Bank's future may be decided soon

Nov 16 2007 by Russell Lynch, The Journal

THE future of mortgage lender Northern Rock will come a step closer to being decided today as the group weighs up rescue proposals for its crisis-hit business.

The Newcastle-based group was at the centre of a financial storm in September after soaring borrowing costs forced the bank into a funding bail-out from the Bank of England.

Northern Rock’s advisers, Blackstone, Citi and Merrill Lynch have reportedly sought to drum up would-be buyers from as far afield as China in an effort to salvage the UK’s first casualty of the credit crunch.

Four financial groups are known to have expressed an interest in taking over the company, though the lender’s shareholders are unlikely to gain any respite from the rescue due to the £20bn-plus debt burden racked up so far.

Shares in the company were trading at record lows yesterday as hopes of a return for investors waned and the UK’s fifth-largest mortgage lender’s stock market value has now slumped to little more than a tenth of the £5.2bn it was worth in February.

A sale of the whole company is considered extremely unlikely.

Other options said to be under consideration include the sale of its mortgage assets to a willing buyer – leaving shareholders with a rump company saddled with the Bank of England debts. The potentially long-term nature of the debt has also heaped political pressure on Chancellor Alistair Darling, who has been forced to guarantee the deposits of all Northern Rock savers.

He has called for the crisis to be resolved in a matter of “weeks”. As well as proving an embarrassment to the British financial system and the Government, sustained help for Northern Rock risks flouting European Union state aid rules.

Reports have even suggested the Government could “nationalise” the lender – taking over and breaking up the business in a bid to recoup taxpayers’ cash.

The four groups known to be interested in the Rock are American-based private equity groups Cerberus and JC Flowers, Virgin Money and Olivant, an investment group headed by former Abbey chief Luqman Arnold.

The deadline for proposals is today, although a Northern Rock spokeswoman said it will make an announcement when there is “greater clarity“ over the future of the business.

Shares in the Rock saw their lowest close since October 1 as traders braced themselves for bad news from the rescue bids.

The shares closed yesterday 4.5p off at 134.7p.