Northern Rock in cash SOS to Bank
By Richard Fletcher, Philip Aldrick, Richard Blackden and James Quinn
Last Updated: 2:33am BST 14/09/2007
Shares in Northern Rock will plunge today with the company expected to issue a profits warning and confirm that it has been forced to turn to the Bank of England for emergency financial support.
Adam Applegarth: the man under the spotlight
The court of the Bank of England is understood to have met last night to approve the unprecedented support. 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.
Another source familiar with the situation said: "The firm is solvent, and has a good asset book, there is no black hole. The problem is that it just can't raise money in the short-term money markets."
Last night a spokesman for Northern Rock would only say: "The next scheduled announcement is on October 1. The company is aware of its obligations. If it needs to make an announcement in the mean time it will do so."
But traders expect the company to issue a profits warning and make a full announcement before the Stock Exchange opens at 8am.
Adam Applegarth, chief executive of Northern Rock, is likely to face 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. The lender is now the highest profile UK casualty of the so-called credit crunch reaping havoc across the world.
Shares in Northern Rock have fallen 48pc since February. They closed down almost 5pc yesterday at 639p.
A leading banking analyst said: "It's clearly not going to be well received, although given that Northern Rock is so reliant on wholesale funding, I wouldn't necessarily read that this is a foreteller of future such events across the wider banking community.
"I would have thought that a mortgage bank would essentially be able to avoid such crises given the nature of its asset book," he added
However, stock market traders warned that the fallout could well spread to the rest of the market, with banks and other financial institutions likely to be hit hardest.
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 last night 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.
cheers