Years of debt for Northern Rock

Regardless of whether Northern Rock gets bought out or broken up, the crisis-torn bank could still owe the Bank of England as much as £5.9 billion by 2010. The debt is currently over £20 billion and is expected to reach £25-£30 billion before the crisis is over.

If Northern Rock, which was Britain’s fifth largest bank, is bought out in its entirety, it could still owe the Bank of England nearly £6 billion because it is doubtful that any buyer would be able to raise the necessary funds to repay the debt to the Bank of England.

The above information was leaked in a confidential memo to the press and could jeopardise potential bids. The internal memo was meant for Blackstone, the bank’s advisors. It suggests that Northern Rock will continue to be indebted to the Bank of England for several years.

The bank of England issued the loan to rescue Northern Rock when it ran out of money in the summer following the sub-prime mortgage crisis in the US.

There are a couple of options for Northern Rock, one is to separate entities such as branches, call centres, IT systems and securitised mortgages. This would leave the bank with assets that could be used to repay its debts.

The second option is a buy-out for which there are many suitors such as private-equity groups, JC Flowers, Cerberus, Blackstone and Apollo. A consortium led by Virgin boss, Richard Branson, has also joined a growing list of those expressing an interest in the bank.

Interested buyers are trying to reduce the amount of debt they end up with by urging the Bank of England to write off the interest on the loan which is currently at £2 billion but will continue to escalate until the debt is settled.

Alistair Darling, the Chancellor, had stated that the bank would only need government support for a few months. However, the memo implies otherwise.

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