WIREDGOV

Statement on the government's Asset Protection Scheme

HM TREASURY News Release (PN/18/09) issued by COI News Distribution Service. 26 February 2009

Introduction

On 19 January the Government set out a comprehensive plan to remove the remaining obstacles to increased bank lending and restore confidence to financial markets. The Government is today announcing the implementation of its Asset Protection Scheme (the "Scheme").

This statement briefly summarises the Scheme, the terms of which are attached to this statement.

Overview of the Scheme

Under the Scheme, in return for a fee, the Treasury will provide to each participating institution protection against credit losses incurred on one or more portfolios of defined assets to the extent that credit losses exceed a "first loss" amount to be borne by the institution. The Scheme aims to target those assets where there is the greatest amount of uncertainty about their future performance. The Treasury protection will cover 90 per cent. of the credit losses which exceed this "first loss" amount, with each participating institution retaining a further residual exposure of 10 per cent. of any credit losses exceeding this amount. Both the "first loss" amount and the residual exposure provide an appropriate incentive for participating institutions to endeavour to keep losses to a minimum on those assets included in the Scheme.

Eligible Institutions

Protection under the Scheme is offered, in the first instance, to those UK incorporated authorised deposit-takers (including UK subsidiaries of foreign institutions) with more than £25 billion of eligible assets. Affiliated entities of those deposit-takers will also be considered by the Treasury for participation under the Scheme.

The Treasury will consider extending the Scheme more widely to other UK incorporated authorised deposit-takers (including UK subsidiaries of foreign institutions). Eligible institutions are entitled to request to participate in the Scheme until 31 March 2009.

Each applicant to the Scheme is required to satisfy the Treasury that:

* it is adequately capitalised and funded or has a realistic plan for accessing adequate capital and funding;

* it has a sustainable business model and delivery plan;

* its funding profile, sources and mix are broad-based and sustainable; and

* its senior management team is credible, with demonstrable ability to deliver its business model and delivery plan.

Each applicant's participation in the Scheme will also be conditional upon the applicant committing to agreements to increase lending to credit-worthy borrowers in a commercial manner. They will report to Government on a monthly basis on delivering on the commitments. The Government will report annually on their delivery. Participation in the Scheme will also be conditional upon the applicant giving the Treasury and its advisors access to information required to assess the risk in relation to that applicant's assets, and its satisfaction of the eligibility criteria for protection under the Scheme.

Applicants will be required to:

* comply with a remuneration policy consistent with the Financial Services Authority's code of practice on remuneration policies; and

* meet the highest international standards of public disclosure in relation to the applicants assets.

Finalised Scheme Rules will be published by the Treasury in due course. Each applicant wishing to participate in the Scheme is required to accede to the Scheme pursuant to an accession agreement to be entered into with the Treasury (in a form to be agreed between that applicant and the Treasury).

Eligible Assets

* The following categories of assets are eligible for inclusion in the Scheme:

* corporate and leveraged loans;

* commercial and residential property loans;

* structured credit assets, including residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised loan obligations (CLO) and collateralised debt obligations (CDO); and

* participations in respect of the above,in each case, held by the covered entities as at 31 December 2008 and thereafter. Inclusion of additional classes of assets within the Scheme is subject to determination by the Treasury and its advisers in conjunction with the participating bank on a case-by-case basis.

Assets proposed for inclusion in the Scheme will be subject to appropriate investigation by the Treasury and its advisers in order to assess their satisfaction of the asset eligibility criteria and the expected future performance of the asset. Applicants are required to give the Treasury and its advisers open access to all information required by them for this purpose.

Assessment of "First Loss" Amount and Fee

In setting the terms under which protection will be offered, the Treasury and its advisers will take into account their estimation of the performance of the assets of the institution to be included in the Scheme.

Pricing of the Scheme will be structured having regard to international practice so as to provide appropriate incentives to participating institutions to meet their commitments agreed with the Treasury to support lending to creditworthy borrowers and to ensure appropriate protection for taxpayers. The pricing will also ensure that the Treasury benefits from a share of any upside returns.

The fee may be satisfied by the issue of capital instruments by the institution. These may include a range of alternative capital instruments, but are not expected to include ordinary voting shares at the outset. The Treasury is open to proposals for other forms of fee, including cash.

Assessment of Loss under the Scheme

Once the first loss amount has been exceeded, the Treasury will cover 90% of the loss based on the outstanding principal amount of the asset at the date on which a credit event (failure to pay, bankruptcy or other applicable event) occurs or, if lower, the amount covered under the Scheme in respect of the asset. After this first loss amount has been exceeded, participants will receive interest on the amount due from Treasury at a rate equal to the Treasury's cost of funding until that payment is settled. The Scheme therefore protects the banks against accounting impairments which would otherwise have accrued. Recoveries will be offset against losses (other than the 10% vertical slice of recoveries retained by the participent).

