Northern Rock Gets Emergency Bank of England Funding (Update4)
By Ben Livesey and Jon Menon
Sept. 14 (Bloomberg) -- Northern Rock Plc got emergency funding from the Bank of England, the biggest bailout of a British lender in 30 years, after a freeze in money markets left the mortgage provider unable to finance itself.
Northern Rock shares plunged as much as 26 percent to a six- year low after the company said today the central bank will provide an unspecified amount of credit. The Newcastle, England- based bank is the U.K.'s third-biggest lender by gross mortgages with loans worth 17.4 billion pounds ($35 billion) as of June 30.
The rescue stoked concern among investors and depositors that other financial firms that rely on short-term credit rather than deposits may be vulnerable. The Chancellor of the Exchequer Alistair Darling authorized the move, saying the Bank of England will step in as the lender of last resort ``where institutions face short-term liquidity difficulties.''
``This is a set of circumstances that I've not seen in 25 years,'' Chief Executive Officer Adam Applegarth said on a call with journalists. ``It's a substantial program, it is at a penalty rate. The facility will provide a solid ground base.''
The Bank of England hasn't had to bankroll a major U.K. lender since the 1973 collapse of Cedar Holdings, which pioneered second mortgages, triggered a crisis of confidence that threatened to unravel the banking system.
Bank `Solvent'
The move will ``help Northern Rock to fund its operations during the current period of turbulence in financial markets,'' the Bank of England, U.K. Treasury and Financial Services Authority said in a joint statement. ``Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.''
Pretax earnings will be between 500 million pounds and 540 million pounds, missing analysts' estimates of 647 million pounds, the company said today. It blamed a ``severe liquidity squeeze'' and rising short-term interest rates, saying it won't make new loans that are unprofitable in current markets.
``It leaves Northern Rock desperately hoping that something comes along to restore confidence,'' said Colin Morton, who helps manage 14.4 billion pounds including Northern Rock shares at Rensburg Sheppards Plc in Leeds. ``At the moment their funding costs are higher than what they get from people who are buying a house from them.''
Credit-default swaps based on Northern Rock's debt rose 22.5 basis points to 152.5 basis points, according to Deutsche Bank AG prices.
`Only Viable Alternative'
Northern Rock is the U.K.'s worst performing bank stock this year. Its shares fell 46 percent through yesterday, compared with the 12 percent drop of the nine-member FTSE All Share Banks Index. The stock fell 137 pence to 502 pence as of 10:45 a.m. in London, valuing the lender at 2.11 billion pounds.
``The outlook for Northern Rock as an independent entity does not look good,'' said Sandy Chen, a London-based analyst at Panmure Gordon & Co., who has a ``sell'' rating on the stock.
The bank is an ``increasingly likely'' takeover target, Credit Suisse Group analysts wrote today. The decline in the stock price already made it ``attractive,'' MF Global Securities Ltd. analysts said earlier this week.
``Northern Rock will struggle to fund any new growth without the backing of a larger financial partner,'' Merrill Lynch & Co. analyst John-Paul Crutchley wrote in a note to clients today. He has a ``buy'' rating on the stock. A partnership or acquisition is ``the only viable alternative if Northern Rock is to return to writing significant new business volumes,'' he wrote.
`Freeze, Thaw'
Northern Rock's origins date back to 1850, and the current company was formed from a merger between two building societies and the initial public offering of Northern Rock Building Society in October 1997. The company has relied on borrowing in the money markets to control costs and grow faster than it would if it relied on its deposit base.
The amount that Northern Rock can borrow is capped by the collateral it is able to provide, CEO Applegarth told reporters. The interim dividend will be paid as planned on Oct. 26. The bank, which has 6,000 employees, this year won't replace all of the 15 percent of employees who typically leave annually, he said.
``Looking forward I can't see when the global liquidity freeze is going to end,'' Applegarth said. ``The thaw will only come when banks make it clear what they hold on their balance sheets.''
The Bank of England yesterday relaxed restrictions on financial institutions, encouraging them to lend more to each other as it tries to reduce overnight borrowing costs that are threatening to crimp economic growth.
`Excessive Risk Taking'
Yesterday's action by the U.K. central bank was its first to help credit markets since the subprime market collapsed. Governor Mervyn King has indicated the bank won't go as far as the European Central Bank and the Federal Reserve in helping banks cope with the credit rout because policy makers can't afford to ``encourage excessive risk taking.''
Commercial banks, which agree to hold a specific amount of money at the Bank of England at the end of each monthlong maintenance period, can now undershoot that target by 37.5 percent to free up cash if needed. That compares with the usual limit of 1 percent.
To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net
Last Updated: September 14, 2007 05:56 EDT |
