Northern Rock suspends interest payments

19 August 2009

Nationalised lender Northern Rock is putting the brakes on interest payments on a range of bonds as it attempts to rebuild its capital position.
The bank, which reported a loss of £724 million for the first half of the year, says interest payments on eight sub-ordinated debt coupons will be frozen until further notice. Although Northern Rock did not reveal the amount of outstanding debt affected by the decision, analysts estimate it could be around £1.65 billion.
“The company has now decided, until further notice, to defer payment of all subordinated debt coupons which the company is entitled to defer," Northern Rock said in a statement. “The deferral of coupons [interest repayments] by the company will be made in accordance with the existing terms and conditions of the company's subordinated debt and there is no change to the legal terms of these instruments."
The affected debt includes: the 12.625% perpetual subordinated notes; the 8% undated subordinated notes; the 6.75% fixed-rate step-up undated subordinated notes; the floating rate undated subordinated notes; the 5.6% perpetual fixed to floating-fate subordinated notes; the 6.594% perpetual fixed to floating rate subordinated notes; the 8.399% reserve capital instruments; and the 7.053% callable perpetual core Tier 1 notes.
However, the lender will continue to make payments on its debt where it is contractually obliged to do so with the interest being paid on 23 August for the floating-rate undated subordinated notes and 15 September 2009 for the 8% undated subordinated notes.
Northern Rock is planning to split its assets into a 'good bank' and a 'bad bank' – a move which has been panned by the Building Societies Association for giving the streamlined lender an unfair advantage in the mortgage market.
The subordinated debts bonds, which rank below other forms of debt and are therefore bottom of the pile when an institution fails, would be placed within the asset company or 'bad bank'.
Last month, the lender revealed that its capital base had fallen below its minimum regulatory capital requirement. The British government has said it will support the bank once its restructuring has gone through and it receives state aid approval from the European Commission.
The latest move by Northern Rock is not the first time a British lender has suspended the payment on its subordinated debt. In May, Bradford & Bingley announced it would not pay interest on its £325 million, lower-tier 2 bonds due June 2023.

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