Another week older and deeeeeeper in debt.... NR plumbs new depths of reckless borrowing

The Bank of England's (BoE) weekly accounts - the Bank Return, showed £2.9Bn, "other assets" which the chicken entrail readers and soothsayers of Bishopsgate claim represents further emergency / panic borrowings by Northern Rock (NR).

Now, 3 weeks after NR went to the BoE for support, it owes nearly £11 Bn. - equivalent to 45% of its deposit base at the end-June ( and probably more as the private / domestic lenders draw down their deposits and move them elsewhere). The Financial Times (FT) calculates that NR has £ 14 Bn. of short-term and medium-term notes that require refinancing in the second half of their financial year year.

Apparently however the company is considered solvent. The crooks are still at the helm.

Those who still follow these matters will be interested in a thoughtful article last week in the FT which carefully explained the "Granite" securitisation system.

NR's main (not the only one) securitisation vehicle is called Granite Master Issuer. (Granite - Rock solid - Geddit ?)

This trust is a "revolving facility" - new mortgages written by Northern Rock are constantly being pumped into Granite, which is required to maintain a certain level of mortgage assets - as some mortgages mature.

The trust has 3 beneficiaries:
1 . The vehicle called Funding One
2. The vehicle called Funding Two
3. Northern Rock itself.

If certain "triggers" are breached ,the trust will be wound down and go into early amortisation.

Many of the triggers are related to the credit quality of the mortgage book – if mortgage arrears were to increase dramatically, for example, this would trigger a wind down.

However, the trust would also be wound down if it breaches non-asset related triggers – such as Northern Rock becoming insolvent.

The government has insisted that Northern Rock is solvent. (As do the dishonest Directors)

However, some investors in Northern Rock are concerned that the value of the bank is now dropping sharply.

Some of the senior note holders in NR bonds have formally appointed London lawyers to represent their interests in the event that the bank turns out to be insolvent, or is sold to outside parties at a loss.

If the trust is wound down, bondholders with notes issued from the Funding One and Funding Two vehicles get paid in full before anyone else. See Prospectus Page 6 -" Principal of the offered notes may be repaid earlier than expected if a trigger event or an event of default occurs in respect of these notes." and see Page 57 about redemption of notes ..."For more information on the redemption of the notes, including a description of asset trigger events and non-asset trigger events, see ‘‘The mortgages trust – Cash management of trust property – principal receipts’’ and ‘‘Cashflows’’. See also ‘‘– Payment priority and ranking of the notes’’.

So far, rating agencies such as Standard & Poor's have said that no triggers have been breached by Granite.... this filing made on 20th September (but presented on 14th) to the Securities and Exchange Commission in New York is therefeore more than a curiosity....

"On September 14, 2007, Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc. ("Standard & Poor's") and Fitch Ratings Limited "Fitch") each downgraded Northern Rock's long-term credit ratings from "A+" to "A". On September 17, 2007 and September 19, 2007, respectively, Fitch and Standard & Poor's further downgraded Northern Rock's long-term credit rating from "A" to "A-". The downgrade to "A-" by Fitch constitutes a trigger event under the Funding 2 basis rate swaps entered into in connection with the Granite program, under which Northern Rock acts as Funding 2 basis rate swap provider. For a description of the potential consequences of this trigger event, please see the section entitled "The swap agreements - The Funding 2 basis rate swaps" in the prospectus of Granite Master Issuer plc (the "Company") dated May 17, 2007 and the Funding 2 Basis Rate Swap, which was filed with the Securities and Exchange Commission as Exhibit 10.1 to the Company's Form 8-K dated May 23, 2007. Northern Rock (i.e the Directors Ed.) has indicated that it does not currently propose to take any further action following the trigger event, due to the liquidity provided by the standby liquidity arrangements it has recently agreed with the Bank of England, as described in the preceding paragraph. Fitch has stated that it considers these standby liquidity arrangements of sufficient strength and form as to satisfy the substance of their criteria and does not currently propose to take any negative rating action with respect to any notes issued by Granite Master Issuer plc (the "Company"). Additionally, Moody's Investors Services Limited ("Moody's") has placed its "Aa3" long-term rating of Northern Rock on review "direction uncertain." The short-term credit ratings of Northern Rock remain at A-1 by Standard & Poor's, F1 by Fitch and P-1 by Moody's. "

The original can be consulted at the SEC records here

The "trigger" event has happened but well we'll drag our brogues on that one shall we boys, as long as old Uncle Mervyn and Cousin Alastair and Grandad Gordy keep popping cash into the till... and anyway it's all Fitch's and Moody's fault .....

To repeat what the FT said ..."Some of the senior note holders in NR bonds have formally appointed London lawyers "..... hardly surprising.

Late Breaking News

The Treasury have announced .."The Chancellor of the Exchequer Alistair Darling will present the Pre-Budget Report and the outcome of the Comprehensive Spending Review to the House of Commons on Tuesday 9th October at 3:45pm." Sky also report ..."The Chancellor is promising to learn lessons from the recent Northern Rock crisis." Ho.Ho.Ho.

"Northern Rock's asset quality remains good - Fitch " Forbes 12.26 BST