Northern Rock shares lifted by fresh speculation

Fresh takeover hopes and reports of a possible £10 billion loan boosted investor sentiment in crisis-hit Northern Rock today.

Shares in the troubled lender rose by more than 10% at one stage after reports at the weekend said that US banking giant Citi was preparing to lend the bank up to £10 billion to help it retain its status as an independent group.

The details of the emergency funding are still to be thrashed out, according to reports, but the cost is understood to be below the Bank of England’s penal rate at a minimum 6.75%.

Meanwhile, reports in the United States that private equity giants Blackstone and Apollo Management had indicated an interest in buying the Newcastle-based lender, raising the possibility of a bid battle, also sent shares higher.

The stock fell to a record low of 132.1p last week amid fading hopes of a rescue takeover and concerns that a “fire sale” could see the bank picked up at bargain prices.

But news that New-York based private equity firm JC Flowers had raised £15 billion towards a bid for the firm helped raise confidence.

A potential loan from Citi should please investors as it would help stabilise the company and enable it to keep operating as a single, independent company, minimising the risk of it being snapped up at a huge discount.

It is also understood that it would allow the current board, including chief executive Adam Applegarth, to remain in place.

Analysts at Royal Bank of Scotland said in a note that while the loan was likely to be at a discount to the Bank of England’s rate, it would not be that much cheaper as it was likely to remain linked to the three-month interbank lending rate – currently 6.24%.

“The sum is also too small to significantly change Northern Rock’s fortunes although the line would allow the bank to limp along for a few more months in the hope that financial markets normalise,” it added.

Northern Rock has seen its share price plummet from more than 600p in September, before it was forced to seek emergency funding from the Bank of England, sparking a run on the bank. Shares closed at 158.5p on Friday.

It also issued a profits warning after it was landed with higher borrowing costs following the contraction in credit markets which has seen banks reluctant to lend to each other, shoring up lending rates.

While Northern Rock has not disclosed how much it has borrowed from the Bank of England, analysts believe it could be as much as £10.9 billion.

They have also slashed their forecasts to a £120 million loss next year, a far cry from the profits of £647 million expected before the start of the financial turmoil.