Northern Rock Buys Time Before Getting Bought Out

From Staff Reports

Citigroup Inc. (C) is preparing to lend Northern Rock PLC – the United Kingdom bank bailed out by the Bank of England – $20.4 billion so it can buy time for a buyout, according to news reports from both Bloomberg News and the Financial Times.

Northern Rock desperately needs to refinance 14 billion British pounds Sterling in the second half of this year, and 30 billion pounds over the next year. The Citigroup loan would equate to approximately 10 billion pounds.

Reportedly, private equity firms such as Apollo Management LP, The Blackstone Group LP (BX), Flowers & Co., and Cerberus Capital Management LP, have been actively engaging Northern Rock in takeover talks.

Northern Rock hired Citigroup last week to join Merrill Lynch & Co. Inc. (MER) as an advisor in those discussions.  Citigroup’s size has allowed it to step in with a big loan package, where Merrill Lynch, a smaller firm, could not, according to published reports. It’s possible that Citigroup could end up as the head of a coalition of banking agents helping Northern Rock to refinance its debt, the media reports stated.

A government guarantee has also bolstered Northern Rock’s position. The Bank of England, the U.K. Treasury, and Financial Services Authority will cover money deposited after Sept. 19.  Northern Rock has said the deposit guarantee and central bank funding will enable to company to engage in takeover talks until February.

“It gives them more breathing space in a difficult time,” James Hutson analyst at Keefe Bruyette, & Woods Ltd. of London told Bloomberg.  The proposed plan covers all retail deposits including future interest payments and the transfer of funds. 

Northern Rock’s stock closed up nearly 20% Tuesday on the London exchange. It’s up more than 50% over the past five days.

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