Private equity groups eye assets of Northern Rock

The future of Northern Rock remains in the balance, with reports over the weekend suggesting that private equity groups had been given a "green light" by the Treasury to take on the stricken mortgage bank's assets.

Lloyds TSB was also reported as having taken a "second look" at the Rock, after abandoning an earlier bid of 200p to 300p per share, but may not proceed with a takeover if the Government does not extend its guarantees to Northern Rock when it comes under new ownership.

Northern Rock has borrowed about £8bn from the Bank of England over the past fortnight to fund its activities, and worries persist that the high cost of that borrowing, at 6.75 per cent, will have an increasingly deleterious effect on Northern Rock's profitability. However its mortgage book, currently acting as collateral with the Bank of England is usually seen as being of good quality and it is this, rather than the tarnished brand and other assets of the business, that has caught the attention of potential buyers.

The Treasury has appointed Goldman Sachs to advise on its options, and all interested parties are keen to see a swift resolution to the crisis. The Bank of England has reserved the right to appoint an administrator if the Rock could not pay its debts.

Two American funds, JC Flowers and Cerberus, have met Treasury officials to discuss their interest in Northern Rock, with further meetings between the Rock's advisers, Merrill Lynch, and the private equity groups set for this week.

JC Flowers and Lloyds are thought to be in favour of keeping the Northern Rock business intact, although possibly rebranded, while Cerberus is keener on a break-up, with a sale of assets on to other investors.

Northern Rock's existing shareholders, preference shareholders and bondholders may also intervene to protect their stake in the bank.

Citadel and Apax Partners are other private equity names being linked to Northern Rock. JC Flowers' bid is believed to be backed by Credit Suisse andJP Morgan.

In a separate development, Northern Rock's auditor, PricewaterhouseCoopers, is being accused of a conflict of interest when it was reported that the accountant earned larger fees from helping the lender to sell on its loans than for certifying the company accounts.

Northern Rock's annual report states that PwC was paid £500,000 in 2006 for auditing and £700,000 in "non-audit fees", specifically " in respect of securitisation transactions and the raising of wholesale funding".

Corporate governance proponents have long argued that the sums accountants should earn in non-audit fees should be restricted, in order to avoid compromising their independence.

It also emerged yesterday, in The Independent on Sunday, that Northern Rock savers were forced to pay more than £100m in penalty charges when the £2bn run on the bank began a few weeks ago. One customer is believed to have paid £12,000 to take out £1m of savings products.

Adam Applegarth, chief executive of Northern Rock, is expected to appear before the Treasury Select Committee later this month to explain himself.