The bank hopes the restructure will strengthen its capital and liquidity position and enable it to be an active participant in the mortgage market. The restructure, which remains conditional on FSA approval, is expected to be complete by the end of 2009.
Northern Rock plc will be a new savings and mortgage bank which will hold and service all customer savings accounts and some existing mortgage accounts.
It will hold some wholesale deposits, will be authorised as a deposit taker by the FSA and will offer new savings products. It will also offer new mortgage lending to support the Government’s objective of increasing mortgage supply.
On the other side, Northern Rock Asset Management will hold and service the balance of the existing residential mortgage book It will be regulated as a mortgage provider and 90% of its mortgages will not be in arrears.
It will also hold all unsecured loan accounts, the Government loan, Northern Rock’s current wholesale funding and subordinated debt instruments.
Northern Rock plc and Northern Rock Asset Management will both be in receipt of state aid following the restructure. However, compensatory measures have been offered by the Government, which have also been agreed with the EC, in order to continue to avoid competitive distortion in the market.
The measures include that Northern Rock plc and Northern Rock Asset Management expect to limit new lending volumes to £4bn in 2009, £9bn in 2010 and £8bn in 2011. Retail deposit balances will be maintained at or below £20bn until the end of 2011.
The bank will also not rank in the top three of Moneyfacts mortgage categories for two, three or five year fixed or variable mortgages before the end of 2011 excluding mortgages with an LTV ratio of greater than 80% and products for first time buyers.
Gary Hoffman, chief executive of Northern Rock, said: “Receiving approval from the EC is an important and positive step for Northern Rock, our customers, employees and the Government. We are making good progress towards achieving the legal and capital restructure and will continue to work with the Government and the FSA to achieve the necessary approvals. We are delivering on our promises.”
