Britain backs bond plan to aid N.Rock rescue: source

SHANGHAI/LONDON (Reuters) - Britain will back a plan to convert its lending to Northern Rock NRK.L into bonds, a source familiar with the matter said, potentially tying itself to the bank for years but avoiding full-scale nationalization.

The source told Reuters on Saturday that the government had endorsed a plan by its adviser, U.S. investment bank Goldman Sachs (GS.N), to convert Northern Rock's loans from the Bank of England, around 25 billion pounds ($51 billion), into bonds.

The bonds would be backed by government guarantees and sold onto private investors. But the deal would need to comply with European Union rules on state aid for private companies.

Prime Minister Gordon Brown has come under fire from the Conservative opposition for taking too long to find a solution to Northern Rock, Britain's biggest casualty of the global credit squeeze, and has seen his popularity slump in opinion polls.

Brown, on a visit to China, confirmed the government had received the Goldman Sachs report and said finance minister Alistair Darling would make a statement to Britain's Parliament on Monday.

He neither confirmed nor denied he had backed plans to convert Northern Rock loans into bonds. A government source said the statement on Monday would be about "process" and would not announce an outcome to the four-month crisis at the bank.

Northern Rock, which was Britain's fifth biggest mortgage lender at its height, requested emergency help from the Bank of England in September, in a move that sparked the first run on a British bank in over a century.

The government has since been searching for a private sector rescue in a bid to recoup taxpayers' money and has held extensive talks with two consortia, one led by Richard Branson's Virgin Group and the other by Olivant, an investment group headed by former Abbey boss Luqman Arnold.

The prolonged credit squeeze in financial markets, however, has made it difficult for the two consortia to raise money.

"WAY FORWARD"

A plan to convert Northern Rock loans into bonds could help Virgin and Olivant, and could also make it easier for the bank to remain independent.

On Friday, Northern Rock named former insurance executive Paul Thompson to its board, and a person familiar with the matter said he would run the bank if it tried to pursue an independent recovery.

Branson, part of a business delegation accompanying Brown on a tour of China and India, said the Goldman Sachs proposals offered a way forward.

"I believe they (Goldman Sachs) have talked to our team and we are in initial discussions, but our initial reactions are that there is a way forward and we are looking forward to getting into detailed discussions with them in the next couple of days," he told reporters in Shanghai,

However, the bond plan would need to comply with the European Union's rules on state aid for private companies.

The government has until March 17 to report back to the EU on its intentions regarding Northern Rock.

Brown, speaking at a news conference, repeated that all options remained open, including nationalization.

"Now we've been presented with a report that we commissioned from Goldman Sachs that gives us a number of options for the future," Brown said.

"All options, including public ownership on the road to moving the bank into the private sector, are on the table and are available to the government," he said.

Brown also said he was confident that everything the government did would comply with EU rules.

"Clearly, whatever it (the government's plan for Northern Rock) is, the Commission will have to assess whether it is compatible with the restructuring that requires that the company be viable in the future, without future injections of aid," said European Commission competition spokesman Jonathan Todd.

Northern Rock, which like the government has said it would prefer a private sector solution to nationalization, declined to comment. Goldman Sachs and Olivant were not immediately available.

(Additional reporting by Robert Woodward, Mark Potter and Steve Slater in London, and David Lawsky and William Schomberg in Brussels; editing by Michael Roddy)