Paragon joins race to take Northern Rock private once again

Specialist lender Paragon has joined the race to buy Northern Rock despite narrowly avoiding the nationalised bank’s fate during the credit crunch.

The buy-to-let group has joined Virgin Money, Coventry Building Society, NBNK Investment and Co-operative Financial Services among the contenders for Northern Rock, put up for sale by the UK government last month. Blackstone, the US private equity group, is also thought to be considering a bid.

Northern Rock was bailed out by the government after its collapse in September 2007, before being nationalised in February 2008.

It was split last year into Northern Rock Asset Management – the so-called “bad bank”, housing its more toxic loans – and Northern Rock Plc, which is the operation being sold off. It had liquid assets of £5.9 billion at the end of 2010 and reported a £232 million loss for last year.

The bank has soaked up an estimated £1.4bn of taxpayer funds and is valued at around £1bn, although experts believe the sale price could fall below that, due to high capital requirements.

Deutsche Bank, which is advising the UK Treasury and UK Financial Investments on the sale of Northern Rock, is to send an information memorandum to interested parties over the coming weeks.

Paragon is the latest potential suitor to have asked for information about Northern Rock’s return to private ownership, according to reports.

Paragon accounted for around one in ten buy-to-let mortgages given during the property boom as it benefited from record demand for landlord loans. But without customer deposits to advance as mortgages, it relied on wholesale money markets for funding.

The group came close to going out of business just weeks after the collapse of money markets sent Northern Rock crashing, before chief executive Nigel Terrington led a £287m rights issue to keep the lender afloat.

It withdrew from the buy-to-let market in February 2008 but returned last year and earlier this year posted a 32 per cent rise in pre-tax profits to £71.8m. A successful bid for Northern Rock would double its size instantly and pave the way for Paragon, with a book value of about £600m, to become a fully-fledged bank.

The front runners for Northern Rock, which has 76 branches across the UK, include Virgin Money and NBNK, the bank buyout vehicle. Both are looking at combining a bid for Northern Rock with the acquisition of 632 branches put up for sale by Lloyds Banking Group.

The Lloyds branches are being sold on European Commission orders as payback for the bank’s government bailout in October 2008. The EC said Lloyds should sell at least 600 branches, but the Independent Commission on Banking recommended earlier this year that “substantially” more than that number are sold off.