and upside case NR would
move into modest profit before tax in […] and on the
recession case in […].

2.3.5.9. Financing proposals

(76) Subject to a potential increase in the margin for the BoE
facilities and a revised facility fee (which are under
consideration) the current economic terms of the BoE
facilities (and the Repo Facility until it is repaid) would
continue to apply until the Commission has reached a
decision on the company's
restructuring plan. The
current economic terms are as follows:

(i) interest on the BoE facilities at BoE rate plus […] bps

margin (as part of the PIK facility);

(ii) interest on the Repo Facility at BoE rate plus […]
bps margin (which is not part of the PIK facility);

(iii) facility fee of […] bps which is calculated on the
maximum aggregate principal amount of advances
outstanding under
the
average principal amount of advances outstanding
during the life of the BoE facilities;

the BoE facilities minus

(iv) fees for the guarantee arrangements on new retail

deposits of […] bps; and

(v) fee

for

the

additional balance

sheet guarantee
arrangements of GBP […] per month. This fee relates
to the
announced on
guarantee
18 December 2007;

arrangements

are repaid, would be set by reference to the antici-
pated profitability and viability of NR. They are likely
to be finalised during the course of the State aid
investigation, in particular to the extent that forecasts
and other financial
information are amended. The
economic terms would be included in a schedule to
the amended facility agreement.

(77) On this basis, the plan assumes that the cost to the
company of
the guarantee arrangements and funding
costs would be about GBP [400-700] million between
2008 and 2011. The exact structure of the fee arrange-
ments is, however, still being finalised (e.g. the division
between fees in relation to the guarantee arrangements
and fees relating to the BoE facilities) but it is intended
that these fees will be set at the maximum level consis-
tent with maintaining the ongoing viability of the busi-
ness, and that these will be direct payments out of the
business as the sums fall due. However, to the extent that
the fees paid by the company under the rescue aid
arrangements exceed the fees that the company would
pay under the revised arrangements, the plan envisages a
retrospective reimbursement of the difference, conditional
on State aid approval being obtained, with respect to
payments between 17 March 2007 and implementation
of revised financing arrangements following receipt of
final State aid approval. This would reduce the quantum
of losses in 2008 and thus ensure the Company's capital
position remains above prudential regulatory require-
ments.

(78) It is recognised that NR would need to return gradually
to the wholesale market prior to the repayment of the
BoE facilities and the lifting of the guarantee arrange-
ments. The Government would encourage NR to finance
itself via operating cash flow and the wholesale markets
to the maximum extent possible, rather than relying on
the UK State support.

(79) A liquidity framework document would be developed to
set out the circumstances in which NR would be able to
access the wholesale markets for short-term liquidity
purposes. Proposals for new wholesale funding would be
considered by the Government against this framework,
which would include a test of acceptable value for
money. In addition, counterparty limits and other limits
on amount and duration would be set out in this liquidity
framework document.

2.3.6. Avoidance of undue distortions of competition and miti-

gating measures

(80) The Government is prepared to commit to the following
specific compensatory measures reflecting the company's
current base case plan:

(vi) the economic terms for the period of implementa-
tion of the restructuring plan, until the BoE facilities

(i) a targeted reduction in the balance sheet by […] %

to about GBP 48-53 billion by 2011;

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(ii) a reduction of new residential mortgage origination
from (on the base case) about GBP 30-35 billion in
2007 to about GBP 18-23 billion in total for the
four years from 2008 to 2011, and in any event
within the limits of the market share cap on gross
new lending. This would clearly benefit its rivals
who would be able to take up the additional
demand;

(iii) a commitment to an aggressive redemption policy
including the active encouragement of redeeming
customers to move to competitors;

(iv) closure and run-off of NR's operations in Denmark
in 2008 and a commitment not to expand in other
EU markets before 2011;

(v) a commitment to a “Competitive Charter”, described
further below, which would set out the basis on
which the business would compete in the retail
savings and mortgage lending markets. Again, this
would facilitate rivals in attracting the re-mortgage
business of NR's existing customers;

(vi) a commitment to withdraw from unsecured personal
lending for the restruc-
lending and commercial
turing period. A withdrawal would directly benefit
rivals;

(vii) a commitment not to increase the overall number of

branches in the UK.

(81) According to the UK authorities, competition in the
marketplace for deposits and lending is based on a
factors e.g. product availability and
complex set of
flexibility, speed and quality of service, brand reputation,
channel offering and pricing features (rates, fees, charges,
structure). This
complexity of product design and
day-to-day competitive activity in the market prevents
effective management of price controls based in real time.
However, NR would commit to a published “Competitive
Charter” which would ensure that NR would not be able
to use its Government support
in order to compete
unfairly in the market. The Competitive Charter would be
designed to ensure that NR has no sustained presence as
market
leader, whilst allowing the company sufficient
flexibility to take account of seasonal changes and tactical
variations which mean that the levels of deposits and
lending, and the competitive positioning of NR, would
fluctuate (for example, the business can see a significant
outflow of deposits as a result of a large number of fixed
term deposits maturing, or may see a significant inflow
as a result of rate cuts by competitors which make NR
products more competitive). The Competitive Charter
would include commitments that:

(iv) NR would ensure that it would not hold […] ranking

[…] in […] product categories, […] in […];

(v) NR would strive to differentiate itself on the basis of
its service levels and product innovation, rather than
simply on price;

(vi) NR would at all times treat its customers fairly.

(82) The UK estimates that NR's savings attrition since August
2007 will in any event curtail its ability to sustain aggres-
sive price-based competition.

