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Northern Rock credit ratings hold after fall

Global credit ratings agency Fitch Ratings says its downgrading of Northern Rock will not impact upon the ratings assigned to the Residential Mortgage-Backed Securities issued from Northern Rock’s Granite master trust.

The announcement comes after Fitch reduced Northern Rock’s credit ratings on Friday and again on Monday. The Newcastle-based bank saw its long-term issuer default rating drop from ‘A plus’ on Friday to ‘A minus‘ by Monday.

But a spokesperson for Fitch said Northern Rock had hit its support rating floor and, with the recent intervention of the Bank of England and the Treasury, no further rating fall was expected. He says: “We expect 100 per cent support from the Bank of England. Northern Rock is not going to default on its liabilities so we don’t anticipate any further downgrade.”

On 14 September, Fitch downgraded Northern Rock’s individual rating from ‘A/B’ to ‘B/C’ and placed it on Rating Watch Negative. The long-term issuer default rating dropped to ‘A’, before being downgraded again to ‘A-minus’ on 17 September.

Northern Rock’s individual rating dropped to ’B/C’ from ‘A/B’ on 14 September, dropping again to ‘C/D’ and remaining on Rating Watch Negative on 17 September.

A stable outlook was assigned on Monday and Fitch upgraded its support rating floor to ‘A minus‘ from ‘BB plus’ and its support rating to ‘one’ from ‘three’.

Fitch EMEA Financial Institutions Group managing director Gordon Scott says the support rating was raised from ‘three’ to ‘one’ prior to the announcement that the Treasury would step in to guarantee savers’ deposits because of noises coming from the authorities.

He says: “The messages coming out were such that gave us confidence that the Chancellor was going to take that approach, although we didn’t expect him to say it publicly.”

Fitch says rating triggers exist within the Granite programme, impacting upon Northern Rock’s role as a swap and guaranteed investment contract provider to the Granite trust. Trust documents compel the basis swap provider to maintain Long- and Short-term issuer default ratings.

Scott says: “The dilemma in analysing Northern Rock is that it has a very good performance record, very low cost base and very good asset quality, so there is not much wrong with it as an entity. However, its Achilles’ heel is that it has been reliant on the wholesale markets for funding. Although they have some diversification, all those markets dried up about the same time.

“They were finding funding harder to find. We knew their would be an earnings issue, maybe having to pay a little higher for funds, but we weren’t expecting it having this problem with getting funds.”

He adds: “I cannot see how the Chancellor and the Bank of England, having made the announcements they have made, can do anything other than support Northern Rock. But the question is, how long will that last for? It has to get back on an even keel.”

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