Northern Rock may remain independent

It is rumoured that Northern Rock may stay independent and possibly keep its existing management. A sell-off was expected for the crisis-torn bank.

It is understood that Citigroup and Merrill Lynch are putting in place a financing facility so the bank can be sold on for a much better price in a few months time. The money would be lent at a lower rate of interest than the 6.75% it is paying to the Bank of England.

Several potential bidders have also added momentum, the private-equity group, JC Flowers, is interested and is currently examining Northern Rock’s books to assess the bank’s financial health in more detail.

Cerberus is also interested but almost certainly only in a break-up. Furthermore, US private-equity firms Blackstone and Apollo both expressed interest in the bank last week.

Northern Rock was forced to go to the Bank of England for emergency funding because it could not borrow the money it required from other banks. The sub-prime mortgage crisis in the US has left several banks owning debt that was of questionable value and created doubt about their credit-worthiness.

Consequently, this led to a credit squeeze with banks reluctant to lend their surplus cash to other banks. Northern Rock was affected badly because it borrows a rather large proportion of the money it lends to homebuyers from other banks. Other banks are inclined to obtain more of the money from their savers.

Northern Rock’s board members have been subject to criticism for engaging in such a scheme that exposed them to this danger. Because of the crisis, they had not been expected to keep their jobs.

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