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Ash4781

Northern Rock Credit-default Swaps Soar On Emergency Funding

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http://www.bloomberg.com/apps/news?pid=206...&refer=home

Northern Rock Plc credit-default swaps soared to a record after the U.K.'s third-biggest mortgage lender sought emergency funding from the Bank of England.

The contracts, used to protect debt from default or speculate on credit quality, rose as much as 80 basis points to 210 basis points, and traded at 155 basis points at 5:00 p.m. in London, according to Deutsche Bank AG.

Credit-default swaps pay buyers the face value of debt protected if the borrower fails to meet payments. A basis point on a credit-default swap contract protecting 10 million euros ($13.5 million) of debt from default for five years is equivalent to 1,000 euros a year.

Does this mean they can't lend ?

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Very simply credit default swaps (CDS) are a form of insurance contract.

Say for instance a pension lent funds to NR at 700bps and they wanted to hedge their exposure to NR. They would then go to another financial institution with a better credit rating and purchase a CDS. For this they will pay a premium usually in bps and for this they get protection i.e. if NR default the other financial institution pays up. Thus the pension fund has lent to NR but actually suffers credit risk on the financial institution that wrote the CDS. The larger the CDS premium the larger the peceived risk on NR.

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No.

What is happening here is that the credit derivatives market is repricing the credit risk of Northern Rock.

In the same way that someone with a dodgy credit history has to pay a higher rate of interest than someone with a squeaky clean record, so Northern Rock are going to have to pay higher interest rates, because lenders are getting more worried about their ability to repay their debt.

It's basically risk/reward, and now that the risks have risen, the reward (ie interest rates) must rise.

Edited by BandWagon

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If they cant lend, they are Sooooooooooo Deeeeaaaad. someone is going to have to take over all those Assetts which are Sooooooo valuable, secured on a falling housing market.

Dead

Edited by Bloo Loo

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http://investing.reuters.co.uk/news/articl...CORP-URGENT.XML

LONDON, Sept 17 (Reuters) - The cost of insuring Northern Rock's (NRK.L: Quote, Profile , Research) debt against default rose on Monday, but broader financial credit default indexes held steady despite concerns about the British mortgage lender's liquidity problems.

By 0645 GMT, five-year credit default swaps on Northern Rock were 20 basis points wider at 175 basis points versus 155 basis points late on Friday, a trader said.

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