FACTBOX: Potential risks of Northern Rock bonds

(Reuters) - Northern Rock shares NRK.L plunged as depositors queued for a third day on Monday to withdraw funds, and credit default swaps on the British mortgage lender widened by 50 basis points.

Northern Rock is a major issuer of securities backed by UK mortgages, including six deals under its Granite program between January 2006 and August 2007. About 10 billion pounds ($20 billion) of Granite bonds are to come due in the next 12 months, according to a recent research report by Lehman Brothers.

Analysts at Lehman reviewed the potential risks for holders of Granite notes:

* There appears to be no credit problem in Granite, which has a low delinquency rate of 30-day-plus arrears at 1.83 percent, a management repossession rate at 0.36 percent and recovery rates estimated at 95 to 97 percent.

* Northern Rock is the servicer of all the Granite mortgages, but the risks regarding servicing are modest. In the extreme case that the bank could not service the loans, another servicer would be willing to take over at its rate of 10 basis points or modestly higher, the analysts wrote.

* The redemption schedule includes fixed dates when the bank can call the bonds. But for some of those dates, it will need a certain amount of cash from prepayments of the mortgages to help cover the cost. The life of the bonds, therefore, may be longer than expected if Northern Rock is unable or unwilling to fund the call, the analysts wrote.

For example, the redemption profile for the triple-A notes requires a prepayment rate of about 15 percent of principal to avoid extension of the notes.

* The Granite notes contain asset triggers, which are keyed to the performance of the underlying mortgages, such as if their 90-day-plus arrears exceed a set percentage. But asset-related triggers are not the major concern because of the performance record of the mortgages, the analysts wrote.

* Of greater concern are the non-asset triggers, which are hit if Northern Rock itself has problems.

* One of those requires that Northern Rock must have a minimum share of 7.11 percent of the bonds. Below that, all the bonds come due immediately for payment in order of seniority. Northern Rock's share is now 11.51 percent, Lehman said.

* If the bank does not call bonds as scheduled, it may face restrictions on substituting in new mortgages when the existing mortgages are paid off. In that case, high prepayments of the mortgages could reduce its share of the notes and hit the trigger for immediate payment.

* If Northern Rock's unsecured debt ratings fall below A- by Standard & Poor's and Fitch or A3 by Moody's, it will be prohibited from substituting in new loans. The current ratings are A for S&P, A- for Fitch and Aa3 for Moody's.

The bank also is responsible for the underlying swaps ensuring that the notes yield Libor plus 50 basis points. If its counterparty credit rating falls and it has difficulty in keeping up that yield, it may be restricted from substituting in new mortgages.

In both cases, that could lead to a reduction in its share of the notes and trigger immediate repayment.