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Northern Rock gets another L5 billion from Bank of England, pays dividend

Section: Daily Dispatches

Northern Rock Debt to Bank of England now L8 Billion

By Chris Giles, Peter Thal Larsen, and Gillian Tett
Financial Times, London
Thursday, September 27, 2007

Northern Rock borrowed another L5 billion from the Bank of England, it emerged on Thursday, bringing its indebtedness to the central bank close to L8 billion since it was given access to emergency funds nearly two weeks ago.

The Financial Times has learned that Northern Rock last week distributed almost L40 million in dividends to holders of preference shares, issued to maintain capital ratios just two days before the bank cancelled its interim dividend to ordinary shareholders, saving about L60 million.

People close to Northern Rock said that while the bank had the option of deferring the dividends on the preference shares, payable each September 21, it would have had to give three weeks' notice.

The extent of Northern Rock's financing crisis -- it has now borrowed the equivalent of a third of its retail deposits at the end of June -- is raising fresh concerns about its viability.

Northern Rock has been ap­proached by potential buyers for all or part of its business. But debt advisers and distressed investors have been circling its investment vehicles. Creditors holding the bank's tier-two debt are forming a formal committee to protect their interests in any restructuring or insolvency and have appointed investment bank Houlihan Lokey and the Bingham McCutchen law firm to advise them.

The additional borrowing appears to be linked to mortgages the bank has underwritten but not been able to sell on. In normal circumstances, it would have expected to issue L8 billion in mortgage-backed securities in the fourth quarter. Expectations are rising that some investment vehicles might be forced to dissolve.

The Treasury declined to comment on where it would stand in the list of unsecured creditors if the bank went under.

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