Northern Rock shares soar as hedge fund builds stake

Beleaguered mortgage lender Northern Rock’s shares surged nearly 25% today after a Monaco-based hedge fund built up a 4% stake in the business.

Beleaguered mortgage lender Northern Rock’s shares surged nearly 25% today after a Monaco-based hedge fund built up a 4% stake in the business.

The news of SRM Global’s interest encouraged market hopes of a rescue of the Newcastle-based group, which was forced to agree emergency funding from the Bank of England in September.

The stake-building comes a day after Northern Rock extended funding guarantees from the Treasury to cover the deposits of new savers, amid reports of potential interest from private equity bidders and a £10bn (€14.5bn) loan for the company from banking giant Citi.

SRM Global, which paid 199p a share for the latest addition to its holding yesterday, declined to comment.

Northern Rock was trading at more than 250p today, its highest level for three weeks, giving the company a stock market value of more than £1bn (€1.45bn).

Sources close to the hedge fund, which was founded in September 2006 by former UBS trader John Wood, said SRM saw value in Northern Rock and was watching developments closely.

The company joins another hedge fund, RAB Capital, as a significant shareholder in the troubled mortgage lender. RAB took a 6.7% stake in the business late last month.

Northern Rock first ran into trouble after soaring borrowing costs in money markets on which the company depends for its mortgage lending. The news prompted queues of panicked savers in the first run on a UK bank for more than 150 years.

But potential buyers include New York-based private equity firm JC Flowers - last week said to have raised £15bn (€22.7bn) to bid for Northern Rock, which has already borrowed billions in emergency funding – as well as US private equity giant Blackstone, also rumoured to have shown interest.

Yesterday the City’s regulator, the Financial Services Authority (FSA), acknowledged that it needed to improve its monitoring in the wake of the Northern Rock crisis.

FSA chiefs told MPs on the Treasury select committee that “lessons had to be learned” after the run on the bank.

Chancellor Alistair Darling is expected to make a statement to MPs on Northern Rock this week, while the mortgage lender’s chief executive and chairman, Adam Applegarth and Matt Ridley, also face a grilling from MPs next Tuesday.

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