Shares in Northern Rock jumped 10 per cent on Wednesday after it emerged that JC Flowers, the private equity group, had secured about £15bn of funding that could be used for a takeover.
The firm, founded by Chris Flowers, former Goldman Sachs banker, specialises in taking over ailing financial groups. Mr Flowers’ team is to meet the bank’s advisers for talks that could lead to due diligence.
JC Flowers is one of several bidders to have expressed interest in buying all or part of Northern Rock since the UK government in effect rescued it last month. But most have given up on any purchase. Cerberus, the hedge fund, is the only other firm thought still to be interested.
It emerged that Northern Rock was ready to hire Citigroup, the US bank, to work with Merrill Lynch, its main investment banking adviser. Citigroup is expected to provide a financing package that could be offered to prospective bidders.
Regulators have urged Northern Rock to explore all options to resolve a crisis in which it has borrowed an estimated £8bn from the Bank of England. But some people involved in the situation now believe the lender could continue as an independent entity for some time.
JC Flowers had access to Northern Rock’s data room last week to examine details about its financial performance.The group is interested in keeping Northern Rock as a whole entity and is understood to have received funding commitments from blue-chip banks. These could be used to refinance part of the estimated £20bn that analysts believe the bank will need to raise in the next year.
JC Flowers is being advised by Credit Suisse. Any bid for the whole of Northern Rock could be complicated.
A buyer would need to persuade rating agencies to maintain the bank’s credit rating to avoid further funding problems.
Any buyer for Northern Rock would be expected to demand some form of financial support from the government. The Bank of England has said a buyer would have access to Northern Rock’s existing facility, which allows it to borrow against mortgage collateral at a penalty rate.
If no buyer comes forward, its board could put the bank into administration – although this would be highly controversial and politically damaging.
Northern rock shares were 14p higher at 149.6p in lunchtime London trading. The stock had dropped sharply ahead of Wednesday’s news amid expectations that shareholders would receive little from any deal.