(83) The Government currently envisages that these compen-
satory measures, unless otherwise specified above, would
remain in place until such time as the BoE/Treasury
financial assistance has been fully repaid (and the liquidity
facility transferred to a third party provider) and the
balance sheet guarantee arrangements have been released
in full. In the event of an earlier sale of assets or a part of
the business, the Government envisages that these assets
would be sold without
the benefit of any guarantee
arrangements or Government financial assistance (other
than, for example, to manage execution risk), and there-
fore also would not need to be subject to compensatory
measures, even if these continue to apply to the retained
business.

3. POSITION OF THE UK

(84) The UK Government believes that

in current market
conditions the plan presented in this notification is most
likely to meet the conditions specified in the R & R
Guidelines.

(85) Overall, the effect of the plan will be to establish NR as a
much smaller rival in the market. There will be a signifi-
cant reduction in new mortgage origination and in NR's
market share. Although there will be some growth in
retail deposit taking over the period of the plan, this
increase will not
significantly exceed the anticipated
growth in the total UK onshore retail savings market.
NR's share of
the deposit-taking market will remain
significantly below pre-crisis levels for most or all of the
restructuring period and will represent only a moderate
increase in share of the total market compared to current
levels. The potential for a distortive effect on any of the
markets where NR will continue to be active therefore
appears to be limited.

4. ASSESSMENT

4.1. Existence of aid

(i) NR would not promote its Government backing in

any market;

(ii) NR would not allow its share of

retail deposit
balances to exceed 1,5 % in the UK and [0,8-1] % in
Ireland (well below its historic levels);

(iii) NR would limit its share of gross new mortgage
origination to below 2,5 % in any calendar year;

4.1.1. The guarantees of 18 December 2007

(86) The Commission must first assess whether the measure
implemented on 18 December 2007 constitutes State aid.
Article 87(1) EC lays down that any aid granted by a
Member State or through State resources in any form
whatsoever which distorts or threatens to distort compe-
tition by favouring certain undertakings or the produc-
tion of certain goods is, insofar as it affects trade between
Member States, incompatible with the common market.

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(87) The Commission observes that this measure fulfils all
conditions laid down in Article 87(1) EC. It involves State
resources since the State would have to indemnify the
creditors of NR if the guarantees were invoked. It is selec-
tive since it is granted only to NR. It gives an advantage
since in the absence of State guarantees NR's rating
would have been downgraded, what would have created
several problems for NR, as previously described. As
it must also be
regards the existence of an advantage,
recalled that the Commission has already established in
its decision of 5 December 2007 that NR is a firm in
difficulty. The absence of access to the financial market at
commercially-viable rates was precisely the reason for the
State intervention. The behaviour of the State is therefore
not similar to the one of a market economy guarantor in
similar circumstances. As a consequence, this selective
measure provides a clear advantage to NR since it allows
NR to remain in the market.

(88) By preventing NR from exiting the market and allowing
it to remain active, the State intervention distorts compe-
tition. This affects intra community trade since some
competitors of NR on the UK mortgage loans and retail
deposits markets are subsidiaries of
In
addition, NR is active in the Irish and Danish retail
deposits markets. Due to all the above considerations, the
measure implemented on 18 December 2007 constitutes
State aid.

foreign banks.

(89) It should be noted that the UK authorities do not contest

this conclusion.

4.1.2. The nationalisation of NR

(90) As noted at paragraph 47 above,

the UK authorities
consider that the terms on which NR was nationalised
did not provide further aid either to the bank or to its
former shareholders. The Commission has noted that the
terms of the legislation provide for the discounting of
Government or BoE assistance when the price paid to
shareholders is determined by an independent valuer. In
the shareholders are only
if
these circumstances,
compensated on the basis of the value of the company
without any State support, the purchase of the shares
from the existing shareholders does not in itself seem to
contain aid to the bank or to its former shareholders.

i.e.

(91) However, the Commission notes that in conjunction with
the nationalisation of NR, HM Treasury addressed a letter
to the FSA in which it confirms its intention to take
appropriate steps to ensure that NR will operate above
the minimum capital requirements, subject to State aid
rules. Based on this commitment, the FSA did not force
the new owner to proceed to an immediate capital injec-
tion, different from what would have been imposed on
this formal
is arguable that
It
private sector bidders.
if needed qualifies as State
promise to inject capital
aid (14).
it
seems to involve State resources, since the State would
have to inject the amount needed if the capital of the
bank became insufficient. Also, it constitutes an advan-

Indeed, as with any other State guarantee,

(14) Case C-13a/2003, France Telecom.

tage to NR since the bank can continue to operate. If the
State had not made this commitment, the FSA would
have limited NR's operations. The Commission therefore
this specific measure does not constitute
doubts that
State aid and therefore intends to review it. The Commis-
sion notes, however, that according to the NR's preli-
minary financial forecasts for the period of 2008-2013,
no capital injection is envisaged even under the downside
case scenarios.

(92) In the context of

the investigation procedure,

the
Commission invites the UK and interested parties to
submit comments as to whether the commitment of HM
Treasury to the FSA involves State aid elements.

4.1.3. The notified restructuring aid measures

(93) The Commission observes

the

that,

except

one
mentioned in the next paragraph, all the notified restruc-
turing measures are basically the continuation of
the
rescue aid measures granted by the UK. The Commission
has already established in its decision of 5 December
2007 and — as regards the measures implemented on
18 December 2007 — in the present decision that they
constitute State aid.

