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N. Rock Sells $4.3 Billion of Assets to Repay BoE

Britain's Northern Rock has sold a 2.2 billion pound ($4.3 billion) portfolio of mortgages to U.S. bank JP Morgan, a first step to help the troubled lender repay loans from the Bank of England.

Northern Rock, Britain's fifth-largest mortgage lender at its height, became the country's highest profile casualty of the credit crunch in September. It has since borrowed about 26 billion pounds from the central bank.

Friday's news of the first major asset sale since the bank's near collapse boosted Northern Rock's volatile shares as much as 10 percent. The stock had closed sharply lower on Thursday after finance minister Alistair Darling told a parliamentary committee he would protect depositors and the taxpayer, but said shareholders would not be allowed to hinder a rescue.

Shares in Northern Rock were up 5 percent at 89.5p, valuing the bank at roughly 380 million pounds.

The government, which guaranteed the bank's deposits and said it would protect creditors, hopes to find a rescuer for Northern Rock to repay the loans and revive the ailing business.

Efforts have focused on two consortiums, led by investment groups Virgin and Olivant, but extended credit market turbulence has raised concerns the suitors will struggle to finance a deal and the government could be forced to nationalize the bank.

Friday's sale of the portfolio of home equity release mortgage assets will push down the bank's funding costs and should encourage buyers. The price, Northern Rock said, represents a premium of 2.25 percent, or approximately 50 million pounds over the 2.2 billion balance sheet value.

The portfolio represents around 2 percent of the company's total assets at the end of June 2007.

"Proceeds from the sale are payable in cash and will be applied by the company to reduce its current funding from the Bank of England," it said. "Completion is expected on Jan. 11."

Amid growing uncertainty over its future, the trustees of the bank's final salary staff pension scheme said in a separate statement on Friday that they had transferred investments from equities into more conservative government bonds and cash deposits.

They have separately applied to the board and to regulators for a guarantee to support the scheme.

"We have emphasized to the board that members and trustees of the scheme do not wish to remain unsecured creditors in these circumstances unless alternative additional protection is made available," the trustees said in a letter to members.

Around 93 percent of the fund is now invested in gilts, bonds and cash deposits, with the remainder in property and private equity investments.

The overall value of assets held to cover final salary benefit payments is around 355 million pounds.

Northern Rock said that as a result of the changed in asset strategy, the scheme has a deficit of around 100 million pounds.

This would rise to 150 million to 200 million pounds if an insurance company were called in to buy out the pension scheme, for example in the case of an acquisition or a breakup.

Trustees of the pension fund said they had made initial contacts with Virgin and Olivant and would seek a commitment for additional funds.

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