Money Wise

UK mortgage company needs to a loan to stay afloat


Northern Rock shares plunge on emergency loan from BoE

By Richard Fletcher and Richard Blackden
Last Updated: 4:54pm BST 14/09/2007

Shares in Northern Rock tumbled today after the lender was forced to issue a profits warnings and turn to the Bank of England for emergency financial support.

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    In a trading update this morning, the Newcastle-based lender confirmed it had arranged an emergency financial assistance from the Bank of England and that profits will be hit both this year and next.

    Despite the insistence of the bank that there was no need to panic, its website is struggling to keep up

    Chief executive Adam Applegarth declined to give a figure on the loans it has arranged with the Bank of England but said: "It's clearly a substantial amount because we've been using mortgage paper as collateral." The under-fire boss also declined to say how much interest Northern Rock will have to pay.

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    However, the bank did admit that profits for the current financial year will now be around 500m-540m, down from the City's current forecast of 647m. The news sent the shares plunging and they ended the day down 31pc at 438p.

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    Analysts at Credit Suisse said: "The loan from the Bank of England is temporary. Fundamentally Northern Rock depends on debt investor confidence in its model, and without that, there is no model."

    Mr Applegarth, who has run the bank since 2001, added: "I can't see when the global liquidity freeze will end. It started on August 9 and banks basically stopped lending to each other."

    The court of the Bank of England is understood to have met last night to approve the unprecedented support.

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    Northern Rock is believed to be paying the Bank of England a penal rate of interest believed to be 6.75pc - a whole percentage point above base rate. "Customer deposits are safe," said a source to close to the Bank.

    Mr Applegarth is likely to face severe criticism for building a business based on short-term funding and could even come under pressure to quit the firm he has worked for since he left university.

    Unlike many other mortgage lenders Northern Rock relies on borrowing from other financial institutions, rather than using customer deposits. As the sub-prime mortgage crisis in America has spread contagion around the world the money markets which Northern Rock borrows from have seized up.

    Last month, Northern Rock admitted it was struggling to raise money in the markets and in June was forced to issue a profits warning. The lender is now the highest profile UK casualty of the so-called credit crunch reaping havoc across the world.

    Northern Rock share price graph

    Paul Kavanagh, a partner Killik & Co, said: "Northern Rock's model is unique, but this is nevertheless still a sign of the lack of liquidity in the lending market. The market is not going to like this - banks will lead the market lower."

    One City analyst, who wished to remain anonymous, said: "This is a potential disaster… it is already the most shorted stock in the FTSE. This will be a major blow for it."

    But despite the insistence of the bank that there was no need to panic the bank's website was struggling to cope as customers attempted to transfer funds.

    The crisis in the credit markets has caused several banks to raise their mortgage rates this week after the cost of their own funding soared due to the market crisis.