(94) In addition to the continuation of

the rescue aid
measures, the UK indicates that, to the extent that the
fees paid by the company under the rescue aid arrange-
ments exceed the fees that the company would pay under
the revised arrangements, the plan envisages a retrospec-
tive reimbursement of the difference, conditional on State
aid approval being obtained, with respect to payments
between 17 March 2008 and implementation of revised
financing arrangements following receipt of final State aid
approval. Such a retrospective reimbursement seems to
constitute additional restructuring aid to NR.

4.2. Amount of aid

(95) The Commission notes that the bulk of the aid measures
takes the form of loans and guarantees. The Commission
notes that the quantification of the aid is particularly
problematic in the present case. Indeed, the calculation of
the aid element
in loans and guarantees is normally
derived from the comparison of the market rate with the
rate effectively paid by the firm. In the present case, the
State intervened precisely because the firm no longer had
access to the market, and certainly not in the amounts
granted by the State.

(96) The Commission observes that the calculation of the aid
amount does not alter the nature and effect of
the
restructuring aid measures, which is to rescue NR and
allow its restructuring and thus keep it — in a reduced
form — on the market. The calculation of
the aid
amount is however relevant to the assessment of the
compliance with certain conditions laid down in the R & R
Guidelines for finding restructuring aid compatible (it is
recalled that for rescue aid measures, the R & R Guidelines

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do not request the quantification the aid amount in the
loans and guarantees). Therefore, the Commission intends
to analyse possible quantification methodologies. First,
the aid element in each loan and guarantee could be
estimated by use of
the Commission's reference rate
methodology. Second, if NR could not have received the
liquidity and the guarantees at all on the markets, then
the aid element might be as high as the full amounts
guaranteed or granted. Third, the aid element could be
estimated by using market
indicators like NR's credit
default swaps prices or interest rate on credit facilities
offered to NR by private banks since 17 September
2007. At this stage, the Commission doubts that the
latter indicators are a valid reference point since they
already take into account the rescue of the bank by the
State. Such a State involvement dramatically improves the
chances of viability. The Commission invites the UK
authorities and interested parties to comments on this
point
investigation
procedure.

context of

in the

formal

the

4.3. Legality of the measures

(97) Article 88(3) EC indicates that a Member State shall not
put an aid measure into effect before the Commission
has
taken a decision authorising this measure. The
Commission observes that on 18 December 2007 the
UK implemented the new guarantee arrangements and
therefore did not comply with this provision. Conse-
quently, these arrangements constitute non notified aid.
As regards the HM Treasury's letter
to the FSA in
February 2008, if it were to involve aid, it would also
constitute non notified aid. As regards the measures noti-
fied on 17 March 2008, they have not yet been put into
effect as of today and therefore the standstill obligation is
currently complied with.

4.4. Legal basis for the assessment

(98) Article 87(1) EC Treaty lays down a general prohibition
of State aid. Article 87(2)
lays down some automatic
exemptions to this general principle, but none of these
apply to the present case. Article 87(3) indicates some
categories of aid which may be considered compatible
with the common market.

(99) Given that, as already established in the 5 December
Decision, NR had financial difficulties,
the aid could
essentially be assessed under Article 87(3)(c) EC, and in
particular under the Community Guidelines on aid for
rescue and restructuring of firms in difficulty (15) (herein-
after “Guidelines”),
in which the Commission has laid
down the terms under which it may find aid in favour of
a firm in difficulty compatible as rescue or as restruc-

(15) Communication from the — Commission Community guidelines on
State aid for rescuing and restructuring of firms in difficulty (OJ C 244,
1.10.2004, p. 2).

turing aid. Aid to such banks is amongst the potentially
most harmful forms of aid, carrying in particular the
risks of “moral hazard” under which economic operators
are encouraged to take excessive risks because they will
not endure the consequences of their actions. Rescue and
restructuring measures in favour of such banks must
necessarily aim at
long-term viability,
restoring its
including a possible reorganisation, whilst any associated
potentially serious distortions of competition must be
limited to the minimum. It follows that, while measures
in favour of individual banks in difficulties may in parallel
also pursue wider public interest objectives such as to
prevent harmful spill-overs on other banks or the finan-
cial system as a whole, they need in all circumstances and
in any event to comply with the conditions set out in the
Guidelines.

(100) The

Instance has

in principle be

aid could finally

the Court of First

considered
under Article 87(3)(b) EC, which allows aid to remedy a
serious disturbance in the economy of a Member State.
However, the Commission would first like to point out
that
stressed that
Article 87(3)(b) EC needs to be applied restrictively so
that aid cannot be benefiting only one company or one
tackle a disturbance in the entire
sector but must
economy of a Member State (16). The Commission has
consequently decided that a serious economic disruption
is not remedied by an aid that “resolve[s] the problems of a
single recipient […], as opposed to the acute problems facing
all operators in the industry” (17). Also in all cases of banks
in difficulty, the Commission has refrained from invoking
this provision, as
it already did in its Decision of
5 December (18).

significant

to specific

(101) The Commission observes that the problems of NR are
due
size
(risky) activities of
compared to the overall size of the bank. Therefore, the
present case seems rather to be based on individual
problems, and thus requires tailor made remedies, which
can be addressed under the rules for companies in diffi-
culties. As regards the claim that the default of this single
firm would have affected other banks and created a
systemic crisis, the Commission does not contest that the
bankruptcy of NR would have had negative spill-over
effects
information
provided by the UK authorities has not convinced the
these negative consequences could
Commission that
have reached a size constituting “a serious disturbance in
the
the UK within the meaning of
Article 87(3)(b). It can in particular be noted that the risk
of
contained by the measures
approved on 5 December and that the measures notified
for the restructuring of NR are not therefore primarily
seeking to address this issue.

for other banks. However,

economy” of

crisis was

systemic

the

(16) Cf. in principle Case Joined Cases T-132/96 and T-143/96, Freistaat
Sachsen and Volkswagen AG Commission [1999] ECR II-3663, para-
graph 167.

