Nationalized mortgage lender Northern Rock Tuesday said that it has cut its debt to the Bank of England to GBP17.5 billion from GBP26.9 billion at the end of last year.

But it said that following large losses in the first half of this year, the government will convert GBP3 billion of that debt into shares in the lender in order to boost its capital.

After its difficulties in finding funding in the wholesale markets in mid 2007, Northern Rock was forced to turn to the Bank of England for a lender of last resort facility in September.

But, following a run on the lender, it was taken into government ownership earlier this year.

In its March budget, the government said ownership of the loan will be transferred from the BOE to the treasury, and it hopes the amount outstanding will be cut to GBP14 billion by March 2009, with the loan fully repaid by the end of 2010.

Northern Rock said the rate of repayment was “ahead of business plan.” But it added that it still has a GBP21 billion loan from the BOE, which has been offset by a GBP3.5 billion liquidity deposit at the central bank.

In its first results since being nationalized, Northern Rock said it had made a loss before tax of GBP585.4 million in the six months to June.

“The external environment has deteriorated and the consequences of this for Northern Rock are increased credit losses,” Northern Rock Chairman Ron Sandler said.

Sandler said that, following the transfer of the loan from the BOE to The government, the U.K. Treasury has agreed to strengthen the lender’s capital base by converting GBP3 billion of the debt into ordinary shares in the lender.

Speaking on the BBC’s Today program, Chancellor of the Exchequer Alistair Darling said that was an approximate figure, because the government first had to secure state aid approval, but that up to GBP3 billion may be necessary.

“In common with many other banks, because of the very difficult situation we have seen over the last year - and that difficult situation is going to continue for a while yet - Northern Rock needs more share capital,” Darling said.

“It doesn’t have shareholders now that it’s owned by the government so it’s got to come to us, so what we’ve said is that we will put in up to GBP3 billion.”

The treasury will also convert GBP400 million of preference shares into ordinary shares.

“This capital restructuring will be finalized, following a further review of the plan and subject to approval by the European Commission of the application for State aid,” Northern Rock’s Sandler said.

Sandler said retail deposits have increased to GBP14.2 billion from GBP10.5 billion, although he added they remain “substantially below” their level at the same time last year.

“New lending in the first half of the year was below the levels anticipated in the plan, reflecting the slowdown in the housing market and a cautious approach to the quality of lending that Northern Rock is pursuing,” Sandler said.

Source: http://www.djnewswires.com/eu

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