The rating action follows yesterday’s announcement by Northern Rock that it has decided to defer payment on all of its subordinated debt coupons.
The bank will still pay coupons due on two securities where it has already given notice of its intention to pay, but will defer later coupons.
The Banking Code, launched by the Government earlier this year, allows both Northern Rock and Bradford & Bingley to defer payments on any of its subordinated debts if either bank cannot afford to pay bond holders. B&B has already deferred several bond payments in June, but this is the first time Northern Rock has had to resort to this measure.
Although Northern Rock has stated that the coupon payments have been deferred until further notice, Fitch says it does not expect payments to be started again in the near-to-medium term.
Fitch senior director Matthew Taylor says: “Fitch considers that Northern Rock is likely to retain all deferrable coupons for the foreseeable future, making payments to senior creditors a priority over hybrid creditors, to ensure that, to the extent possible, the senior creditors are paid without recourse to the UK government’s guarantee.”
The ratings agency says that after the restructuring of the bank in the autumn, it will be particularly important for ‘AssetCo’, the wholesale side of the bank, to protect the position of the senior creditors as it begins to be wound down and sold off by the Government.