(17) See Commission Decision in Case C-47/1996, Crédit Lyonnais, OJ 1998

L 221, p. 28, point 10.1.

(18) See also Commission Decision in Case C-47/1996, Crédit Lyonnais,
OJ 1998 L 221, p. 28, point 10.1, Commission Decision in Case
C-28/2002 Bankgesellschaft Berlin, OJ 2005 L 116, p. 1, points 153
et seq. and Commission Decision in Case C-50/2006, BAWAG, not yet
published, point 166, Case C-9/2008, Sachsen LB, not yet published,
and Case C-10/2008, IKB, not yet published.

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4.5. Compatibility under the R & R Guidelines

4.5.1. Eligibility of the firm

(102) The decision of 5 December 2007 already established
that NR is a firm in difficulty.
Its situation has not
improved since then. In particular, if all the rescue aid
measures were withdrawn, the firm would immediately
exit the market.

must come to an end within a period of not more than six
months after the disbursement of the first instalment of the
firm”. The Commission observes that no formal date has
been set for the end of the guarantees. However, since
the UK authorities undertook to communicate within six
months from 17 September 2007 a restructuring or
liquidation plan for NR — an undertaking which has
since then been fulfilled — the Commission considers
that these measures fulfilled the time limit of the R & R
Guidelines.

4.5.2. Compatibility as rescue aid of the measures implemented

on 18 December

(103) According to point 25 of the R & R Guidelines, rescue
aid can only be granted during a six months period after
the first
implementation of a rescue aid measure.
According to Commission decision of 5 December 2007,
the first aid measures were implemented on 17 September
2007 and therefore the six month period ends on
17 March 2008.

(104) The Commission has assessed whether the non notified
aid implemented on 18 December 2007 constitutes
compatible rescue aid, taking into account that NR was
already in receipt of rescue aid since 17 September 2007
and that these further measures represented therefore an
increase in the total rescue aid being granted to the bene-
ficiary.

(105) First,

the aid must comply with the conditions of
point 25(a) of the R & R Guidelines, according to which
it must consist of liquidity support in the form of loan
guarantees or loans. The Commission considers that the
measures implemented on 18 December 2007 consist of
liquidity support equivalent to a loan guarantee. In par-
ticular, as described above, the State guarantees insure
third parties that have a claim against NR that they will
receive the amounts due under these claims. It is equiva-
lent to insuring a lender that he will be reimbursed the
amounts due under a loan contract.

(106) The Commission observes that these guarantees do not
diminish the cost of
funding for NR below that of
healthy banks, since after implementing this measure,
NR's costs of funding rose: NR continues to pay the
normal interest rates to the various categories of lenders
(e.g. bond holders of Granite) and depositors and to bear
respective administrative costs, but
in addition NR is
charged a monthly guarantee fee of GBP […] to the State.
It therefore complies with the condition of the R & R
Guidelines that the interest rate is “at least comparable to
those observed for loans of healthy firms”. In line with the
Commission practice (19), even though the remuneration
might be under
the reference rate adopted by the
Commission, since the cost of financing of NR is at least
comparable to the one of a healthy firm, the Commission
considers that this condition is fulfilled. Point 25(a) of
the R & R Guidelines further indicates that “any guarantee

(19) See Commission Decision of 26 September 2006 in Case NN 16/06,

concerning rescue aid to CIT.

(107) Second, the aid is in line with point 25(b) of the R & R
Guidelines warranted on the grounds of serious social
difficulties and has no unduly adverse spill-over effects on
other Member States. On the one hand, since the alterna-
tive scenario would have led to the rapid liquidation of
Granite, and as a consequence of NR, which may have
led to job losses, the aid was justified on the grounds to
avoid serious social difficulties. On the other hand, since
these guarantees are the minimum necessary to keep the
bank viable, the Commission considers that the condition
concerning the absence of unduly adverse spill-over
effects is fulfilled.

(108) Third, in line with point 25(c) of the R & R Guidelines
the UK authorities undertook to communicate within six
months from 17 September 2007 a restructuring or
liquidation plan for NR, an undertaking which has now
been fulfilled.

(109) Fourth, the amount must be the minimum necessary to
keep the firm in business during the six months period
as stipulated in point 25(d) of the R & R Guidelines. […],
these measures were necessary to keep the existing rating
and avoid a downgrade which, as previously explained,
would have probably led to the bankruptcy of the firm,
despite the presence of the measures already in place. The
this condition is
Commission therefore considers that
fulfilled.

(110) Finally, the UK authorities confirm that NR has not bene-
fited from any rescue or restructuring aid in the last ten
years, with the exception of the rescue measures imple-
mented from 17 September 2007 and of which the
measures implemented on 18 December 2007 are the
continuation and extension, since they aim at keeping the
firm alive during the same six months period. Therefore
the notified aid complies with the “one time, last time prin-
ciple” as set out in points 72 et seq. and point 25(e) of the
R & R Guidelines.

(111) From the foregoing analysis, it can be concluded that the
aid measures implemented as of 18 December 2007
constitute compatible rescue aid (20),
in addition to the
measures authorised on 5 December, until 17 March
2008.

