As part of its half year results, published today, the lender says due to deterioration in market conditions the new Government help is needed to ensure it meets regulatory capital requirements.
The Treasury is to convert into ordinary shares its holding of £400m preference shares and will also swap up to £3bn of debt into equity, subject to state aid approval.
The results show Northern Rock has reduced its original Government loan by 35 per cent, from £26.9bn to £17.5bn, discounting this new equity swap.
Arrears over three months have more than doubled since the start of the year, from 0.45 per cent to £1.18 per cent, set against a CML average of 1.21 per cent.
The lender has also strengthened its senior management by appointing Gary Hoffman as chief executive, Rick Hunkin as chief risk officer, Richard Smelt as human resources director and Andy Tate as director of debt management.
Executive chairman Ron Sandler says: “The external environment has deteriorated and the consequences of this for Northern Rock are increased credit losses. Following a review in July of the Company’s ongoing regulatory capital requirements, HM Treasury has committed to a significant strengthening of the Company’s capital base.
“This will not involve any cash transfer to Northern Rock and will be provided by HM Treasury through conversion into Ordinary shares of both its holding of £400 million of Preference shares as well as up to £3 billion of the outstanding debt following transfer of the Bank of England loan to HM Treasury. This capital restructuring will be finalised following a review of the Plan and will be implemented subsequent to State aid approval.”
Conservative Shadow Chief Secretary to the Treasury, Philip Hammond says: “This is the predictable consequence of nationalising a mortgage bank at the height of the housing boom. Gordon Brown’s regulatory regime failed to prevent the run on Northern Rock, and his subsequent dithering prevented a successful rescue. Now the taxpayer is being forced to hand over yet more money in order to keep this bank afloat.”