Northern Rock’s bondholders fear they may lose billions of pounds under the nationalised lender’s plans to recapitalise the bank without any further taxpayer money.

Bond prices slumped as Northern Rock revealed it would spin off its toxic mortgages into a “bad bank” and restart lending as a separate, cleaned-up legal entity.

Creditors are concerned that they will be dumped in the bad bank to absorb the worst of the losses so Northern Rock’s remaining capital can be used to support new lending of as much as £14bn.

Bondholders, who have £12bn in Northern Rock, have been spooked because the Government tore up the rule book on traded debt on Friday by unilaterally rewriting creditor contracts with Bradford & Bingley to delay payment of both interest and capital.

Daily Telegraph