Northern Rock sells £2.2bn of mortgages

Northern Rock said today it has agreed to sell £2.2bn (€2.9bn) of its mortgage assets to a US investment bank.

The troubled lender said it would use the funds, which represent 2% of the bank’s total assets, to reduce the £25bn (€33bn)-plus of emergency loans from the Bank of England.

Northern Rock said the price Wall Street giant JP Morgan is paying represents a 2.25% premium over the value of the assets – or £50m (€66m).

The lender had to turn to the Bank of England in September last year when its business model collapsed amid the global credit crunch. The British government is trying to find a buyer for the bank.

Chief executive Andy Kuipers said the sale agreement was a “positive development” for the bank.

“This is a relatively small transaction, representing around 2% of Northern Rock’s gross assets, but it is a positive development in the company’s ongoing strategic review,” he said.

“It illustrates the quality of our assets, which has enabled us to achieve a sale at a premium despite continuing difficult financial markets and will allow the company to reduce its debt to the Bank of England.”

Shares in Northern Rock were up 3% in early trading after the news.

Yesterday, British Chancellor Alistair Darling conceded that it “may not be possible” to find a private buyer for the bank.

He told MPs that all options, including nationalisation, remain on the table.

The asset sale, which comprises Northern Rock's portfolio of Lifetime home equity release mortgages, comes just a few days before a crunch meeting of the bank's investors.

It has been called by two hedge funds, SRM and RAB Capital, which together own about 18% of Northern Rock, to discuss a greater say for shareholders over the future of the bank.

Time is said to be running out for the Government to find a private-sector solution for the crisis-hit lender.

European Union rules on state aid require the Bank of England’s £25bn (€33bn) loan to Northern Rock to be repaid next month.

The British government is understood to have given Goldman Sachs, the investment bank charged with finding financing for a takeover, the all-clear to widen the search to include so-called sovereign wealth funds.

Speculation is also mounting that the British government may have to nationalise the Newcastle-based group as potential bidders Virgin and Olivant are reportedly struggling to secure financing.

The Virgin-led consortium is proposing to repay £11bn (€14.5bn) of Northern Rock’s loans immediately, with the remainder to be repaid over three years. Olivant’s proposals similarly show that it aims to repay between £10bn (€13.2bn) and £15bn (€19.8bn) straight away.

But it is believed that the credit crunch and complexities of the deal have led to reluctance among banks to commit the cash.

In another development for Northern Rock, the bank’s pension trustees revealed today that the group’s pension fund has a hole of around £100m (€132m).

Guardians of the bank’s pension fund said the final salary shortfall comes after the scheme’s assets were switched into safer, but lower returning investments in light of Northern Rock’s troubles.