Northern Rock
Northern Rock debt holders call in lawyers
A group of junior bondholders has hired two sets of advisers as Northern borrows a further £5bn from Bank of England
A group of Northern Rock bondholders is preparing to fight its corner as the troubled mortgage bank continues to search for potential buyers amid mounting pressure on its funding.
The Tyneside-based bank's junior, or "tier-two" bondholders have hired Houlihan Lokey, the investment bank that specialises in distressed debt and restructuring, to advise them on their position.
Since the Government allowed Railtrack, the rail operator, to collapse into administration five years ago, bondholders have become increasingly prepared to take legal action to ensure their rights are protected.
The bondholders will be keen to protect their repayment rights in the event that Northern Rock collapses or is forced into a financial restructuring.
The number of bondholders and the amount of Northern's debt they represent remained unclear. Sources said there was "critical mass" among what had turned into a "rather large" group of creditors. They said it was likely approaches to the mortgage bank and Bank of England will follow.
Bondholders have also mandated the debt specialist law firm Bingham McCutchen as their legal adviser.
This came as it emerged that Northern Rock has borrowed as much as £8 billion from the Bank of England since it first sought emergency funding a fortnight ago.
Simon Ward, an economist at New Star, the fund manager, analyses changes to the Bank of England's balance sheet.
He found yesterday that its "other assets" had risen by £5 billion in the past week, after increasing by £2.25 billion the previous week.
Mr Ward, who has described Northern Rock's borrowing from the Bank as "massive", is convinced the assets can only be borrowings by the mortgage bank.
Northern Rock today declined to confirm its borrowing from the Bank.
Northern's shares fell 5.4 per cent to 183p in early trading this morning.
The early expressions of defiance among bondholders increase the pressure on the Bank of England, which has not set a timeframe for its guarantee for the Tyneside lender, put in place last week.
One source said; "If you are the Bank of England, you need to make a decision: what do you want to happen. There is no question that a sale won't happen; the question is the price and who gets wiped out."
Goldman Sachs is advising the Treasury on the guarantee.
Private equity firms, thought to include American company JC Flowers, continue to circle Northern Rock, alongside specialist investors such as distressed debt firms and other potential buyers in a break-up.
(Published by Times Online, September 28, 2007)
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