N. Rock sells assets to repay BoE

LONDON Fri Jan 11, 2008 8:40am EST

A woman passes a Northern Rock bank branch in central London November 19, 2007. Troubled mortgage bank Northern Rock has sold a 2.2 billion pound ($4.3 billion) portfolio of mortgages to U.S. investment bank JP Morgan and said it would use the cash to repay the Bank of England. REUTERS/Toby Melville

A woman passes a Northern Rock bank branch in central London November 19, 2007. Troubled mortgage bank Northern Rock has sold a 2.2 billion pound ($4.3 billion) portfolio of mortgages to U.S. investment bank JP Morgan and said it would use the cash to repay the Bank of England.

Credit: Reuters/Toby Melville

LONDON (Reuters) - Northern Rock, the mortgage lender saved from collapse by 26 billion pounds from the Bank of England, took its first step toward repaying the loans by selling a 2.2 billion pound portfolio to JP Morgan on Friday.

Northern Rock, Britain's fifth-largest mortgage lender, became the country's highest profile casualty of the credit crunch in September when it was forced to ask the central bank for emergency funds. It has borrowed about 26 billion pounds ($50.9 billion), though the rate of borrowing has eased.

Friday's news of the first major asset sale since the bank's near collapse boosted Northern Rock's volatile shares as much as 10 percent.

The stock had closed sharply lower on Thursday after finance minister Alistair Darling told a parliamentary committee he would protect depositors and would recover government funds, but said shareholders would not be allowed to hinder a rescue.

At 1307 GMT, shares in Northern Rock were up 6.7 percent at 91p, valuing the bank at roughly 380 million pounds. The stock is down from highs above 1,200 pence earlier in 2007.

The sale of the non-core portfolio of home equity release mortgages, due to be completed on Friday, will push down the bank's funding costs and should encourage its suitors.

"Any rescuer will seek to trim down Northern Rock's assets. This portfolio was not core and they got a premium to the book value, which is positive," one source close to the process said.

"Every little bit helps."

The price, Northern Rock said, represents a premium of 2.25 percent, or approximately 50 million pounds over the 2.2 billion balance sheet value. The portfolio represents around 2 percent of the company's total assets at the end of June 2007.

"Proceeds from the sale are payable in cash and will be applied by the company to reduce its current funding from the Bank of England," the bank said.

The government, which guaranteed the bank's deposits and has said it would protect creditors, hopes to find a rescuer for Northern Rock to repay the loans and revive the ailing business.

Efforts have focused on two consortiums, led by investment groups Virgin and Olivant, but extended credit market turbulence has raised concerns the suitors will struggle to finance a deal and the government could be forced to nationalize the bank.

A source familiar with the situation said on Friday that U.S. investment Goldman Sachs was close to finalizing a financing package and was expected to report to the government before Northern Rock shareholders gather in Newcastle on Tuesday.

PENSION WORRIES

Amid growing uncertainty over its future, trustees of the final salary pension scheme for hundreds of Northern Rock staff and former employees said separately on Friday they had applied to the bank and to regulators to be included in the security umbrella that now protects depositors and creditors.

Trustees of the scheme, which has also shifted the bulk of its investments from equities into government bonds and cash, said the bank's weakened financial strength meant it now had a deficit of 100 million pounds.

That rises to 150 million to 200 million pounds if an insurance company were called in to buy out the scheme, an option which would provide greater security and guarantees for the scheme's members, but is also costly.

"We are looking for security which would cover the potential maximum buyout deficit," John Watson, trustee for the scheme, said. "We are only asking for contingency security, not an actual payment of cash."

Watson said trustees had already sought quotations in the market for a buyout of the scheme, "so we have the information to enable sensible decisions to be taken".

The scheme, which closed to new members in 1999, has 3,300 members, including 1,377 of the bank's 6,000 current employees.

The trustees also said they had had contact with Virgin and Olivant and would seek a commitment for additional funds.

** For a chronology of Northern Rock's troubles, please click on: nL11775629

(Additional reporting by Elena Moya, Mark Potter and Dan Lalor; Editing by Paul Bolding)