Duration of the Scheme

The duration of the coverage will be not less than five years and will be consistent with the tenor of the assets. Participating institutions may terminate their participation in the Scheme at any time in whole or in part with the prior consent of the Treasury.

Asset Management Requirements for Scheme Participants

Assets included in the Scheme will continue to be managed by the relevant participating institution in accordance with its ordinary business practices and remain on their balance sheets. To protect taxpayers' interests, participants will be subject to a number of conditions and Treasury controls over the management of protected assets. These requirements are expected to include:

* managing protected assets according to agreed principles and guidelines;

* requiring participating institutions to set up effective operating structures to manage and report on protected assets in a regular, transparent, and comprehensive fashion;

* implementation of monitoring and reporting systems which allow verification of asset performance and facilitate determination of payouts;

* requiring participants to agree remuneration policies with the Treasury that align the interests of employees involved in managing assets backed by the Scheme with those of taxpayers;

* right for the Treasury to appoint an independent asset manager in prescribed circumstances; and

* policies regarding the management of conflicts of interest.

Implementation and Regulatory approvals

Implementation of the Asset Protection Scheme will be subject to further due diligence by the Treasury and its advisers, documentation and satisfaction of applicable conditions (including the application criteria and asset eligibility criteria of the Scheme), conditions precedent to accession to the Scheme, including applicable regulatory, state aid and shareholder approvals.

Appendix

Asset Protection Scheme Term Sheet

Part 1. Scheme Participation

1.
Scheme participants

(1) UK incorporated authorised deposit-taker (including UK subsidiary of foreign institution) with more than £25 billion of assets satisfying the Asset Eligibility Criteria (as defined in paragraph 11) (the "Bank"); or

(2) an affiliate of the Bank (including a holding company thereof) that has been approved by Her Majesty's Treasury ("HMT") as eligible for inclusion under the Scheme, (the Bank or, as the case may be, such affiliate, the "Participant").

HMT may consider extending the Scheme to other UK incorporated authorised deposit-takers (including UK subsidiaries of foreign institutions not covered by (1) or (2) above) based on advice of the Bank of England and the Financial Services Authority (the "FSA") and based on HMT's best judgment of how important the deposit-taker concerned is to financial market stability and the overall economy and the most effective possible use of public resources.

2.

Application period

A Participant shall be entitled, until (and including) 31 March 2009 (or such later date as may be determined by HMT in its sole discretion), to request to participate in the Scheme.

3.

Application Criteria; Lending Condition

In order to participate in the Scheme each Participant must satisfy HMT that it meets the criteria for eligibility for protection under the Scheme (the "Application Criteria"), namely that the Participant and its group:

* is adequately capitalised and funded or has a realistic plan for accessing adequate capital and funding;

* has a sustainable business model and delivery plan;

* has a broad-based and sustainable funding profile, sources and mix; and

* has a credible senior management team, with demonstrable ability to deliver its business model and delivery plan.

Each Participant's participation in the Scheme is also conditional upon:

(1) the relevant Participant making a verifiable commitment to advance new credit to creditworthy borrowers in a commercial manner (the "Lending Condition"); and

(2) the relevant Participant giving HMT and its advisers (or, as applicable, procuring that HMT and advisers are given) open access to all information (including full disclosure of the Balance Sheet (as defined in paragraph 11)) as may be required by HMT and its advisers to assess the probability and expected quantum of future loss in relation to the relevant assets and the satisfaction of the Application Criteria.

4.

Accession to the Scheme by the Participants

Each Participant wishing to participate in the Scheme is required to accede to the Scheme Rules (as defined in paragraph 6) pursuant to an accession agreement to be entered into with HMT (in a form to be agreed between that Participant and HMT) (the "Accession Agreement"). The Accession Agreement will specify, inter alia, each of the details set out in the Schedule to this term sheet in respect of that Participant. The relevant accession date with respect to a Participant shall be the "Participant Accession Date".

5.