(20) Since, as part of the restructuring plan notified on 17 March 2008, the
UK notified its intention to prolong the guarantees implemented on
18 December 2007 beyond 17 March 2008 and beyond the date of a
final Commission decision on the extended aid measures, the Commis-
sion will also analyse the compatibility of these measures as restruc-
turing aid in the following parts of the decision.

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4.5.3. The compatibility of aid potentially included in HM
Treasury's letter to the FSA in February 2008

(112) To the extent that State aid is involved in the commit-
ment given by the UK authorities to the FSA, it would
constitute aid to NR. Consequently,
the Commission
would assess it in conjunction with the restructuring aid
measures notified on 17 March 2008. The preliminary
assessment of the latter measures is described in the next
Section. The Commission notes that the letter addressed
to the FSA does not contain any limit to the amount of
capital which could be made available to NR, and could
therefore be assimilated to an unlimited guarantee in the
sense of paragraph 3.4 of the Commission Notice on the
application of Articles 87 and 88 of the EC Treaty to
State aid in the form of guarantees (21).

4.5.4. Compatibility of the measures notified for the financing

of NR during the interim period

(113) The Commission has noted that, to the extent that the
measures authorised on 5 December remain in place
unchanged or are adjusted to the disadvantage of NR,
they remain authorised until a Commission decision on
the restructuring plan by virtue of paragraph 26 of the
R & R Guidelines (22).

(114) The same analysis applies also to the measures imple-
mented on 18 December, since these are authorised as
rescue aid by the current decision.

4.5.5. Compatibility of measures notified for the financing of

NR after the interim period

(115) In this Section, the Commission will assess whether the
measures notified on 17 March 2008 for the financing of
NR after the interim period, i.e. the period of the exami-
nation by the Commission, comply with the conditions
laid down in points 32 to 51 of the R & R Guidelines
and therefore constitute compatible restructuring aid.

4.5.5.1. Restoration of long ter m viability

company's difficulties,

thereby providing a basis

(116) According to point 36 of the R & R Guidelines, “[t]he
restructuring plan must describe the circumstances that led to
the
for
assessing whether the proposed measures are appropriate. […]
It must enable the firm to progress towards a new structure
that offers it prospects for long-term viability and enable it to
stand on its own feet”. In their different submissions, the
UK authorities have analysed the sources of NR's current
difficulties. Over the last eight years, NR increased rapidly
mortgage lending and funded this growth thanks to
securitisation and other secured borrowing. The weakness
the current crisis has
that
in NR's business model
for
the market
that, were
revealed
securitisation notes or covered bonds suddenly to falter,

appetite

is

(21) OJ C 71, 11.3.2000, p. 14.
(22) “Where the Member State has submitted a restructuring plan within six
months of the date of authorization or, in the case of non-notified aid, of
implementation of the measure, the deadline for reimbursing the loan or
for putting an end to the guarantee is extended until the Commission
reaches its decision on the plan, unless the Commission decides that such
an extension is not justified”.

NR would need to have access to alternative sources of
funding to fund the mortgages planned to be securitised.
If at that moment,
it also faced difficulties in raising
funds in the wholesale money market, the bank would
find itself in a liquidity crisis. As explained earlier, this is
exactly what started to happen in the summer of 2007,
following the beginning of the US subprime crisis. The
envisaged restructuring plan seems
these
In particular, as a
weaknesses in the business model.
result of
the firm, retail deposits,
which are a more stable source of funds, will account for
a significantly higher share of the liabilities of the bank
compared to June 2007. However, the Commission has
at this stage not enough information to confirm whether
a 50:50 ratio of retail deposits to non-retail funding is
sufficient to stabilise the balance sheet and avoid the risk
of being overly dependent on any one source. It invites
the UK authorities to explain why this ratio is sufficient.
Third parties are also invited to comment on that point.

the downsizing of

to address

lead to the downsizing of

(117) Point 35 of the R & R Guidelines indicates that “[t]he
restructuring plan, the duration of which must be as short as
possible, must restore the long-term viability of the firm within
a reasonable timescale and on the basis of realistic assumptions
as to future operating conditions. […] The improvement in
viability must derive mainly from internal measures contained
in the restructuring plan”. The Commission considers posi-
tively the fact that the plan is mainly based on internal
measures which will
the
balance sheet. If the restructuring plan had aimed to keep
the current size of the balance sheet, NR would have
needed much more funds, which could only be achieved
through a slower reduction of the State guarantees and/or
by assuming a rapid and full reopening of the securitised
notes market and the wholesale money market. This alter-
native scenario illustrates that the restructuring measures
notified by the UK contribute to limiting the duration of
the restructuring period and of the aid, and that the plan
seems not to be depending on overly optimistic assump-
the
tions as to future operating conditions. However,
Commission doubts that the duration of the plan is “as
short as possible”. […] In addition, the Commission has
some concerns that, by encouraging existing customers
to refinance their mortgages with other banks,
the
restructuring plan may lead to adverse selection. Indeed,
the high credit quality borrowers can more easily get a
proposal
from another bank than low credit quality
borrowers. A high proportion of the latter customers
risks therefore to remain within NR's mortgage loans
portfolio, which could endanger the return to long term
viability. The Commission therefore invites the UK to
explain why the restructuring plan can be implemented
without overly increasing the risk of the mortgage loans
portfolio. Finally, whereas point 35 of the R & R Guide-
lines requests that “The plan must be submitted in all rele-
vant detail to the Commission”, the Commission has not
received a viability analysis, as well as the opinion of the
FSA on the plan. In addition, the Commission was not
yet provided with the final financial figures of NR for
2007. The Commission has not been provided with the
assumptions underlying the base case, the recession case,
the upside case and the downside scenarios either
(notably, regarding loss provisions, the interest margin).
At this stage, the Commission has therefore not been
able to assess in details the restructuring plan and to
verify whether it was made “on the basis of realistic assump-
tions as to future operating conditions”.

