Northern Rock's plan to sell the majority of its first loss positions from outstanding RMBS deals should greatly improve the mortgage lender's capitalization and has prompted Standard & Poor's to assign a positive outlook for its A' rated unsecured credit rating. Moody's Investors Service and Fitch Ratings have both already upgraded Northern Rock one notch higher at A1' and A+' respectively.

Weakening capitalization has been a ratings constraint for the U.K. lender, said analysts at S&P. According to figures reported by S&P in June, Northern Rock's ratio of adjusted common equity to adjusted assets, including securitized assets, was a low 1.9%. "S&P recognizes the funding benefits that securitization provides Northern Rock, but prior to this transaction, did not consider that risk had necessarily been transferred, as it seemed likely that Northern Rock had retained expected losses in the various Granite deals," said analysts. "Following this transaction, Northern Rock's adjusted common equity ratio (less the residual retained first loss piece) to risk-weighted assets is expected to move more in line with peers."

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