Conditions precedent to the Participant's accession to the Scheme

To include the following in respect of each Participant:

* evidence satisfactory to HMT that the Participant and its group (i) satisfy the Application Criteria (including the delivery of its business model and delivery plan) and (ii) have committed to the applicable Lending Condition;

* executed Scheme documents, including the relevant Accession Agreement and documents relating to issue of capital instruments pursuant to the fee arrangements referred to in paragraph 23, each in a form satisfactory to HMT;

* European Commission state aid clearance in respect of the Scheme;

* other applicable regulatory approvals or waivers (including any approvals required in connection with the issue of capital instruments pursuant to the fee arrangements referred to in paragraph 23);

* all relevant opinions (which may include legal, regulatory capital, tax and accounting opinions) issued to the Participant (and disclosed to HMT) by the Participant's relevant professional advisers;

* board resolutions (including specified signatories acceptable to HMT) and requisite shareholder resolutions approving the entry into the Scheme and execution of associated documentation, including the applicable Accession Agreement and any capital instruments to be issued as part of the fee arrangements referred to in paragraph 23 (in the case of shareholder resolutions, save to the extent that a derogation from the applicable Listing Rule has been obtained from the UKLA);

* documentation for implementation, administration and monitoring compliance with the applicable Remuneration Policy (as defined in paragraph 27), as specified in the applicable Accession Agreement;

* evidence that the asset management structure required by the Asset Management Requirements (as defined in paragraph 26) has been or will be implemented as specified in the applicable Accession Agreement;

* completion of due diligence satisfactory to HMT in relation to the relevant Covered Assets (as defined in paragraph 10) and in relation to the Balance Sheet (as defined in paragraph 11); and

* such further conditions as may be specified in the relevant Accession Agreement.

6.

Anticipated commencement date of Scheme

The date of publication of the finalised rules of the Scheme (the "Scheme Rules") by HMT shall be the "Scheme Commencement Date".

This term sheet is not legally binding and no obligation or liability on HMT or any Participant arises except to the extent that it is expressly undertaken by such party, whether in the Scheme Rules, the relevant Accession Agreement or otherwise.

Part 2. Scheme structure and parameters

7.

Availability of Scheme within Participant's group; nature of the Scheme Subject as provided below in this paragraph 7, it is envisaged that the Scheme will comprise one protection scheme (which will be structured as a financial guarantee as defined in IAS 39 and recorded as such in the consolidated accounts of the Participant's group).

The Scheme is intended to cover assets satisfying the Asset Eligibility Criteria (as defined in paragraph 11) Owned (as defined in paragraph 11) by the Participant and one or more of its affiliates approved by HMT in light of HMT's assessment of (i) the impact on financial market stability and the overall economy and (ii) the most effective possible use of public resources (such affiliates together with the relevant Participant and any transferee of the Covered Assets referred to in paragraph 28, the "Covered Entities"). The Participant may enter into appropriate risk transfer arrangements with the Covered Entities.

To the extent that the Covered Assets cannot be reclassified so that they are no longer required to be fair valued, HMT may consider a request by a Participant to split the Scheme into two transactions for, respectively:

(1) Covered Assets not being fair valued through the consolidated profit and loss account of that Participant's group (the relevant protection being structured as a financial guarantee as defined in IAS 39); and

(2) Covered Assets being fair valued through the consolidated profit and loss account of that Participant's group (the relevant protection being structured as a derivative as defined in IAS 39).

HMT will seek to implement the Scheme in respect of each Participant in a manner which is efficient and effective for regulatory capital purposes and, in this regard, HMT intends to work closely with the relevant Participant and the FSA.

8.

Term

The term of the protection under the Scheme will be consistent with the tenor of the relevant Covered Assets. The Scheme will terminate on the date specified in the applicable Accession Agreement or, as the case may be, on the date of termination of that Participant's participation in the Scheme in accordance with paragraph 9 (the "Termination Date").

9.

Early termination

A Participant may terminate its participation in the Scheme at any time in whole or in part with the prior consent of HMT. It is envisaged that a termination amount will be payable in connection with any early termination in accordance with paragraph 23.

10.

Covered Assets; Covered Assets Pool

The following assets may be included within the Scheme:

* corporate and leveraged loans;

* commercial and residential property loans;

* structured credit assets (including residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised loan obligations (CLO) and collateralised debt obligations (CDO));

* participations in respect of the above; and

* such other assets or exposures as HMT may consent to being included in the Scheme, in each case, provided each asset or exposure satisfies the Asset Eligibility Criteria. Assets which meet such Asset Eligibility Criteria and are included within the Scheme constitute the "Covered Assets".

Each asset or exposure to be included in a pool of Covered Assets (the "Covered Assets Pool") must be identified upon entry into the Scheme in a schedule to the Accession Agreement (the "Covered Assets Schedule"). The Covered Assets Schedule may be amended as a result of the post-accession confirmation process pursuant to paragraph 25.