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4.5.5.2. Avoidance

of

undue

distor tions

of

competition

(118) According to point 38 of the R & R Guidelines, “[i]n order
to ensure that the adverse effects on trading conditions are
minimized as much as possible, so that the positive effects
pursued outweigh the adverse ones, compensatory measures
must be
“The
measures must be in proportion to the distortive effect of the
aid and, in particular, to the size and the relative importance of
the firm on its market or markets. They should take in place in
particular in the market(s) where the firm will have a signifi-
cant market position after restructuring”.

taken”. Point 40 further

indicates that

(119) In order to apply these principles, it is necessary to iden-
tify the relevant markets on which NR was and would
remain a significant player. In this respect, it is necessary
to analyse the funding side and the lending side of NR's
balance sheet.

(120) As regards the funding, NR was raising funds from three
main markets: secured wholesale funding (23), unsecured
wholesale market and retail deposits.

(i) As

regards

In this regard,

secured wholesale funding,

the UK
considers the relevant market to be non-government-
guaranteed secured wholesale funding in a global
market.
the Commission observes,
that NR issued RMBS denominated in US dollars,
Sterling, Euros and Canadian dollars. These issues
were marketed in the US, Europe and Scandinavia. It
more recently started to issue covered bonds. Since
issuers of different continents try to raise funds from
it seems that, as
investors of different continents,
regards
the relevant
geographical market is at least European and possibly
worldwide (24). In view of this geographical scope, it
seems that, even if a narrower
relevant product
market is considered, the market share of NR was
very limited and will remain so.

secured wholesale funding,

(ii) As regards the wholesale money market,

and notes,

types of bonds

the relevant market

the UK
considers
to be unsecured
wholesale funding in a global market. NR issued
including
different
commercial paper. These securities differ from the
secured securities because they are not backed by
any specific bank assets and cover a wide range of
maturities. Regarding the geographical scope of that
market, the same consideration seems to apply as for
secured wholesale funding. Indeed, over the last five
years, NR has issued unsecured notes in US dollars,
Euros, Sterling, Japanese Yen and Australian dollars.

(23) Such as securitisation through the issuance of Residential Mortgage-
Backed Securities (RMBS), Commercial Mortgage-Backed Securities
(CMBS) and Covered Bonds. The Covered bonds differ from RMBS in
that the payments are guaranteed by the bank. Thus the credit risk
remains on the balance sheet.

(24) In particular, it seems that the relevant market is not the UK. Indeed, it
seems that NR has not prevented other UK banks to raise funds by
attracting funds at their expenses. It seems rather that NR has incited
other banks to raise funds on that market by copying NR's model.

These notes have been sold to US, European and
Asian investors. In view of this at least European and
possibly worldwide geographical scope, it seems that,
is
even if a narrower
considered, the market share of NR was very limited
and will remain so.

relevant product market

(iii) As regards the retail deposits market, the UK authori-
ties consider the relevant markets to be the respective
national markets (25) and the Commission agrees
with such definition of the relevant markets. It seems
that nearly all the retail customers do not consider
making deposits in other Member States. NR's share
of UK retail deposits varied between 1,6 % and 1,9 %
during recent years. In Ireland and Denmark, NR's
market share reached respectively 3 % and less than
1 % in 2006. The market share is therefore limited
in all these markets, but it is not negligible.

(121) From the foregoing preliminary analysis of the funding
activities of NR,
it seems that the presence of NR on
these three markets is limited. Nevertheless, the markets
like the retail deposits markets appear to be transparent
and competitive in the sense that deposits can be
switched between deposit-takers without incurring signifi-
cant switching costs. More favourable terms offered by a
deposit-taker, even if with a modest market share, could
forcing the
therefore have significant market effects,
competitors
their prices. The Commission
invites the UK authorities and the parties to comment on
this aspect, and whether
the “Competitive Charter”
described at paragraph 81 above, and the arrangements
for its enforcement, are sufficient to address any concerns
about distortion of competition in the future or whether
other measures should be implemented.

to adjust

(122) As regards the lending side of the balance sheet, the
Commission observes that NR's lending is concentrated
on one product, mortgage loans. Indeed, at the end of
June 2007, 85 % of NR's assets were loans to customers,
of which 91 % were mortgages. That market seems to be
national since almost no customer contracts a mortgage
with a bank located in another country. The Commission
observes that in the recent years NR became one of the
largest players on the UK mortgage market. In 2006, it
accounted for 13,4 % of UK net lending, 8,3 % of UK
gross lending and 7,1 % of the UK closing balances. In
the first half of 2007,
these market shares increased
respectively to 18,9 %, 9,7 %, and 7,6 %. The growth of
the market share was achieved by proposing very low
interest rates. It seems that this aggressive pricing policy,
which was made possible by the low cost of raising funds
on the secured wholesale market and on the unsecured
wholesale market, has forced competitors to revise down-
wards their own prices. The Commission observes that,
without downsizing, NR would keep a significant posi-
tion on this market after restructuring.

(25) In the case of the Guernsey operation, it is believed that the majority of
these deposits are from UK customers. Therefore, the UK authorities
consider that for this operation the relevant geographic market is also
believed to be the UK.

