Northern Rock to pay £400 million for rescue package

The run on Northern Rock

Northern Rock will pay the Government up to £400 million in return for it providing a rescue package which will enable the troubled lender to be sold to a private bidder.

Shares in Northern Rock soared by over 40% following the Government unveiling a £25 billion plan to rescue the lender.

The proposal would see Northern Rock's debt converted into Government guaranteed bonds and sold to investors. The funds raised would be used to pay off its debt to the Bank of England and would pave the way for a private sale.

Virgin’s Richard Branson publicly reiterated his intention to buy Northern Rock over the weekend. Other bidders includes investment firm Olivant and potentially the Northern Rock board. Although all takeover bids will be considered by the Bank of England, the Financial Services Authority and the Treasury, chancellor Alistair Darling says that he will ultimately decide who buys the bank.

The Government says the scheme to sell Northern Rock bonds would protect the interests of taxpayers, because any losses made from the sale of assets would be bourn by Northern Rock first. However, it does mean that taxpayers exposure to Northern Rock will be extended until 17 March.

If the plan fails to attract any private sector interest then the Government says it will temporarily nationalise the bank and appoint a management team to run it on a commercial basis. But the plan has sent a vote of confidence to the market that a private sector solution is very much on the cards, and the value of Northern Rock shares rose this morning by 41% to 91.25p.

Bidders have until 4 February to make their offers for Northern Rock. The Government says the successful proposal would ensure all Bank of England loans repaid in full, with interest, upfront and would also provide the a robust funding strategy to take the lender forward.

The Government’s existing guarantee to protect savers’ money remain in place.