DBRS Comments on E.C. Approval of Northern Rock Restructuring, Unaffected at A (low), UR-Developing

DBRS has today commented that the ratings of Northern Rock plc (Northern Rock or the Company), including its A (low) Issuer Rating are unaffected by the announcement by the European Commission that it has approved Northern Rock’s restructuring plan. All ratings remain Under Review – Developing, where they were placed on 29 May 2009.

DBRS recognises the importance of the announcement from the European Commission (E.C.) as a necessary step towards the planned legal and capital restructuring of Northern Rock, which is expected to be completed by the end of 2009, subject to FSA approval. As a result of the planned restructuring Northern Rock will be separated into two companies, Northern Rock plc and Northern Rock (Asset Management) plc.

Northern Rock plc will be a new savings and mortgage bank that will hold and service all current savings accounts and some existing mortgages of the current Company. Northern Rock (Asset Management) will hold and service the balance of the existing residential mortgage book and will retain the Company’s interest in those mortgages allocated to the Granite securitisation and covered bond programmes. In addition, Northern Rock (Asset Management) will hold all unsecured loan accounts, the Government loan and Northern Rock’s current wholesale funding and subordinated debt instruments. Northern Rock (Asset Management), will not engage in new mortgage lending.

DBRS’s review will include an analysis of the earnings generation ability, capital position, funding profile and balance sheet composition of both entities upon the completion of the restructuring. Included in the analysis will be an assessment of the impact of certain compensatory measures agreed to by the U.K. Government and E.C. on Northern Rock plc’s business over the near-term. Among these measures were a limit on new lending volumes through 2011, a cap on retail deposit gathering through 2011 and a restriction on mortgage rate offerings.

The Under Review – Developing reflects the remaining level of uncertainty surrounding the restructuring. Positive rating actions could result depending on the extent of government guarantees afforded Northern Rock (Asset Management). While DBRS acknowledges the important step forward, the potential for negative ratings actions remains given the uncertainties surrounding Northern Rock plc’s capital adequacy, level of any government support, funding profile and its longer-term earnings generation ability following the restructuring. DBRS anticipates concluding its review upon completion of the legal and capital restructuring of the Company.

Notes:
The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.