JC Flowers to take a 49% stake in Kent Reliance

12 July 2010 | By John Murray

Legislation that allowed Britannia Building Society and Co-operative Financial Services, to create a new model for mutuality is ironically now facilitating a deal between the two firms.

JC Flowers was one of the firms that failed in its bid to buy Northern Rock.

And Kent Reliance had been the UK’s fastest growing building society until the credit crunch brought mortgage lending to a virtual standstill.

The deal, between JC Flowers and Kent Reliance is to be confirmed on Wednesday, but news of the groundbreaking development was leaked to the press over the weekend.

But it was misreported in the Sunday Times as yet another building society rescue story rather than an innovative solution to a problem that has bedevilled building societies since the Financial Services Authority ruled that permanent interest bearing shares didn’t qualify as tier one capital.

As societies capital is derived from profits accumulated over the years and profits have been badly hit by an increase in the liquidity requirements, unfair competition for retail savings from the nationalised banks, and massive contributions to the Financial Services Compensation Scheme, many have been forced to deleverage their lending or simply stand still, while others have had to merge with bigger brethren such as Skipton Building Society, Yorkshire Building Society, and Nationwide Building Society.

Now, thanks to a £50m investment on the part of JC Flowers, Kent Reliance will see its tier one capital double, so literally enabling the society to start lending in earnest again.

Mike Lazenby, chief executive of the mutual, declined to comment on the situation but with its mortgage processing outsourced to a subsidiary in India the society could double its mortgage lending without a corresponding increase in costs.

In return for its investment JC Flowers will receive a 49% stake in a new holding company under the management of the society. Lazenby will be chief executive of the enlarged organisation and Sir Callum McCarthy, former chairman of the FSA, will add considerable gravitas as the chairman.

The negotiations, which involved the FSA and were ongoing for around nine months, were made possible under the provisions of what has become known as the Butterfill Act which started life as a private member’s bill sponsored by former Tory MP Sir John Butterfill who wanted to facilitate mergers between different types of mutuals without them have to forgo their mutual status.

Although deals with private equity firms were never envisaged at the time of when the bill became law in March 2009 the tie up between JC Flowers and Kent Reliance would not have been possible without such a change in legislation and could pave the way for further deals with other building societies.

Under the agreement Kent Reliance remains a building society and the deal itself will be subject to the approval of its 120,000 members.

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