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Official Journal of the European Union

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(123) From the prior analysis of the markets in which NR is
active, the Commission at this stage concludes that the
market were NR held and will continue to hold a signifi-
cant market share is the UK mortgage market. Compensa-
tory measures, which aim at avoiding undue distortions
of competition, should therefore in priority aim at redu-
cing the presence of NR on this market. Measures aimed
at limiting NR's presence on the UK, Irish and Danish
retail deposits markets could also prove necessary.

(124) The Commission notes that the measures proposed by
the UK authorities should provoke a reduction of NR's
presence on the UK mortgage market. First, during the
restructuring period NR would strongly reduce the
granting of new mortgage loans. This means that NR
would only account
for a small percentage of gross
lending in the UK market during these years. The UK
authorities explain that if NR were to stop completely
any new lending, this would trigger the rapid amortisa-
tion of Granite and different early redemption provisions
under different notes issued by NR, which would conse-
quently exit the market. Second, during these three years
NR would actively incite its existing customer to refi-
nance their mortgages with competitors. This increase of
the prepayment rate entails that NR would account for an
even more limited share of the net lending during these
years. Third, the combination of the two prior actions
will cause a reduction of
the mortgage portfolio to
[30-55 %] the size recorded in June 2007, which means
that NR will account for a much more limited share of
the closing balances.

(125) It could be questioned whether the measures described in
the previous paragraph are disqualified as compensatory
measures on the basis of point 40 of the R & R Guide-
lines, which indicates that “[w]rite-offs and closure of loss-
making activities which would at any rate be necessary to
restore viability will not be considered reduction of capacity or
market presence for the purpose of the assessment of compensa-
tory measures”. After a preliminary analysis, the Commis-
sion considers that it is probably not the case since the
mortgage lending activities have not been loss-making,
and therefore do not constitute “loss-making activities”.
The Commission notes that the problem of the viability
of
information
provided, to be rather a liquidity issue (i.e. lack of suffi-
insufficient
cient
the downsizing
capital
results from a dramatic reduction of its lending activity
and from an active redemption policy of the existing
mortgages during the restructuring period. It could also
be argued that if the State would have been ready to
provide guarantees during longer period, the firm would
probably not have had to implement
such drastic
measures (26). Therefore, the downsizing seems to qualify,
at least to a certain extent, as compensatory measure.
Interested parties are invited to give comments on this
preliminary assessment.

the bank appears, on the basis of

than a solvency issue (i.e.

following losses).

In addition,

funding)

(126) Nevertheless, the Commission doubts at this stage that
the size and the duration (i.e. until 2011) of the down-
sizing proposed by the UK are sufficient to avoid undue

(26) […].

distortions of competition. Indeed, the size of the aid
measures (in terms of the total potential exposure of the
UK Government)
In addition, as
is particularly large.
previously indicated, NR's growth has been particularly
rapid over the last years, hurting competitors who lost
market shares and had their margins squeezed. This rapid
growth has been achieved by adopting a strategy which,
at least with the benefit of hindsight, was highly risky. All
these elements seem to warrant a particularly significant
and durable reduction of the market presence and the
adoption of measures to limit the distortion created by
the State support during the restructuring phase. The UK
authorities and interested parties are invited to comment
and why the proposed compensatory
on whether
measures are sufficient
to avoid undue distortions of
competition.

(127) The Commission also observes that NR is considering to
implement “through-lending” i.e. making arrangements
with other mortgage providers in order to be able to
offer third party branded products directly to customers
with maturing mortgage deals. The business rationale is
that
this method would increase the probability and
speed of redemptions, allow NR to maintain full control
of
the sales and advice process and by assisting its
customer to achieve a good outcome will better maintain
NR's brand promise and reputation. At this stage, the
Commission considers
if NR would implement
“through-lending”, this would limit the reduction of NR's
market presence and limit the extent in which the down-
sizing could be considered as a valid compensatory
measure. Indeed, as just described, NR would remain the
contact point for the customer and would maintain full
control of the sales and advice process. In addition, at the
end of
the restructuring period, NR could probably
rather easily replace third party branded products by its
own products and grow rapidly. The UK authorities and
interested parties are invited to comment these considera-
tions.

that

(128) The UK authorities indicate that if NR were sold to a new
owner in the course of the restructuring period, the bank
would be sold free of any obligations, and in particular
the compensatory measures indicated previously or any
other appropriate measures. The Commission doubts that
in order to avoid undue
this can be accepted. Indeed,
distortion of competition following from the rescue of
the bank by the State, the market presence of the rescued
economic entity has to remain limited during a suffi-
ciently long period, whoever the owner of this economic
entity is (27).

4.5.5.3. Aid limited to the minimum: real contr i-

bution, free of aid

(129) According to point 43 of the R & R Guidelines, “[t]he
amount and intensity of the aid must be limited to the strict
minimum of the restructuring costs necessary to enable restruc-
turing to be undertaken in the light of the existing financial
resources of the company [and] its shareholders”.

(27) This also implies that the State could not grant to the new owner a
guarantee that if any aid would be recovered from NR, it would receive
an equivalent compensation. Indeed, without threat of recovery, the
new owner would have no incentive to manage the bank in compli-
ance with the compensatory measures.

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(130) At this stage, the Commission doubts that the aid is
the following

limited to the minimum necessary for
reasons.

the Commission has doubts as to the level of funding
costs and the premium for
the different guarantees
appropriate to ensure that the aid and thereby the distor-
tion of competition is limited to the minimum.

