MG Rover Collapse: Inquiry Slams Financing Practices
The recent official inquiry report on the MG Rover collapse in
2005 included a strong focus on the point-of-sale finance
arrangements associated with the failed manufacturer.
The final years of MG Rover Group (MGRG) represent
a story of continuous loss-making on the manufacturing side. This
was funded by a dowry of £500 million put in by its previous owner
BMW in 2000 as a soft loan, never expected to be repaid. That was
when BMW disposed of the main Rover business and the Longbridge
factory in Birmingham.
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The Longbridge operation went to the ‘Phoenix Four’
– John Towers, Peter Beale, John Edwards and Nick Stephenson, all
previously directors of either the Rover group or one of its main
dealers, Edwards Cars.
Car finance controversy
A major part of the scandal around Rover
revolves around car sales finance operations. The finance arm Rover
Financial Services (RFS) had been a pure captive subsidiary of BMW
in 1998-2000, replacing a joint venture with Lombard prior to
that.
Immediately after the establishment of Phoenix, BMW
retained ownership of RFS, while MGRG was liable for residual value
guarantees under most of its PCP deals. First National Finance took
over as the finance partner for new business immediately after MG
Rover was sold in 2000. Yet in 2001 the Phoenix Four introduced a
new financial partner in Bank of Scotland (BoS), with new business
financed by BoS.
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By GlobalDataHowever, for the consumer portfolio incepted under
BMW before May 2000 a joint venture was formed between Phoenix and
BoS in the shape of MGR Capital, which took over RFS.
The Phoenix share in MGR Capital was vested in a
new corporate vehicle, Phoenix Partnership, created for that
purpose. The Phoenix Four each held two ninths of its shares, with
the remaining ‘half share’ going to MGRG chief exec Kevin Howe.
A separate company, RV Capco, was set up to
underwrite RV risk on the portfolio, with a £41 million cash
injection from MGRG. Some £23 million of this was repaid in
2003-04.
The government inspectors appointed to report were
strongly critical of these arrangements, noting the structuring of
MGR Capital and RV Capco was designed for the capture of financial
rewards by the Phoenix Four directly from MGR Capital, and
suggesting the Phoenix Four misled other directors of MGRG as to
the structuring rationale.
It was found that the Phoenix Four took some £4.6
million each out of MGR Capital, having invested only £500,000
apiece. Moreover, MGR Capital (which did not become insolvent with
the PVH group) was still worth £23 million as at the end of 2008.
It gained a windfall of £11 million, after corporation tax, from a
judicial VAT ruling (the GMAC case) affecting all finance companies
in relation to repossessions.
The inspectors’ report implied in connection with
MGR Capital, the liquidators of PVH/MG Rover could have a claim
against the Phoenix Four for breach of fiduciary duties as
directors.