The Covered Assets may include unfunded commitments and revolving facilities that satisfy the Asset Eligibility Criteria provided that the commitment to fund was in effect at all times from (and including) 31 December 2008 to (and including) the date of utilisation. Certain refinancings and roll overs of assets or exposures will be eligible for inclusion on a basis to be agreed with HMT.

The Covered Assets may not include synthetic positions or long positions arising without Ownership (as defined in paragraph 11) nor do they include short positions, hedges or other credit mitigants, unless HMT specifically consents to the inclusion of such assets.

When considering whether to consent to the inclusion within the Scheme of assets or exposures which would otherwise be excluded, HMT is likely to have regard, among other things, to whether the inclusion of such assets or exposures is likely to be consistent with the Scheme's objectives. The provisions of this term sheet may have to be amended to accommodate any such assets or exposures which are so included.

11.

Asset Eligibility Criteria

The "Asset Eligibility Criteria" are that the relevant asset or exposure:

* must have been an asset or exposure:

(i) Owned (as defined in this paragraph 11) by the Participant, an affiliate of the Participant or any Relevant Entity (as defined in this paragraph 11) from (and including) 31 December 2008 to (and including) the Scheme Commencement Date (subject to any Permitted Arrangement, as defined in this paragraph 11),

(ii) Owned by a Covered Entity on the Scheme Commencement Date (subject to any Permitted Arrangement), and

(iii) which was included in the audited consolidated balance sheet of the Participant's group or the audited balance sheet of a Relevant Entity (each, a "Balance Sheet") from (and including) 31 December 2008 to (and including) the Scheme Commencement Date;

* must not be an equity or equity-linked asset, save that convertible and exchangeable instruments on standard terms may be included with the consent of HMT;

* must have fixed or determinable payments and a defined final maturity or an imputed maturity date;

* must not have as an obligor the Participant or a person that, directly or indirectly, is in control of, is controlled by or is under common control with the Participant (and, for this purpose, SPV issuers of asset-backed securities will not be deemed to be so affiliated solely as a result of any economic interest in such issuer); and

* must be denominated in euro, US dollars or sterling or such other currency as may be agreed by HMT, provided that HMT may at any time waive one or more of such criteria on a case by case basis. When considering whether to waive such criteria with respect to a specific asset or exposure, HMT is likely to have regard, among other things, to whether the inclusion of such asset or exposure within the Scheme is likely to be consistent with the Scheme's objectives. The provisions of this term sheet may have to be amended to the extent such criteria are waived.

In this paragraph 11:

"Ownership" of an asset means (i) legal and beneficial ownership of that asset or (ii) other significant economic exposure to that asset acceptable to HMT and "Owned" shall be construed accordingly.

"Permitted Arrangement" means a pledge or other security interest or a repo, stock loan or other title transfer arrangement in respect of an asset where:

(i) the relevant Covered Entity (or, as the case may be, affiliate of the Participant) continues to retain sufficient economic exposure to the relevant asset, and

(ii) such arrangement allows the relevant Covered Entity (or, as the case may be, affiliate of the Participant) to obtain Ownership of the asset (or an equivalent asset) at any time (including, for example, by substituting other eligible collateral), provided that HMT may agree to vary the conditions referred to in (i) and/or (ii) above on a case by case basis.

"Relevant Entity" means an entity which became a member of a Participant's group before the Scheme Commencement Date but which was not part of that Participant's group as at 31 December 2008.

12.

Quantum of Covered Assets

The amount of each Participant's Covered Assets Pool (the "Covered Assets Pool Amount") will be set out in the relevant Accession Agreement, being an amount equal to the aggregate of the outstanding principal balance (or, as the case may be, the amount of the applicable commitment) (the "Covered Amount") of each Covered Asset in the relevant Covered Assets Pool as at 31 December 2008, as specified in the Covered Assets Schedule.

13.

First loss retention by Participant

Payments will be made under the Scheme in respect of Losses (as defined in paragraph 16) on Covered Assets only to the extent that the aggregate amount of such Losses (as reduced by any Recoveries received by the Participant in accordance with paragraph 17) exceeds the sterling amount specified as the first loss amount in the Accession Agreement for that Participant (the "First Loss Amount").

14.

Loss allocation

HMT will cover 90% of the Losses arising in respect of the Covered Assets Pool which exceed the First Loss Amount applicable to that Participant. The remaining 10% of those Losses will be borne by the relevant Covered Entity (the "Residual Amount").

15.

Triggers

A Covered Asset will be treated as defaulted upon the occurrence with respect to it of any of the following (each, a "Trigger"):