(131) First, while it seems clear that the downsizing of the
balance sheet contributes to reduce the aid amount neces-
sary in the next years by allowing a reimbursement of the
State facilities and a decrease of the amounts covered by
the State guarantees, the Commission observes that […].
The Commission therefore doubts that, while preserving
the firm as a viable independent entity, a deeper and
more rapid downsizing could not be implemented:

(i) the Commission

doubts whether

the 60 %
redemption rate which is targeted is the maximum
possible, or whether a higher rate would be achiev-
able (e.g. […] %, as envisaged in the private sector
proposals);

(ii) it also doubts whether NR really need to conduct
new lending of approximately GBP [3-5] billion a
year over the period 2008 to 2011 “in order for the
company to retain a footprint in the mortgage market, to
manage average credit quality effectively, to avoid any cessa-
tion of business triggers in existing financing and struc-
tured finance programmes (including Granite) and to origi-
nate sufficient new lending to provide for the continuation
of the Granite and covered bond programmes”. In particu-
lar, the Commission does not have at its disposal
sufficient information which would allow it to agree
with the foregoing claim of the UK authorities.
It
requests the UK to provide full documentation and
explanation of the Granite structure and other struc-
tured finance programmes,
including a description
and status of all
the legal entities involved. The
Commission cannot exclude at this point that these
structures result in undertakings other than NR being
beneficiaries, for the purposes of Article 87(1) EC, of
the State aid measures under consideration in the
investigation. The Commission will be examining this
issue further during the investigation.

(132) Second, the Commission doubts whether the State guar-
antees can not be abolished earlier than foreseen in the
current plan. In particular, the UK authorities have not
precisely justified the choice of the proposed dates.

(133) Thirdly, the Commission does not have at its disposal
information on the price which would be charged by the
State for the guarantees (i.e. the guarantee premiums) and
for the facilities (i.e. the interest rate and the facility fee)
and only a mere indication of the total amount of fees
that NR would be charged. In this regard the Commission
doubts whether this amount could not be higher while
not endangering the viability of NR. In particular, the UK
authorities have not explained in detail how these
premiums and rates will be set so as to ensure that NR's
funding costs do not fall significantly below the revenues
from the existing loans portfolio and thereby to prevent
NR from generating profits from these existing assets
which are financed or insured by the State. In conclusion,

(134) On these three points, the Commission invites the UK to
submit the relevant missing information and to justify its
claims and proposals, and it
invites third parties to
comment.

(135) As regards the own contribution that the beneficiary has
to make to the costs of the plan, first of all, it should be
underlined that point 43 of the R & R Guidelines indi-
cates that “[s]uch contribution is a sign that
the markets
believe in the feasibility of the return to viability”. The own
contributions planned in the restructuring plando not
include injections of funds in the form of loans or capital
from private investors. They mainly consist
in the
sale/redemption of existing assets. It is therefore doubtful
whether any of these own contribution can be considered
as a sign that the markets believe in the feasibility of the
return to viability. On the other hand, the Commission
observes that one of the private bidders had in February
2008 gathered sufficient promises from investors to
make a capital increase of several hundreds millions of
pounds, in the framework of a restructuring plan which
was similar to the plan notified by the UK on 17 March
2008.
It is therefore not excluded that this could be
considered as a sign that the markets believe in the feasi-
bility of the return to viability. In the framework of the
formal
therefore
analyse whether this condition is fulfilled.

the Commission will

investigation,

the restructuring costs.

(136) For large companies, point 44 of the R & R Guidelines
requires that the own contribution amounts to at least
50 % of the restructuring costs. This raises the issue of
Indeed, as
the calculation of
already explained, NR does not face a solvency problem
following loss of value of assets. NR faces a liquidity
shortage, and therefore needs sufficient liquidity to be
rescued and return to viability. It could be considered that
the amount of funds which is lacking to finance the
existing assets (and which was provided by the State as
rescue aid — including the State guarantees which
prevented that additional sources of
funds vanished)
constitutes the restructuring costs. The Commission has
doubts about whether NR could be held, under the noti-
fied plan, to have attracted an own contribution of half
this amount. The Commission invites comments on how
this condition can be applied to the case in question.

DECISION

The Commission has accordingly decided that the measures
implemented on 18 December 2007 are compatible with the
EC Treaty and that if the shareholders are only compensated on
the basis of an independent valuation of the company without
any State support, the purchase of the shares from the existing
shareholders does not constitute State aid.

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In the light of the foregoing considerations, the Commission
has also decided to initiate the procedure laid down in
Article 88(2) of the EC Treaty with respect to the HM Treasury's
commitment to the FSA in February 2008 and with respect to
the measures notified on 17 March 2008. The Commission
requires the UK, within one month of receipt of this letter, to
provide in addition to all documents already received, informa-
tion and data needed for the assessment of these measures.

In particular, the Commission would wish to receive comments
on the points on which it raised doubts.

The UK is requested to forward a copy of this letter to the
potential recipient of the aid immediately.

The Commission wishes to remind the UK that Article 88(3) of
the EC Treaty has suspensory effect, and would draw your atten-
tion to Article 14 of Council Regulation (EC) No 659/1999,
which provides that all unlawful aid may be recovered from the
recipient.

The Commission warns the UK that it will
inform interested
parties by publishing this letter and a meaningful summary of it
in the Official Journal of the European Union. It will also inform
interested parties in the EFTA countries which are signatories to
the EEA Agreement, by publishing a notice in the EEA Supple-
ment to the Official
the European Union, and will
inform the EFTA Surveillance Authority by sending a copy of
this letter. All such interested parties will be invited to submit
their comments within one month of the date of such publica-
tion.’

Journal of