Tuesday December 18, 01:04 PM
UK government extends Northern Rock deposit guarantees UPDATE
(Adds further analyst comment, detail)
LONDON (Thomson Financial) - The UK government today extended its guarantee for customers and creditors of Northern Rock (LSE: NRK.L - news)
to cover additional wholesale liabilities, in a further effort to encourage a private sector rescue of the stricken mortgage lender.
The guarantee, first issued in September, now covers unsecured and unsubordinated wholesale deposits, payment obligations arising from derivative trades, and payments on the repurchase of mortgages under Northern Rock's Granite (GRNT.TA - news) securitisation programme, the Treasury said in a statement.
The Treasury is also guaranteeing all Northern Rock payment obligations arising from secured derivative transactions where the amount to be paid exceeds the value of the collateral.
Previously, the guarantee covered just Northern Rock's retail and wholesale deposit accounts, as well as the bank's unsecured wholesale borrowing.
The Treasury said it had extended the guarantee at Northern Rock's own request, and that it would give at least three months' notice before withdrawing it.
A Northern Rock spokesperson said the additional guarantees were designed to maintain the credit ratings on the bank's unsubordinated debt, adding that if they were activated, the cost to the Treasury would be 'a few hundred millions of pounds.'
A downgrade to the bank's credit ratings would make it more difficult for the bank to raise funding, potentially deterring private sector buyers of the group.
Prime Minister Gordon Brown's spokesman, Michael Ellam, this morning told reporters the guarantee extension was necessary to 'give the company some breathing space in its efforts to find a private buyer'.
By 11.27 am, Northern Rock shares were up 4.27 pct at 95 pence.
'The government seems to have missed the boat here, because it was a lack of wholesale liquidity that killed the bank in the first place,' said Collins Stewart (LSE: CLST.L - news) analyst Alex Potter.
'If the government is guaranteeing practically the whole balance sheet, what is the difference between that and nationalisation?'
The Treasury's unprecedented deposit guarantee was first issued on Sept 19 in an effort to stop a run on the bank, the first in the UK for over 100 years. Panicked savers had started withdrawing their cash from Northern Rock after the lender revealed on Sept 14 that the credit crunch had forced it to seek emergency support from the Bank of England.
The Financial Times reported today that a consortium headed by Welsh entrepreneur Alfred Gooding and backed by US private equity firms Five Mile Capital Partners and Olympus Partners was considering re-entering the race to buy Northern Rock, having pulled out earlier this month due to concerns about the UK housing market.
A consortium led by Sir Richard Branson's Virgin Group and Olivant Advisers, an investment firm headed by former Abbey chief executive Luqman Arnold, are currently the front-runners in the race to take control of the Rock.
But there has been speculation that difficulties raising finance to pay off Northern Rock's estimated 25 bln stg borrowing from the central bank could derail both bids, leaving the government with little option but to nationalise the group.
In a separate report today, the Guardian said the government had drawn up plans to nationalise the lender, and divide it up between the UK's major banks should a private sector takeover fail to materialise.
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