Northern Rock bolstered by sale of equity release portfolio

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The Independent Online

Northern Rock is to make its first repayment of the £26bn of emergency loans it has racked up with the Bank of England after agree-ing to sell its Lifetime portfolio of equity release mortgages to the investment bank JP Morgan for £2.25bn.

The sale proceeds, to be paid in cash, will immediately be handed over to the Bank of England to reduce the size of Northern Rock's funding position.

The sale of the Lifetime business yesterday is the most positive development for the mortgage bank since it was plunged into crisis in September. The book of equity release loans, mortgages secured on elderly homeowners' properties, represents around 2 per cent of Northern Rock's assets, raising the hope that significant value could yet be achieved from a break-up of the company.

Northern Rock is particularly pleased with the deal struck with JP Morgan because the £2.25bn price achieved for the business was around £50m, or 2.25 per cent, more than its book value of £2.2bn. This suggests the bank has not yet been forced to consider a firesale of its assets.

Andy Kuipers, the chief executive appointed last month to replace Adam Applegarth at the helm of Northern Rock, said: "[The sale] illustrates the quality of our assets, which has enabled us to achieve a sale at a premium despite continuing difficult financial markets."

The sale also provided a boost to Northern Rock shares, which closed up 2p yesterday at 87.25p. However, the bank made it very clear last night that no further asset sales were imminent, suggesting that there is limited scope for any additional reductions in its outstanding debt to the Bank of England.

Moreover, while Northern Rock's conventional mortgage book is widely considered to be of high quality, around two-thirds of the loans have been securitised and are therefore owned by bond investors rather than the bank itself.

Last night, senior exec-utives at Northern Rock were preparing to receive a briefing on future financing options from Goldman Sachs, the investment bank appointed to advise the tripartite group of regulators responsible for resolving the crisis.

Goldman Sachs has been conducting a review of possible solutions to the Northern Rock crisis. It is to update the bank on its work on a possible securitisation of its debts to the Bank of England and will also offer an assessment of the pro-gress made by Virgin and Olivant, the two potential buyers of Northern Rock that are trying to raise finance for a deal.

Alternatively, Goldman Sachs is also understood to be considering the possibility of Middle Eastern sovereign wealth funds buying into Northern Rock. This week, Alistair Darling, the Chancellor of the Exchequer, said he would not be opposed to such an outcome.

Mr Darling is under mounting pressure to bring the saga to a close, with the Conservative Party inc-reasingly keen to focus on Labour's stewardship of the economy and financial affairs as a campaigning issue. Yesterday, George Osborne, the shadow Chancellor, accused Mr Darling of mishandling the Northern Rock crisis and criticised the Government's proposed reforms of financial regulation, particularly the plan to beef up the powers of the Financial Services Authority.

Mr Osborne said: "The Chancellor's decision to sideline the Bank of England in favour of the FSA fits in with a recent pattern; whether it is the Treasury's private briefings against Threadneedle Street, or the very public dithering over the reappointment of Mer-vyn King, the Government is undermining the strong and independent Bank of England the country needs."

The Conservatives also believe that Mr Darling missed several opportunities to secure a private-sector sale of Northern Rock before and shortly after news of the crisis broke.

Since then, several Northern Rock shareholders have fought a campaign to prevent the company being sold off cheaply. The bank will hold an extraordinary general meeting on Tuesday, at which two of its largest investors, RAB Capital and SRM, will attempt to give shareholders powers to veto any significant changes to the company's structure or ownership.

Pension fund's £100m black hole

Northern Rock's final-salary pension scheme trustees presented the bank and its regulators with another headache yesterday, warning that the fund is £100m in deficit. Sir David Chapman, the chairman of the trustees, revealed the black hole in a letter to scheme members, who were also told that one solution would be for the Bank of England to earmark for the pension fund some of the Northern Rock assets deposited with it as security for the loans it has offered.

The deficit will shock the 3,300 members of the Northern Rock final-salary scheme, which was closed to new entrants in 1999. Valuations of the fund conducted in April 2006 and April 2007 both showed a surplus. Since then, however, the trustees have responded to the crisis at the bank by liquidating the 60 per cent of fund assets held in equities in order to buy gilts offering guaranteed incomes, significantly reducing scheme advisers' assumptions about future returns.

The deficit means members would be at risk of losing pension benefits if the bank is forced into administration. The deficit is not sufficiently large for the scheme to qualify for the Pension Protection Fund, so members would receive benefits in excess of its maximum payouts, but less than they are currently expecting.

The deficit will also be a concern for potential buyers of Northern Rock, who will face pressure from the trustees to fund the shortfall. A spokesman for the Bank of England said it had not received any request from the Rock to reallocate collateral to the pension fund.