Page last updated at 08:50 GMT, Tuesday, 18 August 2009 09:50 UK

Rock delays bondholder payments

Northern Rock branch
The bank still depends on taxpayer support to survive

The loss-making nationalised Northern Rock bank has announced that it will be deferring the interest payments on some of its bonds.

A spokeswoman said the move was to "save cash resources" ahead of a proposed reorganisation of the bank.

The delay in payment applies to investors who have bought eight different "subordinated notes".

The terms of the bonds allow the bank to do this, but it admitted the investors had been given no warning.

"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," it added.

However, the bank refused to reveal who its investors were, and how much money would be saved by deferring the repayments to them.

Government plan

The decision of the Northern Rock is a sign of its continued acute financial stress.

It will be quite wrong if it competes with building societies and other institutions that didn't need taxpayers support and didn't lend unwisely
Adrian Coles, Building Societies Association

It teetered on the edge of collapse in 2007 at the beginning of the credit crunch, and was eventually nationalised in early 2008.

Last month, the bank revealed that it did not have a sufficiently large financial cushion under international banking standards to absorb all its losses.

It said this would be resolved by the government's previously announced plan to split the bank in two.

This will separate the Northern Rock's continuing saving and lending business from its old debts, such as mortgages which which have now turned bad.

This plan is still being scrutinised by the European Commission to make sure it does not break EU rules on illegal state aid.

Unfair competition?

The Building Societies Association (BSA) has criticised the idea for potentially giving the Northern Rock an unfair advantage in the future over its rival lenders, such as mutually owned building societies.

"Our fear is it will compete unfairly, it won't have any arrears, it won't be paying anything to the government for the 'cleanliness' that characterises its balance sheet," Adrian Coles of the BSA told the BBC.

"It will be quite wrong if it competes with building societies and other institutions that didn't need taxpayers support and didn't lend unwisely in the year approaching 2007 and are now being penalised unnecessarily by the Northern Rock that will be able to compete easily in the future."

Last month, the bank admitted that the continuing defaults among its mortgage holders, and also among customers who had been lent unsecured loans, meant that it was still losing huge amounts of money.

It revealed that its losses in the first half of 2009 were £724m and it still owed the UK taxpayer nearly £11bn.

Of its outstanding mortgages, 3.92% are more than three months in arrears, above the national average of 2.39%.

The potential losses on its bad debts are the main reason for its continuing heavy overall losses.

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